What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-28 compared with 2023-08-24 · 164 added, 135 removed, 185 unchanged (62% of the section changed)

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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.

Due to our ability to leverage our 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 Current Economic Conditions

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

We have experienced, and may continue to experience, the lengthening of certain sales cycles and revenue growth rates, particularly within net new opportunities.

We have experienced, and may continue to experience, the lengthening of certain sales cycles and moderation of revenue growth rates, particularly within net new opportunities, and have provided certain customers with more flexible payment terms.

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

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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,

2023 2022 Change 2023 2022 Change

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Operating cash flows $ 450,775 $ 408,668 10 % $ 1,153,355 $ 962,743 20 %

As of July 31,

Free cash flows (1)

$ 390,827 $ 349,822 12 % $ 969,190 $ 676,284 43 %

As of October 31,

2023 2022 % Change

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12-month subscription revenue backlog $ 6,047,482 $ 4,962,071 22 %

24-month subscription revenue backlog $ 10,576,013 $ 8,622,191 23 %

Cash, cash equivalents, and marketable securities $ 6,879,984 $ 5,492,085 25 %

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

Subscription services revenues accounted for approximately 91% of our total revenues for the three and six months ended July 31, 2023, and represented 96% of our total unearned revenue as of July 31, 2023.

Subscription services revenues accounted for approximately 91% of our total revenues for the three and nine months ended October 31, 2023, and represented 96% of our total unearned revenue as of October 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.

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Our subscription contracts typically have a term of three years or longer and are generally noncancelable.

We generally invoice our customers annually in advance.

We generally invoice our customers annually in advance, and may provide certain customers flexible payment terms.

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

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

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

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

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In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements.

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

Subscription Revenue Backlog

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Results of Operations

Our total revenues for the three and six months ended July 31, 2023, and 2022, 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, 2023, and 2022, were as follows (in thousands, except percentages):

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

2023 2022 % Change 2023 2022 % Change

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Total revenues $ 1,865,675 $ 1,599,103 17 % $ 5,336,753 $ 4,569,558 17 %

Total revenues were $1.8 billion for the three months ended July 31, 2023, compared to $1.5 billion for the prior year period, an increase of $251 million, or 16%.

Subscription services revenues were $1.6 billion for the three months ended July 31, 2023, compared to $1.4 billion for the prior year period, an increase of $257 million, or 19%.

Total revenues were $1.9 billion for the three months ended October 31, 2023, compared to $1.6 billion for the prior year period, an increase of $267 million, or 17%.

Subscription services revenues were $1.7 billion for the three months ended October 31, 2023, compared to $1.4 billion for the prior year period, an increase of $259 million, or 18%.

The increase in subscription services revenues was primarily due to an increased number of new customers, expansion of our product offerings provided to existing customers, and strong customer renewals, with gross and net retention rates over 95% and over 100%, respectively.

Professional services revenues were $163 million for the three months ended July 31, 2023, compared to $168 million for the prior year period, a decrease of $6 million, or 3%.

The decrease in professional services revenues was primarily due to variation in project size and mix of deployment and integration services provided and continuing to expand and leverage our service partners.

Total revenues were $3.5 billion for the six months ended July 31, 2023, compared to $3.0 billion for the prior year period, an increase of $501 million, or 17%.

Subscription services revenues were $3.2 billion for the six months ended July 31, 2023, compared to $2.6 billion for the prior year period, an increase of $512 million, or 19%.

Professional services revenues were $175 million for the three months ended October 31, 2023, compared to $167 million for the prior year period, an increase of $8 million, or 5%.

The increase in professional services revenues was primarily due to variations in project size and mix of deployment and integration services provided.

Total revenues were $5.3 billion for the nine months ended October 31, 2023, compared to $4.6 billion for the prior year period, an increase of $767 million, or 17%.

Subscription services revenues were $4.8 billion for the nine months ended October 31, 2023, compared to $4.1 billion for the prior year period, an increase of $771 million, or 19%.

Professional services revenues were $319 million for the six months ended July 31, 2023, compared to $331 million for the prior year period, a decrease of $12 million, or 4%.

Professional services revenues were $494 million for the nine months ended October 31, 2023, compared to $498 million for the prior year period, a decrease of $4 million, or 1%.

The decrease in professional services revenues was primarily due to variations in project size and mix of deployment and integration services provided and continuing to expand and leverage our service partners.

Subscription Revenue Backlog

As of July 31, 2023, our total subscription revenue backlog was $17.8 billion, with $10.3 billion expected to be recognized in revenues over the next 24 months.

As of July 31, 2022, our total subscription revenue backlog was $13.5 billion, with $8.4 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, duration of customer contracts, expansion of our product offerings with existing customers, and the timing of renewals.

As of October 31, 2023, our total subscription revenue backlog was $18.4 billion, with $6.0 billion and $10.6 billion expected to be recognized in revenues over the next 12 and 24 months, respectively.

As of October 31, 2022, our total subscription revenue backlog was $14.1 billion, with $5.0 billion and $8.6 billion expected to be recognized in revenues over the next 12 and 24 months, respectively.

The increase in subscription revenue backlog was primarily driven by an increased number of new customers, duration of customer contracts, expansion of our product offerings provided to existing customers, and strong customer renewals.

Operating Expenses

GAAP operating expenses were $1.8 billion for the three months ended July 31, 2023, compared to $1.6 billion for the prior year period, an increase of $181 million, or 12%.

The increase in GAAP operating expenses included increases of $164 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $20 million in third-party expenses for hardware maintenance and data center capacity, and $15 million in facilities and IT-related expenses, offset by a decrease of $24 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

GAAP operating expenses were $3.5 billion for the six months ended July 31, 2023, compared to $3.1 billion for the prior year period, an increase of $377 million, or 12%.

The increase in GAAP operating expenses included increases of $320 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $40 million in third-party expenses for hardware maintenance and data center capacity, and $35 million in facilities and IT-related expenses, offset by a decrease of $47 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

Non-GAAP operating expenses were $1.4 billion for the three months ended July 31, 2023, compared to $1.2 billion for the prior year period, an increase of $131 million, or 11%.

The increase in non-GAAP operating expenses included increases of $114 million in employee-related expenses primarily due to higher headcount, $20 million in third-party expenses for hardware maintenance and data center capacity, and $15 million in facilities and IT-related expenses, offset by a decrease of $24 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

Non-GAAP operating expenses were $2.7 billion for the six months ended July 31, 2023, compared to $2.4 billion for the prior year period, an increase of $273 million, or 11%.

The increase in non-GAAP operating expenses included increases of $215 million in employee-related expenses primarily due to higher headcount, $40 million in third-party expenses for hardware maintenance and data center capacity, and $35 million in facilities and IT-related expenses, offset by a decrease of $47 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

GAAP operating expenses were $1.8 billion for the three months ended October 31, 2023, compared to $1.6 billion for the prior year period, an increase of $152 million, or 9%.

The increase in GAAP operating expenses included increases of $133 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $22 million related to marketing programs, and $18 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to an increase in the estimated useful lives of our data center equipment from 3 years to 5 years, effective beginning fiscal 2024 (“change in useful lives of data center equipment”).

GAAP operating expenses were $5.2 billion for the nine months ended October 31, 2023, compared to $4.7 billion for the prior year period, an increase of $530 million, or 11%.

The increase in GAAP operating expenses included increases of $453 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $58 million in third-party expenses for hardware maintenance and data center capacity, and $37 million related to marketing programs, offset by a decrease of $68 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses were $1.4 billion for the three months ended October 31, 2023, compared to $1.3 billion for the prior year period, an increase of $119 million, or 9%.

The increase in non-GAAP operating expenses included increases of $94 million in employee-related expenses primarily due to higher average headcount, $22 million related to marketing programs, and $18 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses were $4.1 billion for the nine months ended October 31, 2023, compared to $3.7 billion for the prior year period, an increase of $392 million, or 11%.

The increase in non-GAAP operating expenses included increases of $309 million in employee-related expenses primarily due to higher average headcount, $58 million in third-party expenses for hardware maintenance and data center capacity, and $37 million related to marketing programs, offset by a decrease of $68 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

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

Three Months Ended July 31, 2023

Three Months Ended October 31, 2023

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

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Total costs and expenses $ 1,777,820 $ (349,257) $ (24,986) $ 1,403,577

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

Six Months Ended July 31, 2023

Nine Months Ended October 31, 2023

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

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Total costs and expenses $ 5,232,441 $ (1,070,629) $ (104,533) $ 4,057,279

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

(1) Other operating expenses include amortization of acquisition-related intangible assets of $21 million and $22 million for the three months ended July 31, 2023, and 2022, respectively, and $42 million and $43 million for the six months ended July 31, 2023, and 2022, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $12 million and $6 million for the three months ended July 31, 2023, and 2022, respectively, and $37 million and $34 million for the six months ended July 31, 2023, and 2022, respectively.

(1) Other operating expenses include amortization of acquisition-related intangible assets of $16 million and $21 million for the three months ended October 31, 2023, and 2022, respectively, and $58 million and $64 million for the nine months ended October 31, 2023, and 2022, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $9 million and $5 million for the three months ended October 31, 2023, and 2022, respectively, and $46 million and $40 million for the nine months ended October 31, 2023, and 2022, respectively.

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

Costs of Subscription Services

GAAP operating expenses in costs of subscription services were $256 million for the three months ended July 31, 2023, compared to $245 million for the prior year period, an increase of $11 million, or 4%.

The increase in costs of subscription services included increases of $15 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $13 million in third-party expenses for hardware maintenance and data center capacity, and $4 million in facilities and IT-related expenses, offset by a decrease of $23 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

GAAP operating expenses in costs of subscription services were $495 million for the six months ended July 31, 2023, compared to $478 million for the prior year period, an increase of $17 million, or 4%.

The increase in costs of subscription services included increases of $27 million in third-party expenses for hardware maintenance and data center capacity, $22 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, and $9 million in facilities and IT-related expenses, offset by a decrease of $46 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

Non-GAAP operating expenses in costs of subscription services were $211 million for the three months ended July 31, 2023, compared to $205 million for the prior year period, an increase of $6 million, or 3%.

The increase in costs of subscription services included increases of $13 million in third-party expenses for hardware maintenance and data center capacity, $9 million in employee-related expenses primarily due to higher headcount, and $4 million in facilities and IT-related expenses, offset by a decrease of $23 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

Non-GAAP operating expenses in costs of subscription services were $405 million for the six months ended July 31, 2023, compared to $396 million for the prior year period, an increase of $9 million, or 2%.

The increase in costs of subscription services included increases of $27 million in third-party expenses for hardware maintenance and data center capacity, $14 million in employee-related expenses primarily due to higher headcount, and $9 million in facilities and IT-related expenses, offset by a decrease of $46 million in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

GAAP operating expenses in costs of subscription services were $264 million for the three months ended October 31, 2023, compared to $259 million for the prior year period, an increase of $4 million, or 2%.

The increase in costs of subscription services included increases of $15 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, and $13 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

GAAP operating expenses in costs of subscription services were $759 million for the nine months ended October 31, 2023, compared to $737 million for the prior year period, an increase of $21 million, or 3%.

The increase in costs of subscription services included increases of $40 million in third-party expenses for hardware maintenance and data center capacity, $37 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, and $11 million in facilities and IT-related expenses, offset by a decrease of $66 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses in costs of subscription services were $224 million for the three months ended October 31, 2023, compared to $220 million for the prior year period, an increase of $4 million, or 2%.

The increase in costs of subscription services included increases of $13 million in third-party expenses for hardware maintenance and data center capacity and $10 million in employee-related expenses primarily due to higher average headcount, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses in costs of subscription services were $629 million for the nine months ended October 31, 2023, compared to $615 million for the prior year period, an increase of $14 million, or 2%.

The increase in costs of subscription services included increases of $40 million in third-party expenses for hardware maintenance and data center capacity, $24 million in employee-related expenses primarily due to higher average headcount, and $11 million in facilities and IT-related expenses, offset by a decrease of $66 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

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

Costs of Professional Services

GAAP operating expenses in costs of professional services were $192 million for the three months ended July 31, 2023, compared to $178 million for the prior year period, an increase of $14 million, or 8%.

The increase in costs of professional services included an increase of $17 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

GAAP operating expenses in costs of professional services were $371 million for the six months ended July 31, 2023, compared to $348 million for the prior year period, an increase of $23 million, or 7%.

The increase in costs of professional services included an increase of $29 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, offset by a decrease of $7 million in professional services and subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $162 million for the three months ended July 31, 2023, compared to $151 million for the prior year period, an increase of $11 million, or 7%.

The increase in costs of professional services included an increase of $14 million in employee-related expenses primarily due to higher headcount.

Non-GAAP operating expenses in costs of professional services were $308 million for the six months ended July 31, 2023, compared to $290 million for the prior year period, an increase of $18 million, or 6%.

The increase in costs of professional services included an increase of $24 million in employee-related expenses primarily due to higher headcount, offset by a decrease of $7 million in professional services and subcontractor expenses.

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

GAAP operating expenses in costs of professional services were $181 million for the three months ended October 31, 2023, compared to $176 million for the prior year period, an increase of $5 million, or 3%.

The increase in costs of professional services included an increase of $9 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

GAAP operating expenses in costs of professional services were $552 million for the nine months ended October 31, 2023, compared to $524 million for the prior year period, an increase of $28 million, or 5%.

The increase in costs of professional services included an increase of $38 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, offset by a decrease of $7 million in professional services and subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $152 million for the three months ended October 31, 2023, compared to $149 million for the prior year period, an increase of $2 million, or 2%.

The increase in costs of professional services included an increase of $6 million in employee-related expenses primarily due to higher average headcount.

Non-GAAP operating expenses in costs of professional services were $459 million for the nine months ended October 31, 2023, compared to $439 million for the prior year period, an increase of $20 million, or 5%.

The increase in costs of professional services included an increase of $30 million in employee-related expenses primarily due to higher average headcount, offset by a decrease of $7 million in professional services and subcontractor expenses.

Product Development

GAAP operating expenses in product development were $610 million for the three months ended July 31, 2023, compared to $548 million for the prior year period, an increase of $62 million, or 11%.

The increase in product development expenses included an increase of $49 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

GAAP operating expenses in product development were $1.2 billion for the six months ended July 31, 2023, compared to $1.1 billion for the prior year period, an increase of $121 million, or 11%.

The increase in product development expenses included an increase of $97 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

Non-GAAP operating expenses in product development were $443 million for the three months ended July 31, 2023, compared to $398 million for the prior year period, an increase of $45 million, or 11%.

The increase in product development expenses included an increase of $31 million in employee-related expenses primarily due to higher headcount.

Non-GAAP operating expenses in product development were $862 million for the six months ended July 31, 2023, compared to $774 million for the prior year period, an increase of $89 million, or 11%.

The increase in product development expenses included an increase of $65 million in employee-related expenses primarily due to higher headcount.

GAAP operating expenses in product development were $619 million for the three months ended October 31, 2023, compared to $566 million for the prior year period, an increase of $53 million, or 9%.

The increase in product development expenses included an increase of $46 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

GAAP operating expenses in product development were $1.8 billion for the nine months ended October 31, 2023, compared to $1.7 billion for the prior year period, an increase of $174 million, or 11%.

The increase in product development expenses included an increase of $142 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

Non-GAAP operating expenses in product development were $454 million for the three months ended October 31, 2023, compared to $415 million for the prior year period, an increase of $39 million, or 9%.

The increase in product development expenses included an increase of $32 million in employee-related expenses primarily due to higher average headcount.

Non-GAAP operating expenses in product development were $1.3 billion for the nine months ended October 31, 2023, compared to $1.2 billion for the prior year period, an increase of $128 million, or 11%.

The increase in product development expenses included an increase of $96 million in employee-related expenses primarily due to higher average headcount.

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

Sales and Marketing

GAAP operating expenses in sales and marketing were $524 million for the three months ended July 31, 2023, compared to $459 million for the prior year period, an increase of $65 million, or 14%.

The increase in sales and marketing expenses included increases of $58 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

GAAP operating expenses in sales and marketing were $1.0 billion for the six months ended July 31, 2023, compared to $888 million for the prior year period, an increase of $155 million, or 17%.

The increase in sales and marketing expenses included increases of $121 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $16 million related to marketing programs.

Non-GAAP operating expenses in sales and marketing were $447 million for the three months ended July 31, 2023, compared to $389 million for the prior year period, an increase of $57 million, or 15%.

The increase in sales and marketing expenses included increases of $49 million in employee-related expenses primarily due to higher headcount.

Non-GAAP operating expenses in sales and marketing were $871 million for the six months ended July 31, 2023, compared to $746 million for the prior year period, an increase of $126 million, or 17%.

The increase in sales and marketing expenses included increases of $92 million in employee-related expenses primarily due to higher headcount and $16 million related to marketing programs.

GAAP operating expenses in sales and marketing were $538 million for the three months ended October 31, 2023, compared to $470 million for the prior year period, an increase of $68 million, or 14%.

The increase in sales and marketing expenses included increases of $40 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $19 million related to marketing programs, and $9 million in travel expenses.

GAAP operating expenses in sales and marketing were $1.6 billion for the nine months ended October 31, 2023, compared to $1.4 billion for the prior year period, an increase of $222 million, or 16%.

The increase in sales and marketing expenses included increases of $161 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $34 million related to marketing programs, and $17 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $463 million for the three months ended October 31, 2023, compared to $400 million for the prior year period, an increase of $63 million, or 16%.

The increase in sales and marketing expenses included increases of $35 million in employee-related expenses primarily due to higher average headcount, $19 million related to marketing programs, and $9 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $1.3 billion for the nine months ended October 31, 2023, compared to $1.1 billion for the prior year period, an increase of $189 million, or 16%.

The increase in sales and marketing expenses included increases of $127 million in employee-related expenses primarily due to higher average headcount, $34 million related to marketing programs, and $17 million in travel expenses.

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

General and Administrative

GAAP operating expenses in general and administrative were $169 million for the three months ended July 31, 2023, compared to $140 million for the prior year period, an increase of $28 million, or 20%.

The increase in general and administrative expenses included an increase of $26 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

GAAP operating expenses in general and administrative were $336 million for the six months ended July 31, 2023, compared to $274 million for the prior year period, an increase of $62 million, or 23%.

The increase in general and administrative expenses included an increase of $51 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

Non-GAAP operating expenses in general and administrative were $102 million for the three months ended July 31, 2023, compared to $90 million for the prior year period, an increase of $13 million, or 14%.

The increase in general and administrative expenses included an increase of $10 million in employee-related expenses primarily due to higher headcount.

Non-GAAP operating expenses in general and administrative were $207 million for the six months ended July 31, 2023, compared to $176 million for the prior year period, an increase of $32 million, or 18%.

The increase in general and administrative expenses included an increase of $21 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.

GAAP operating expenses in general and administrative were $176 million for the three months ended October 31, 2023, compared to $154 million for the prior year period, an increase of $22 million, or 15%.

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

GAAP operating expenses in general and administrative were $512 million for the nine months ended October 31, 2023, compared to $428 million for the prior year period, an increase of $84 million, or 20%.

The increase in general and administrative expenses included an increase of $75 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

Non-GAAP operating expenses in general and administrative were $112 million for the three months ended October 31, 2023, compared to $102 million for the prior year period, an increase of $10 million, or 10%.

The increase in general and administrative expenses included an increase of $12 million in employee-related expenses primarily due to higher average headcount.

Non-GAAP operating expenses in general and administrative were $319 million for the nine months ended October 31, 2023, compared to $277 million for the prior year period, an increase of $42 million, or 15%.

The increase in general and administrative expenses included an increase of $32 million in employee-related expenses primarily due to higher average headcount.

We expect GAAP and non-GAAP general and administrative expenses will continue to increase in absolute dollars as we invest in our general and administrative organizations to support business growth.

Operating Margin

GAAP operating margin improved from (2.2)% for the three months ended July 31, 2022, to 2.0% for the three months ended July 31, 2023, primarily due to an increase in revenues, the moderation of operating expenses, and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

GAAP operating margin improved from (3.6)% for the six months ended July 31, 2022, to 0.5% for the six months ended July 31, 2023, primarily due to an increase in revenues, the moderation of operating expenses, and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

Non-GAAP operating margin improved from 19.6% for the three months ended July 31, 2022, to 23.6% for the three months ended July 31, 2023, primarily due to an increase in revenues, offset by the moderation of operating expenses and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

Non-GAAP operating margin improved from 19.9% for the six months ended July 31, 2022, to 23.5% for the six months ended July 31, 2023, primarily due to an increase in revenues, offset by the moderation of operating expenses and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in estimated useful lives of our data center equipment from 3 years to 5 years.

GAAP operating margin improved from (1.6)% for the three months ended October 31, 2022, to 4.7% for the three months ended October 31, 2023, primarily due to an increase in revenues, the moderation of operating expenses, and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

GAAP operating margin improved from (2.9)% for the nine months ended October 31, 2022, to 2.0% for the nine months ended October 31, 2023, primarily due to an increase in revenues, the moderation of operating expenses, and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating margin improved from 19.7% for the three months ended October 31, 2022, to 24.8% for the three months ended October 31, 2023, primarily due to an increase in revenues, offset by the moderation of operating expenses and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating margin improved from 19.8% for the nine months ended October 31, 2022, to 24.0% for the nine months ended October 31, 2023, primarily due to an increase in revenues, offset by the moderation of operating expenses and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

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, 2023

Three Months Ended October 31, 2023

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

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Operating margin 4.7 % 18.7 % 1.4 % 24.8 %

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 %

Six Months Ended July 31, 2023

Nine Months Ended October 31, 2023

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

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Operating margin 2.0 % 20.1 % 1.9 % 24.0 %

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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Other Income (Expense), Net

We had other income (expense), net of $46 million and $(33) million for the three months ended July 31, 2023, and 2022, respectively, and other income (expense), net of $72 million and $(53) million for the six months ended July 31, 2023, and 2022, respectively.

Other income, net for the three months ended July 31, 2023, primarily consisted of interest income of $70 million on our marketable securities from higher investment balances and rising interest rates, offset by contractual interest expense of $28 million on our debt primarily related to the Senior Notes.

Other expense, net for the three months ended July 31, 2022, primarily consisted of contractual interest expense of $28 million on our debt primarily related to the Senior Notes and net losses of $16 million on our equity investments, offset by interest income of $15 million on our marketable securities.

Other income, net for the six months ended July 31, 2023, primarily consisted of interest income of $132 million on our marketable securities from higher investment balances and rising interest rates, offset by contractual interest expense of $55 million on our debt primarily related to the Senior Notes and net losses of $7 million on our equity investments.

Other expense, net for the six months ended July 31, 2022, primarily consisted of contractual interest expense of $37 million on our debt primarily related to the Senior Notes and net losses of $24 million on our equity investments, offset by interest income of $19 million on our marketable securities.

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 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, 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, 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.

Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients.

• Other Operating Expenses.

Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.

The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business.

For business combinations, we generally allocate a portion of the purchase price to intangible assets.

The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization.

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, 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

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

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

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

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

We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures.

These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP.

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 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 the three and six months ended July 31, 2023, and 2022.

Other income (expense), net consisted of the following (in thousands):

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

2023 2022 2023 2022

Total other income (expense), net $ 41,388 $ 4,163 $ 113,652 $ (48,789)

Other income, net for the three months ended October 31, 2023, primarily consisted of interest income of $79 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of $28 million related to the Senior Notes and net losses of $14 million on our equity investments.

Other income, net for the three months ended October 31, 2022, primarily consisted of 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 primarily related to the Senior Notes.

Other income, net for the nine months ended October 31, 2023, primarily consisted of interest income of $211 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of $83 million related to the Senior Notes and net losses of $22 million on our equity investments.

Other expense, net for the nine months ended October 31, 2022, primarily consisted of interest expense of $74 million primarily related to the Senior Notes and net losses of $19 million on our equity investments, offset by interest income of $50 million on our marketable securities from higher investment balances and rising interest rates.

Liquidity and Capital Resources

As of July 31, 2023, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $6.7 billion, which were primarily held for working capital purposes.

As of October 31, 2023, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $6.9 billion, which were primarily held for working capital purposes.

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

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

Our cash flows for the three and six months ended July 31, 2023, and 2022, 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, 2023, and 2022, were as follows (in thousands):

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

2023 2022 2023 2022

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Operating Activities

Cash provided by operating activities was $425 million and $114 million for the three months ended July 31, 2023, and 2022, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales, the related cash collections, and interest income, partially offset by cash operating expenses.

Cash provided by operating activities was $703 million and $554 million for the six months ended July 31, 2023, and 2022, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales, the related cash collections, and interest income.

The improvement was offset by the first full-year payout of our performance-based cash bonus program, an interest payment on our Senior Notes that did not occur in the first quarter of fiscal 2023, due to the timing of our debt offering, and payments related to the workforce realignment announced in the fourth quarter of fiscal 2023.

Cash provided by operating activities was $451 million and $409 million for the three months ended October 31, 2023, and 2022, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections and interest received from marketable debt securities, some of which is included in the Prepaid expenses and other assets caption on the Condensed Consolidated Statement of Cash Flows.

Increases were partially offset by higher cash operating expenses, including the mid-year payout of our fiscal 2024 performance-based cash bonus program which did not occur in the prior fiscal year.

Cash provided by operating activities was $1.2 billion and $963 million for the nine months ended October 31, 2023, and 2022, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections and interest received from marketable debt securities.

The improvement was offset by higher cash operating expenses, including payouts under our new performance-based cash bonus program, an interest payment on our Senior Notes that did not occur in the prior fiscal year due to the timing of our debt offering, and payments related to the workforce realignment announced in the fourth quarter of fiscal 2023.

Investing Activities

Cash used in investing activities for the three months ended July 31, 2023, was $385 million, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $346 million and capital expenditures for data center and office space projects of $64 million, offset by proceeds of $25 million from sales of marketable securities.

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 six months ended July 31, 2023, was $1.1 billion, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $1.0 billion and capital expenditures for data center and office space projects of $123 million, offset by proceeds of $48 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, 2023, was $172 million, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $149 million and capital expenditures for data center and office space projects of $59 million, offset by proceeds of $46 million from sales of marketable securities.

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 nine months ended October 31, 2023, was $1.3 billion, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $1.2 billion and capital expenditures for data center and office space projects of $181 million, offset by proceeds of $93 million from sales of marketable securities.

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.

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Financing Activities

Cash used in financing activities was $49 million for the three months ended July 31, 2023, which was primarily due to repurchases of common stock under the Share Repurchase Program of $139 million, offset by $90 million in proceeds from the issuance of common stock from employee equity plans.

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 used in financing activities was $52 million for the six months ended July 31, 2023, which was primarily due to due to repurchases of common stock under the Share Repurchase Program of $139 million, offset by $87 million in proceeds from the issuance of common stock from employee equity plans.

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 used in financing activities was $150 million for the three months ended October 31, 2023, which was primarily due to repurchases of common stock under the Share Repurchase Program of $145 million.

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 $201 million for the nine months ended October 31, 2023, which was primarily due to due to repurchases of common stock under the Share Repurchase Program of $283 million, offset by $82 million in proceeds 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.

Free Cash Flows

In evaluating our performance internally, we focus on long-term, sustainable growth in free cash flows.

We define free cash flows, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus total capital expenditures.

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

Free cash flows improved to $391 million for the three months ended October 31, 2023, compared to $350 million for the prior year period.

The improvement was primarily due to increases in sales and the related cash collections and interest received from marketable debt securities, partially offset by higher cash operating expenses, including the mid-year payout of our fiscal 2024 performance-based cash bonus program which did not occur in the prior fiscal year.

Free cash flows improved to $969 million for the nine months ended October 31, 2023, compared to $676 million for the prior year period.

The improvement was primarily due to increases in sales and the related cash collections, interest received from marketable debt securities, and a reduction in capital expenditures for data center and office space projects.

Reconciliation of our GAAP net cash provided by (used in) operating activities to non-GAAP free cash flow is as follows (in thousands):

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

2023 2022 2023 2022

Net cash provided by (used in) operating activities $ 450,775 $ 408,668 $ 1,153,355 $ 962,743

Total capital expenditures (1)

(59,948) (58,846) (184,165) (286,459)

Free cash flows $ 390,827 $ 349,822 $ 969,190 $ 676,284

(1) Total capital expenditures consists of Capital expenditures, excluding owned real estate projects of $59 million, $59 million, $181 million, and $286 million for the three and nine months ended October 31, 2023 , and 2022, respectively, and Owned real estate projects of $1 million, $0.2 million, $3 million, and $0.4 million for the three and nine months ended October 31, 2023 , and 2022, respectively.

Share Repurchase Program

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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, 2023.

During the three and six months ended July 31, 2023, there were no significant changes to our critical accounting policies and estimates, other than the change in useful lives of our data center equipment as described in Note 1.

During the three and nine months ended October 31, 2023, there were no significant changes to our critical accounting policies and estimates, other than the change in useful lives of our data center equipment as described in Note 1.

Overview and Basis of Presentation , of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

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), non-GAAP operating margin, and free cash flows meet the definition of non-GAAP financial measures.

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

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.

• Share-Based Compensation Expenses.

Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients.

• Other Operating Expenses.

Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.

For business combinations, we generally allocate a portion of the purchase price to intangible assets.

The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization.

Free Cash Flows

We define free cash flows as net cash provided by (used in) operating activities minus total capital expenditures.

We use free cash flows as a measure of financial progress in our business, as it balances operating results, cash management, and capital efficiency.

We believe information regarding free cash flows provides investors and others with an enhanced view of cash flow generation from the ongoing operations of our business.

Limitations on the Use of Non-GAAP Financial Measures

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

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

We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures.

These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP.

See “Liquidity and Capital Resources—Free Cash Flows” for a reconciliation from the most comparable GAAP financial measure, Net cash provided by (used in) operating activities, to the non-GAAP financial measure, free cash flow, for the three and nine months ended October 31, 2023, and 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