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Item 7. Management’s Discussion and Analysis

2025-03-11 compared with 2024-03-08 · 143 added, 137 removed, 244 unchanged (53% of the section changed)

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

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs.

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The following discussion of our financial condition and results of operations covers fiscal 2025 and 2024 items and year-over-year comparisons between fiscal 2025 and 2024.

Discussions of fiscal 2022 items and year-over-year comparisons between fiscal 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2023, that was filed with the SEC on February 27, 2023.

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

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

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.

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.

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

We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling applications, 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 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, and expect to continue making acquisitions and investments in the future.

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.

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

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

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.

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.

Discussions of fiscal 2023 items and year-over-year comparisons between fiscal 2024 and 2023 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2024, that was filed with the SEC on March 8, 2024.

Workday is the AI platform that helps organizations manage their most important assets – their people and money.

We deliver cloud-based applications for financial management, HCM, planning, spend management, and analytics.

Our diverse customer base includes emerging, 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.

With Workday, our customers have an AI-powered platform that can help them deliver better employee experiences, increase productivity, improve operational efficiencies, and provide insights for faster, data-driven decision-making.

We have achieved significant growth since our inception in 2005, when we pioneered HCM in the cloud.

As a result of our innovation and commitment to customer success, today we are a Fortune 500 company with more than 11,000 customers around the world.

As we continue to grow, we are focused on driving sustainable, long-term subscription revenue growth by adding new customers and expanding our relationships with existing customers through increased adoption of our suite of solutions.

Central to this effort is investing in strategic growth areas including leveraging the power of our platform to drive increased adoption of our full suite of applications, expanding internationally, developing innovative AI solutions, growing our partner ecosystem, deepening our industry verticals, and exploring strategic acquisitions to complement our organic innovation.

Our investments across these targeted growth areas may require additional costs, but we remain committed to optimizing resource allocation and realizing a return on our investments.

Over time, we believe these investments will support revenue growth and a more scalable business.

We are focused on expanding our operating margin by driving scale and building efficiencies across the business through investments in people, processes, and systems.

In February 2025, we announced the Fiscal 2026 Restructuring Plan, which is intended to prioritize our investments and continue advancing our ongoing focus on durable growth.

The plan is currently expected to result in the reduction of approximately 8% of our workforce.

In connection with this plan, we expect to exit certain owned office space.

As a result of our focus on expanding operating margin, 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 invest in a disciplined manner to support our long-term growth objectives.

Impact of Current Economic Conditions

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.

Recent macroeconomic events including increased tariffs, elevated inflation, and fluctuating interest rates and foreign currency exchange rates, as well as geopolitical instability, continue to impact the global economy and create 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.

We have experienced, and may continue to experience, a moderation of revenue growth rates due to deal scrutiny and the lengthening of certain sales cycles, particularly within net new opportunities, and reduced growth in headcount level commitments upon renewals of existing customers.

Further, we have provided, and may continue to provide, certain customers with more flexible payment terms.

If the economic uncertainty continues, we may also experience additional negative impacts 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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Subscription services revenues $ 7,718 $ 6,603 17 %

GAAP operating income (loss) $ 183 $ (222) 182 %

GAAP operating income $ 415 $ 183 127 %

Non-GAAP operating income (1)

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12-month subscription revenue backlog $ 7,631 $ 6,623 15 %

24-month subscription revenue backlog

$ 11,656 $ 9,677 20 %

Cash, cash equivalents, and marketable securities $ 8,017 $ 7,813 3 %

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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 during fiscal 2024, and represented 97% of our total unearned revenue as of January 31, 2024.

Subscription services revenues accounted for approximately 91% of our total revenues for the fiscal year ended January 31, 2025, and represented 97% of our total unearned revenue as of January 31, 2025.

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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New products or services offerings by competitors in the future could also impact the mix and pricing of our offerings.

Subscription services revenues are recognized over time as services are delivered and consumed concurrently over the contractual term, beginning on the date our service is made available to the customer.

Subscription services revenues are recognized over time as services are delivered, beginning on the date our service is made available to the customer.

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

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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.

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

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

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

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

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

Costs and Expenses

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Product development expenses .

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

Sales and marketing expenses .

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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.

Restructuring expenses.

Restructuring expenses are associated with a formal restructuring program and consist of charges related to employee transition, severance payments, employee benefits, and share-based compensation, as well as exit charges associated with the closure of facilities.

Results of Operations

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

Our total revenues were as follows (in millions):

Year Ended January 31,

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Subscription services revenues were $7.7 billion for fiscal 2025, compared to $6.6 billion for fiscal 2024, an increase of $1.1 billion, or 17%.

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.

Approximately 60% of the increase in subscription services revenues was attributable to expansion of our customers that existed as of the beginning of the prior fiscal year, and the remaining 40% was attributable to customers added after the beginning of the prior fiscal year.

Professional services revenues were $728 million for fiscal 2025, compared to $656 million for fiscal 2024, an increase of $72 million, or 11%.

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

The increase in professional services revenues was driven by higher demand for our deployment and integration services.

Gross Revenue Retention Rate

Our growth in subscription services revenues attributable to existing customers is further reflected by our gross revenue retention rate of approximately 98% as of January 31, 2025.

Our gross revenue retention rate measures the percentage of recurring revenue retained from existing customers and is calculated by taking total annual recurring revenue (“ARR”) of our customers as of the corresponding prior period-end and comparing that to ARR from that same set of customers as of the current period-end.

The metric takes into account recurring revenues lost to product or customer churn but does not account for additional revenue earned from add-ons or net expansions, which include volume and price adjustments.

Our high gross revenue retention rate demonstrates our ability to maintain our existing customer base and drive strong overall customer satisfaction.

Our gross revenue retention rate is based on ARR, which represents the annualized value of active subscription contracts as of the end of each period.

Each subscription contract is annualized by dividing the total contract value by the number of days in the contract term and then multiplying by 365.

We exclude certain subscription contracts from the calculation, including contracts with terms less than one year that are distinct from our core product offering, such as contracts for tenants which are used for implementation and testing.

To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, ARR is only adjusted if the customer churns.

We calculate ARR on a constant currency basis using exchange rates set at the beginning of each fiscal year.

ARR is a non-GAAP financial measure and should be viewed independently of, and not as a substitute for or combined with, revenue and unearned revenue.

Subscription Revenue Backlog

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.

As of January 31, 2025, our total subscription revenue backlog was $25.1 billion, with $7.6 billion expected to be recognized in revenues over the next 12 months.

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

The increase in subscription revenue backlog was primarily driven by expansion within our existing customer base, sales to new customers, and timing of renewals for existing customers.

Costs and Expenses

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

Our costs and expenses were as follows (in millions):

Year Ended January 31,

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General and administrative 820 702 599

Restructuring

Total costs and expenses $ 8,031 $ 7,076 $ 6,438

Total costs and expenses were $8.0 billion for fiscal 2025, compared to $7.1 billion for fiscal 2024, an increase of $955 million, or 13%.

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”).

The increase in operating expenses included increases of $555 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $84 million in restructuring expenses primarily related to the Fiscal 2026 Restructuring Plan, $57 million in facilities and IT-related expenses, $56 million in data center capacity expenses, $46 million in subcontractor expenses, $44 million in professional services expenses, $38 million in depreciation, $37 million in amortization of deferred sales commissions due to increased sales, and $31 million related to marketing programs.

Costs of Subscription Services

Costs of subscription services were $1.3 billion for fiscal 2025, compared to $1.0 billion for fiscal 2024, an increase of $235 million, or 23%.

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.

The increase in costs of subscription services included increases of $132 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $44 million in data center capacity expenses, and $39 million in depreciation.

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

Costs of Professional Services

Costs of professional services were $803 million for fiscal 2025, compared to $740 million for fiscal 2024, an increase of $63 million, or 9%.

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.

The increase in costs of professional services included increases of $46 million in subcontractor expenses and $12 million in employee-related expenses.

We expect costs of professional services as a percentage of total revenues to continue to decline as we 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 $2.6 billion for fiscal 2025, compared to $2.5 billion for fiscal 2024, an increase of $160 million, or 7%.

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.

The increase in product development expenses included an increase of $158 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

We expect product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies, including costs incurred for hardware maintenance, data center capacity, facility costs, and IT-related expenses.

Sales and Marketing

Sales and marketing expenses were $2.4 billion for fiscal 2025, compared to $2.1 billion for fiscal 2024, an increase of $294 million, or 14%.

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.

The increase in sales and marketing expenses included increases of $180 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $37 million in amortization of deferred sales commissions due to increased sales, $30 million related to marketing programs, and $25 million in facilities and IT-related 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.

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General and administrative expenses were $820 million for fiscal 2025, compared to $702 million for fiscal 2024, an increase of $118 million, or 17%.

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.

The increase in general and administrative expenses included increases of $73 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, and $36 million in professional services expenses.

We expect general and administrative expenses will continue to increase in absolute dollars as we continue to grow our business and invest in our people, processes, and systems to support our global operations.

Restructuring

Restructuring expenses were $84 million for fiscal 2025, with no comparable expense in the prior year.

We recorded expenses of $65 million for employee transition, severance payments, employee benefits, and share-based compensation under the Fiscal 2026 Restructuring Plan and exit charges of $19 million associated with office space reductions under a separate restructuring plan.

We estimate that we will incur approximately $230 million to $250 million in total charges in connection with the Fiscal 2026 Restructuring Plan, which consists of approximately $200 million to $210 million related to employee transition, severance payments, employee benefits, and share-based compensation, with the balance related to an impairment of office space.

The activities associated with this plan are expected to be substantially complete by the second quarter of fiscal 2026, subject to local law and consultation requirements.

Share-based compensation

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

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

Year Ended January 31,

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General and administrative 272 245 210

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

Restructuring

Total share-based compensation expense

$ 1,519 $ 1,416 $ 1,295

Percentage of total revenues

18.0 % 19.5 % 20.8 %

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.

Share-based compensation expense increased by $103 million during fiscal 2025, primarily due to additional grants to new and existing employees.

Equity compensation is an important element of our compensation philosophy.

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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.

GAAP operating income was $415 million, or 4.9% of revenues, in fiscal 2025, compared to $183 million, or 2.5% of revenues in fiscal 2024.

The improvement was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses, including share-based compensation, partially offset by restructuring expenses recognized in the current fiscal year.

Non-GAAP operating income was $2.2 billion, or 25.9% of revenues, in fiscal 2025, compared to $1.7 billion, or 24.0% of revenues in fiscal 2024.

The increase was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.

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

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Year Ended January 31,

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

Amortization of Acquisition-Related Intangible Assets

2025 2024 2023

Operating income (loss) $ 415 $ 183 $ (222)

Operating margin 2.5 % 19.5 % 0.9 % 1.1 % 24.0 %

Year Ended January 31, 2023

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

Share-based compensation expense (1)

1,511 1,416 1,290

Employer payroll tax-related items on employee stock transactions 76 66 50

Amortization of acquisition-related intangible assets 79 75 86

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

Acquisition-related costs

Restructuring costs

Non-GAAP operating income $ 2,186 $ 1,741 $ 1,247

Operating margin 4.9 % 2.5 % (3.6) %

Year Ended January 31, 2022

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

Share-based compensation expense (1)

17.9 % 19.5 % 20.8 %

Employer payroll tax-related items on employee stock transactions 0.9 % 0.9 % 0.8 %

Amortization of acquisition-related intangible assets 0.9 % 1.1 % 1.5 %

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

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

Acquisition-related costs

0.2 % 0.0 % 0.0 %

Restructuring costs

1.1 % 0.0 % 0.6 %

Non-GAAP operating margin 25.9 % 24.0 % 20.1 %

(1) The Share-based compensation expense lines in the GAAP to non-GAAP reconciliation tables above exclude share-based compensation expense of $8 million in fiscal 2025 related to restructuring initiatives.

This expense is included in the Restructuring costs lines.

Other Income (Expense), Net

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

Other income (expense), net was as follows (in millions):

Year Ended January 31,

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Total other income (expense), net $ 223 $ 173 $ (38)

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 increased by $50 million for fiscal 2025, primarily due to increases in interest income earned from higher investment balances and increased average interest rates.

Provision For (Benefit From) Income Taxes

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

The provision for (benefit from) income taxes was as follows (in millions):

Year Ended January 31,

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Provision for (benefit from) income taxes $ 112 $ (1,025) $ 107

The income tax provision for fiscal 2025 was primarily attributable to an increase in our U.S.

pretax income and income tax expenses in profitable foreign jurisdictions.

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.

Pillar Two rules are at varying stages of adoption across the jurisdictions where we operate.

The specific rules and timeline to implement these rules vary by jurisdiction.

The adoption of Pillar Two rules may affect our effective tax rate and current tax obligations and liabilities.

While we do not currently anticipate Pillar Two rules to have a material impact on our consolidated financial results, we are monitoring developments from the OECD, governmental bodies, such as the EU, and intergovernmental economic organizations, to evaluate the impact of changing global tax laws.

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

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, corporate bonds, U.S.

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

agency obligations.

As of January 31, 2025, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $8.0 billion, which were primarily held for working capital and general corporate purposes.

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

treasury securities, money market funds, U.S.

agency obligations, commercial paper, and asset-backed securities.

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 and beyond.

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.

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, share repurchase, and debt repayment needs over the next 12 months and beyond.

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, infrastructure development, and our investment and acquisition activities.

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

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

Our cash flows were as follows (in millions):

Year Ended January 31,

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Net increase (decrease) in cash, cash equivalents, and restricted cash

$ (470) $ 129 $ 354

Operating Activities

Cash provided by operating activities was $2.5 billion and $2.1 billion for fiscal 2025 and 2024, 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.

In fiscal 2025, the improvement in cash flow provided by operating activities was primarily the result of higher cash collections of $868 million due to increased sales and additional interest income received of $112 million from marketable debt securities, offset by increased employee-related payments of $465 million primarily due to higher average headcount and increased supplier payments of $171 million to support our continued growth.

Investing Activities

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 2025 was $1.8 billion, which primarily resulted from a net cash outflow of $667 million related to marketable debt securities activities, cash consideration, net of cash acquired, of $522 million and $303 million for the acquisitions of HiredScore and Evisort, respectively, and capital expenditures of $269 million for data center and office space projects.

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

We expect capital expenditures will be approximately $250 million in fiscal 2026.

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

This primarily includes investments in our office facilities to support our continued growth.

Financing Activities

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.

Cash used in financing activities for fiscal 2025 was $1.2 billion, which was due to repurchases of common stock of $700 million under our share repurchase programs and taxes paid of $636 million related to net share settlement of equity awards, offset by proceeds of $186 million from the issuance of common stock from employee equity plans.

Cash used in financing activities for fiscal 2024 was $268 million, which was due to repurchases of common stock of $423 million under our share repurchase programs, offset by proceeds of $155 million from the issuance of common stock from employee equity plans.

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.

We define free cash flows, a non-GAAP financial measure, as net cash provided by operating activities minus 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):

Free cash flows were $2.2 billion for fiscal 2025, compared to $1.9 billion for the prior year period.

The improvement was primarily the result of higher cash collections of $868 million due to increased sales and additional interest income received of $112 million from marketable debt securities, offset by increased employee-related payments of $465 million primarily due to higher average headcount, increased supplier payments of $171 million to support our continued growth, and increased capital expenditures of $37 million.

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

Year Ended January 31,

2025 2024 2023

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

Total capital expenditures (1)

(232) (364) (435)

Net cash provided by operating activities $ 2,461 $ 2,149 $ 1,657

Capital expenditures (269) (232) (364)

Free cash flows

$ 2,192 $ 1,917 $ 1,293

(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.

In August 2024, our Board of Directors authorized the August 2024 Share Repurchase Program, under which we may repurchase up to $1.0 billion of our outstanding shares of our Class A common stock.

Prior to the August 2024 Share Repurchase Program, our Board of Directors authorized a $500 million share repurchase program in February 2024, which we completed in the third quarter of fiscal 2025, and a $500 million share repurchase program in November 2022, which we completed in the first quarter of fiscal 2025.

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

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

Change in Non-GAAP Financial Measures

Effective beginning fiscal 2025, we exclude certain acquisition-related costs and restructuring costs from our non-GAAP results as they may vary from period-to-period independent of the operating performance of our business.

Prior period amounts have been recast to conform to this presentation.

Non-GAAP Operating Income and Non-GAAP Operating Margin

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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.

• Share-based compensation expense.

Share-based compensation primarily consists of non-cash expenses for employee RSUs and our employee stock purchase plan (“ESPP”).

Although share-based compensation is an important aspect of the compensation of our employees and executives, this expense is 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 expense is 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.

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

Similar to share-based compensation expense, 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 our business.

• Amortization of acquisition-related intangible assets .

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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.

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

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.

• Acquisition-related costs.

Acquisition-related costs include direct transaction costs, such as due diligence and advisory fees, and certain compensation and integration-related expenses.

We exclude the effects of acquisition-related costs as we believe these transaction-specific expenses are inconsistent in amount and frequency and do not correlate to the operation of our business.

• Restructuring costs.

Restructuring costs are associated with a formal restructuring plan and are primarily related to employee severance, the closure of facilities, and cancellation of certain contracts.

We exclude these expenses because they are not reflective of ongoing business and operating results.

Free Cash Flows

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

We define free cash flows as net cash provided by operating activities minus 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.

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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.

Further, these non-GAAP financial measures 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.

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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 2025, 2024, and 2023.

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.

See “Liquidity and Capital Resources—Free Cash Flows” for a reconciliation from the most comparable GAAP financial measure, net cash provided by operating activities, to the non-GAAP financial measure, free cash flows, for fiscal 2025, 2024, and 2023.

Critical Accounting Policies and Estimates

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

We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors.

We determined the period of benefit by exercising judgment, taking into consideration our customer contracts, our technology, and other factors.

Periodically, we review whether events or changes in circumstances have occurred that could impact the period of benefit.

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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.

We record a provision for, or 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.

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We allocate the purchase consideration of acquired companies to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, with the excess recorded to goodwill.

The purchase price allocation process requires us to make significant estimates and assumptions related to the fair value of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies.

The purchase price allocation process requires us to make significant estimates and assumptions related to the fair value of identifiable intangible assets.

Critical estimates used in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer contracts, expected life cycle and innovation timelines for acquired technologies, forecasted customer attrition rates and revenue growth, the fair value of pre-existing relationships, royalty rates for comparable market technologies, and discount rates.

The amounts and estimated useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.

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, 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.

We also evaluate the estimated remaining useful lives of acquisition-related intangible assets for changes in circumstances that warrant a revision to the remaining periods of amortization at least annually, or more frequently if significant events or circumstances indicate a change in expected use.

Non-Marketable Equity Investments

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

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

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

In addition, the rights and preferences related to the particular non-marketable equity investments, as compared to the rights and preferences of other securities within the company’s capital structure, may impact the magnitude of change in the fair value of our investment as compared to the change in total enterprise value of the company.

We assess our non-marketable equity investments quarterly for impairment.

Our impairment analysis encompasses a qualitative and quantitative analysis of key factors including the investee’s financial metrics, such as growth or decline in revenues and operating expenses, market acceptance of the investee’s product or technology, other competitive products or technology in the market, general market conditions, and the rate at which the investee is using its cash.

These factors require significant judgment.

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

Change in Accounting Estimate

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