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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-02-27 · 185 added, 161 removed, 196 unchanged (64% of the section changed)

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

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

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

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

We have achieved significant growth since our inception in 2005.

Our current financial focus is on growing our revenues, operating margin, and operating cash flows, and expanding both our customer base and our footprint within our existing customers.

While we have a history of GAAP operating losses prior to fiscal 2024, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives.

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

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We 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 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.

In addition, we plan to continue to expand our ability to sell our applications globally, particularly in Europe and the Asia-Pacific region, 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 partners.

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

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

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

For example, 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.

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

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

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

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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.

As we continue to leverage our expanding partner ecosystem, we expect that professional services revenue will continue to decline over time as a percentage of total revenues.

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.

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.

Recent macroeconomic events including higher inflation and interest rates, as well as geopolitical factors including the Russia-Ukraine and Israel-Hamas conflicts, have negatively impacted the global economy and created continued uncertainty, volatility, and disruption of financial markets.

Despite this, we are confident in the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy and help our customers on their human capital and finance digital transformation journeys.

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

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

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Financial Results Overview

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

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

As of and for the Years Ended January 31,

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Operating cash flows $ 2,149 $ 1,657 30 %

Free cash flows (1)

$ 1,917 $ 1,293 48 %

Total subscription revenue backlog $ 20,924 $ 16,448 27 %

12-month subscription revenue backlog $ 6,623 $ 5,512 20 %

24-month subscription revenue backlog

$ 11,656 $ 9,677 20 %

Cash, cash equivalents, and marketable securities $ 7,813 $ 6,121 28 %

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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.

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.

We generally invoice our customers annually in advance for subscription services.

We may provide certain customers flexible payment terms and the timing of revenue recognition may differ from the timing of invoicing to our customers.

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

We generally invoice our customers in arrears for our professional services.

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 for services engagements.

Subscription Revenue Backlog

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Costs of subscription services revenues .

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

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

Costs of professional services revenues .

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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.

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.

Results of Operations

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

Our total revenues for fiscal 2024, 2023, and 2022, were as follows (in millions):

Year Ended January 31,

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Subscription services revenues were $6.6 billion for fiscal 2024, compared to $5.6 billion for fiscal 2023, an increase of $1.0 billion, or 19%.

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.

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

Professional services revenues were $656 million for fiscal 2024, compared to $649 million for fiscal 2023, an increase of $7 million, or 1%.

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

Professional services revenues remained relatively consistent as we continued to leverage our service partners to contract directly with our subscription customers for services engagements.

Subscription Revenue Backlog

As of January 31, 2023, our total subscription revenue backlog was $16.4 billion, with $9.7 billion expected to be recognized in revenues over the next 24 months.

As of January 31, 2022, our total subscription revenue backlog was $12.8 billion, with $8.0 billion expected to be recognized in revenues over the next 24 months.

The increase in subscription revenue backlog during fiscal 2023 was primarily driven by the addition of new customers, expansion of our product offerings with existing customers, and the timing of renewals.

Operating Expenses

GAAP operating expenses were $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.

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

As of January 31, 2024, our total subscription revenue backlog was $20.9 billion, with $6.6 billion and $11.7 billion expected to be recognized in revenues over the next 12 and 24 months, respectively.

As of January 31, 2023, our total subscription revenue backlog was $16.4 billion, with $5.5 billion and $9.7 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, timing of renewals for existing customers, expansion of our product offerings provided to existing customers, and longer duration of customer contracts.

Costs and Expenses

Our costs and expenses for fiscal 2024, 2023, and 2022, were as follows (in millions):

Year Ended January 31,

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

Non-GAAP Operating Expenses (2)

2024 2023 2022

Costs of subscription services $ 1,031 $ 1,011 $ 796

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Total costs and expenses $ 7,076 $ 6,438 $ 5,255

Year Ended January 31, 2022

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

Non-GAAP Operating Expenses (2)

Total costs and expenses were $7.1 billion for fiscal 2024, compared to $6.4 billion for fiscal 2023, an increase of $638 million, or 10%.

The increase in total costs and expenses was primarily due to an increase of $516 million in employee-related expenses, including share-based compensation.

The increase in employee-related expenses was mainly driven by higher headcount, partially offset by a $40 million impact from a workforce realignment that occurred in fiscal 2023 and a $28 million impact from a change in the vesting dates of all unvested restricted stock units (“RSU”) from the 15th to the 5th of each month (“vest date change”) in fiscal 2023.

Additional increases in total costs and expenses included $66 million in third-party expenses for hardware maintenance and data center capacity, $56 million in facilities and IT-related expenses, $54 million related to marketing programs, and $38 million in travel expenses, offset by a decrease of $93 million in depreciation expense due to a change 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”).

Costs of Subscription Services

Costs of subscription services were $1.0 billion for fiscal 2024, compared to $1.0 billion for fiscal 2023, an increase of $20 million, or 2%.

The increase in costs of subscription services included increases of $62 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $44 million in third-party expenses for hardware maintenance and data center capacity, and $16 million in facilities and IT-related expenses, offset by a decrease of $89 million in depreciation expense due to the change in useful lives of data center equipment.

We expect 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

Costs of professional services were $740 million for fiscal 2024, compared to $704 million for fiscal 2023, an increase of $36 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.

We expect 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 our subscription services revenues continue to grow as we expand both our customer base and our footprint within our existing customers.

Product Development

Product development expenses were $2.5 billion for fiscal 2024, compared to $2.3 billion for fiscal 2023, an increase of $193 million, or 8%.

The increase in product development expenses included increases of $148 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $22 million in third-party expenses for hardware maintenance and data center capacity, and $15 million in facilities and IT-related expenses.

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

Sales and Marketing

Sales and marketing expenses were $2.1 billion for fiscal 2024, compared to $1.8 billion for fiscal 2023, an increase of $291 million, or 16%.

The increase in sales and marketing expenses included increases of $191 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $51 million related to marketing programs, $21 million in facilities and IT-related expenses, and $21 million in travel expenses.

We expect 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

Total costs and expenses $ 5,255,248 $ (1,112,405) $ (153,749) $ 3,989,094

General and administrative expenses were $702 million for fiscal 2024, compared to $604 million for fiscal 2023, an increase of $98 million, or 16%.

The increase in general and administrative expenses included increases of $77 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount and $11 million in travel expenses.

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

Share-based compensation

Costs and expenses include share-based compensation expenses as follows (in millions):

Year Ended January 31,

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

Non-GAAP Operating Expenses (2)

Costs of subscription services $ 611,912 $ (63,253) $ (34,799) $ 513,860

Costs of professional services 586,220 (101,869) (6,486) 477,865

Product development 1,721,222 (505,376) (27,567) 1,188,279

Sales and marketing 1,233,173 (202,819) (35,797) 994,557

General and administrative 414,068 (131,537) (6,337) 276,194

Total costs and expenses $ 4,566,595 $ (1,004,854) $ (110,986) $ 3,450,755

(1) Other operating expenses include amortization of acquisition-related intangible assets of $86 million, $78 million, and $60 million for fiscal 2023, 2022, and 2021, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $52 million, $76 million, and $51 million for fiscal 2023, 2022, and 2021, respectively.

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

2024 2023 2022

Costs of subscription services $ 120 $ 106 $ 86

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 $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.

Costs of professional services 116 111 113

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 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 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.

Product development 653 619 543

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 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 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.

Sales and marketing 282 249 216

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 $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.

General and administrative 245 210 154

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 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 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.

Operating Margin

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.

Total share-based compensation expenses $ 1,416 $ 1,295 $ 1,112

Percentage of total revenues

19.5 % 20.8 % 21.6 %

Share-based compensation expenses increased by $121 million during fiscal 2024, primarily due to additional grants to new and existing employees, partially offset by the $28 million impact of the vest date change in fiscal 2023.

Share-based compensation expenses increased by $183 million during fiscal 2023, primarily due to additional grants to new and existing employees, and an acceleration of $28 million of expense related to the vest date change in fiscal 2023.

Equity compensation is an important element of our compensation philosophy.

While we expect share-based compensation expense to grow in absolute dollars as we expand our global workforce, we expect it to continue to decline as a percentage of total revenues.

Operating Income (Loss) and Operating Margin

GAAP operating income (loss) increased from $(222) million, or (3.6)% of revenues, in fiscal 2023 to $183 million, or 2.5% of revenues, in fiscal 2024, primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.

This improvement also included a $93 million, or 1.3% of revenues, benefit from the change in useful lives of data center equipment.

Non-GAAP operating income increased from $1.2 billion, or 19.5% of revenues, in fiscal 2023 to $1.7 billion, or 24.0% of revenues in fiscal 2024, primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.

This improvement also included a $93 million, or 1.3% of revenues, benefit from 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 millions, except percentages).

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

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

Year Ended January 31, 2024

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

GAAP Share-Based Compensation Expenses Employer Payroll Tax-Related Items on Employee Stock Transactions

Amortization of Acquisition-Related Intangible Assets

Operating income (loss) $ 183 $ 1,416 $ 66 $ 75 $ 1,740

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Year Ended January 31, 2023

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

GAAP Share-Based Compensation Expenses Employer Payroll Tax-Related Items on Employee Stock Transactions

Amortization of Acquisition-Related Intangible Assets

Operating income (loss) $ (222) $ 1,295 $ 52 $ 85 $ 1,210

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Year Ended January 31, 2022

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

GAAP Share-Based Compensation Expenses Employer Payroll Tax-Related Items on Employee Stock Transactions

Amortization of Acquisition-Related Intangible Assets

Operating income (loss) $ (116) $ 1,112 $ 76 $ 78 $ 1,150

Operating margin (2.3) % 21.6 % 1.6 % 1.5 % 22.4 %

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

Other Income (Expense), Net

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

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

Year Ended January 31,

2024 2023 2022

Total other income (expense), net $ 173 $ (38) $ 132

Other income, net in fiscal 2024 was primarily due to interest income of $296 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of $114 million related to our Senior Notes and net losses of $24 million on our equity investments.

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 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 fiscal 2023, 2022, and 2021.

Provision For (Benefit From) Income Taxes

The provision for (benefit from) income taxes consisted of the following (in millions):

Year Ended January 31,

2024 2023 2022

Provision for (benefit from) income taxes $ (1,025) $ 107 $ (13)

The income tax benefit for fiscal 2024 was primarily attributable to the $1.1 billion release of our valuation allowance related to all U.S.

federal and state deferred tax assets, excluding certain state tax credits.

For further information, see Note 17, Income Taxes , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

The income tax expense for fiscal 2023 was primarily attributable to a taxable gain recognized from integrating intellectual property, income tax expenses in profitable foreign jurisdictions, and an increase in state taxes due to capitalized research and development expenditures.

The income tax benefit for fiscal 2022 was primarily attributable to excess tax benefit from stock option deductions in foreign jurisdictions, reversal of previously accrued tax liabilities upon favorable tax audit results, and amortization of intangibles from business combinations.

The Organization for Economic Cooperation and Development (“OECD”) released Pillar Two model rules defining a 15% global minimum tax for large multinational corporations.

The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected in the near future.

We are in the process of evaluating the potential impacts of Pillar Two.

While we do not currently expect Pillar Two to have a material impact on our effective tax rate, our analysis is ongoing and incomplete, and it is possible that Pillar Two could have a material adverse effect on our tax liability.

Liquidity and Capital Resources

As of January 31, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $7.8 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.

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

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

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

treasury securities, commercial paper, money market funds, and U.S.

agency obligations.

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

We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to the remaining term of contracted noncancelable subscription agreements, which are not reflected on the 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):

Our cash flows for fiscal 2024, 2023, and 2022 were as follows (in millions):

Year Ended January 31,

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Operating Activities

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 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.

Cash provided by operating activities was $2.1 billion and $1.7 billion for fiscal 2024 and 2023, respectively.

In fiscal 2024, the improvement in cash flow provided by operating activities was primarily due to an increase in sales and the related billings, strong cash collections, interest received from marketable debt securities, and a one-time intellectual property transfer tax payment made in fiscal 2023.

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 fiscal 2023.

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.

Cash used in investing activities for fiscal 2024 was $1.8 billion, which primarily resulted from a cash outflow of $1.6 billion from the timing of purchases and maturities of marketable securities and total capital expenditures of $232 million for data center and office space projects, offset by proceeds of $144 million from sales of marketable securities.

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, total capital expenditures of $364 million for data center and office space projects, and purchases of $23 million for non-marketable equity and other investments.

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 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.

We expect capital expenditures will be approximately $330 million in fiscal 2025.

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

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

Financing Activities

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.

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 under the 2020 Credit Agreement.

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.

For fiscal 2024, cash used by financing activities was $268 million, which was due to $423 million of repurchases of common stock under the 2022 Share Repurchase Program, offset by proceeds of $155 million from the issuance of common stock from employee equity plans.

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 $694 million for the term loan under the credit agreement entered into in April 2020 (“2020 Credit Agreement”), and $75 million of repurchases of common stock under the 2022 Share Repurchase Program.

Beginning in April 2024, we intend to fund withholding taxes due on employee equity awards by net share withholding, rather than our current approach of selling shares of our common stock on our employees’ behalf to cover taxes upon vesting of such awards.

We expect this net share withholding approach will increase our financing cash outflows and reduce the number of shares that will be issued in connection with the vesting of our employee equity awards.

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 $1.9 billion for fiscal 2024, compared to $1.3 billion for fiscal 2023.

The improvement was primarily due to increases in sales and the related billings, strong cash collections, interest received from marketable debt securities, a one-time intellectual property transfer tax payment made in fiscal 2023, 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 flows is as follows (in millions):

Year Ended January 31,

2024 2023 2022

Net cash provided by (used in) operating activities $ 2,149 $ 1,657 $ 1,651

Total capital expenditures (1)

(232) (364) (435)

Free cash flows

$ 1,917 $ 1,293 $ 1,216

(1) Total capital expenditures consists of Capital expenditures, excluding owned real estate projects of $228 million, $360 million, and $264 million for fiscal 2024, 2023, and 2022, respectively, and Owned real estate projects of $4 million, $4 million, and $171 million for fiscal 2024, 2023, and 2022, respectively.

Share Repurchase Programs

In November 2022, our Board of Directors authorized the 2022 Share Repurchase Program, under which we may repurchase up to $500 million of our outstanding shares of Class A common stock.

The 2022 Share Repurchase Program has 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.

For further information, see Note 14, Stockholders’ Equity , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

In February 2024, our Board of Directors authorized the 2024 Share Repurchase Program, under which we may repurchase up to an additional $500 million of our outstanding shares of Class A common stock.

For further information, see Note 21, Subsequent Events , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

Contractual Obligations

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).

Our contractual obligations primarily consist of borrowings under our Senior Notes, agreements for third-party hosted infrastructure platforms for business operations, leases for office space and co-location facilities for data center capacity, 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, 2024 (in millions).

For further information, see the associated Notes to Consolidated Financial Statements included in Part II, Item 8 of this report referenced in the table below.

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$ 3,679 $ 110 $ 3,569 Note 11

Operating leases 300,821 97,387 203,434 Note 12

Third-party hosted infrastructure platform obligations 1,857 180 1,677 Note 13

Operating leases 359 100 259 Note 12

Other purchase obligations 463 120 343 Note 13

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

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

Non-GAAP Operating Income and Non-GAAP Operating Margin

We use the non-GAAP financial measures of non-GAAP operating income 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 financial 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 income and non-GAAP operating margin exclude the components listed below.

• Share-based compensation expenses.

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.

• Employer payroll tax-related items on employee stock transactions .

We exclude the employer payroll tax-related items on employee stock transactions in order to show the full effect that excluding share-based compensation expenses has on our operating results.

Similar to share-based compensation expenses, this tax expense is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business.

• 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.

Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP financial 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.

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 income, 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.

Further, the non-GAAP financial measures of non-GAAP operating income, non-GAAP operating margin, and free cash flows have certain limitations as they do not reflect all items of expense or cash that affect our operations and are reflected in the corresponding GAAP financial measures.

In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation, 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.

See “Results of Operations—Operating Income (Loss) and Operating Margin” for reconciliations from the most directly comparable GAAP financial measures of GAAP operating income (loss) and GAAP operating margin, to the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin, for fiscal 2024, 2023, and 2022.

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 flows, for fiscal 2024, 2023, and 2022.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP.

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

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

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

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

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

We believe that of our significant accounting policies, which are described in Note 2, Accounting Standards and Significant Accounting Policies , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report, the following accounting policies and specific estimates involve a greater degree of judgment and complexity.

Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and operating results.

Accordingly, these are the policies and estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and operating results.

Revenue Recognition

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

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

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

Identification of Performance Obligations

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

We record a provision for (benefit from) income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method.

Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

A valuation allowance is established when necessary to reduce deferred tax assets to the net amount that is more likely than not to be realized.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets.

In assessing the need for a valuation allowance, we consider all available evidence, both positive and negative, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.

In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for (benefit from) income taxes in the period in which such determination is made.

We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits.

The tax benefit recognized is measured as the largest amount of benefit which is greater than 50% likely to be realized upon settlement with the taxing authority.

Significant judgment is required to evaluate uncertain tax positions.

Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law or guidance, correspondence with tax authorities during the course of audits, and effective settlement of audit issues.

Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our provision for (benefit from) income taxes in the period in which we make the change.

Business Combinations, Goodwill, and Acquisition-Related Intangible Assets

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We test goodwill and acquisition-related intangible assets for impairment on an annual basis, or more frequently if a significant event or circumstance indicates impairment, by considering qualitative and quantitative factors.

Significant qualitative inputs used in our impairment tests include, but are not limited to, consideration of general macroeconomic conditions, industry market conditions, overall Workday financial performance, and growth or declines in Workday’s share price.

Significant qualitative inputs used in our impairment tests include, but are not limited to, consideration of general macroeconomic conditions, industry market conditions, Workday’s overall financial performance, and growth or declines in Workday’s share price.

The primary quantitative input for our impairment test is Workday’s market capitalization as of the date of the analysis.

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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.

See N ote 1, Overview and Basis of Presentation , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information on our change in estimated useful lives of our data center equipment in fiscal 2024.

Recent Accounting Pronouncements

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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