WORKDAY INC. You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report. Overview Workday provides financial management, human capital management, planning, and analytics applications designed for the world's largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers with highly adaptable, accessible, and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources. We were founded in 2005 to deliver cloud applications to global enterprises. Our applications are designed around the way people work today-in an environment that is global, collaborative, fast-paced, and mobile. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our HCM application in 2006 and our Financial Management application in 2007. Since then we have continued to invest in innovation and have consistently introduced new services to our customers. We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with contract terms of three years or longer and with subscription fees largely based on the size of the customer's workforce. We generally recognize revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription services revenues from subscriptions to our HCM application. We market our applications primarily through our direct sales force. Our diverse customer base includes medium-sized and large, global companies, as well as smaller organizations that primarily use our planning product. We have achieved significant growth in a relatively short period of time with a substantial amount of our growth coming from new customers. Our current financial focus is on growing our revenues and expanding our customer base. While we are incurring losses today, 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. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to the significant growth of our employee population. We had approximately 11,800 and 10,200 employees as ofOctober 31, 2019 , and 2018, respectively. We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our product development efforts to deliver additional compelling applications and to address customers' evolving needs. In addition, we plan to continue to expand our ability to sell our applications globally, particularly inEurope andAsia , by investing in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, acquiring, building and/or leasing additional office space, and expanding our ecosystem of service partners to support local deployments. We expect to make further significant investments in our data center capacity as we plan for future growth. We are also investing in personnel to service our growing customer base. 27
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We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, and intellectual property rights in an effort to expand our product and service offerings. We expect to continue to make such acquisitions and investments in the future, and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the industry. While we remain focused on improving operating margins, these acquisitions and investments will 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. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over time 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 and by utilizing more of the capacity of our data centers. 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 service partner ecosystem to further support our customers. We believe our investment in professional services, as well as partners building consulting practices around Workday, will drive additional customer subscriptions and continued growth in revenues. Due to our ability to leverage the expanding partner ecosystem, we expect that the rate of professional services revenue growth will decline over time and continue to be lower than subscription services revenue growth. Components of Results of Operations Revenues We primarily derive our revenues from subscription services and professional services. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include related customer support. Professional services fees include deployment services, optimization services, and training. Subscription services revenues accounted for 85% of our total revenues during the three and nine months endedOctober 31, 2019 , and represented 96% of our total unearned revenue as ofOctober 31, 2019 . Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the specific applications subscribed to by each customer, and the price of our applications. The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Pricing for our applications varies based on many factors, including the complexity and maturity of the application and its acceptance in the marketplace. 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 they are delivered and consumed concurrently over the contractual term, 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 non-cancelable. 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 or fixed fee basis, and revenues are typically recognized over time as the services are performed. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As our professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenues, we expect professional services revenues as a percentage of total revenues to decline over time. Costs and Expenses Costs of subscription services revenues. Costs of subscription services revenues consist primarily of employee-related expenses related to hosting our applications and providing customer support, the costs of data center capacity, and depreciation of computer equipment and software. Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors, and travel. Product development. Product development expenses consist primarily of employee-related costs. We continue to focus our product development efforts on adding new features and applications, increasing the functionality, and enhancing the ease of use of our cloud applications. 28
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Sales and marketing. Sales and marketing expenses consist primarily of employee-related costs, sales commissions, marketing programs, and travel. Marketing programs consist of advertising, events, corporate communications, brand building, and product marketing activities. Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. General and administrative. General and administrative expenses consist of employee-related costs for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses. Results of Operations Revenues Our total revenues for the three and nine months endedOctober 31, 2019 , and 2018, were as follows (in thousands, except percentages): Three Months EndedOctober 31 , Nine
Months Ended
2019 2018 % Change 2019 2018 % Change
Revenues:
Subscription $ 798,516 $ 624,416 28% $ 2,256,695 $ 1,712,224 32%
services
Professional 139,584 118,773 18% 394,212 321,328 23%
services
Total $ 938,100 $ 743,189 26% $ 2,650,907 $ 2,033,552 30%
revenues
Total revenues were $938 million for the three months ended October 31, 2019 ,
compared to $743 million during the prior year period, an increase of $195
million , or 26%. Subscription services revenues were $799 million for the three
months ended October 31, 2019 , compared to $624 million for the prior year
period, an increase of $175 million , or 28%. The increase in subscription
services revenues was due primarily to an increased number of customer contracts
as compared to the prior year period. Professional services revenues were $140
million for the three months ended October 31, 2019 , compared to $119 million
for the prior year period, an increase of $21 million , or 18%. The increase in
professional services revenues was due primarily to Workday performing
deployment and integration services for a greater number of customers than in
the prior year period.
Total revenues were $2.7 billion for the nine months ended October 31, 2019 ,
compared to $2.0 billion during the prior year period, an increase of $0.7
billion , or 30%. Subscription services revenues were $2.3 billion for the nine
months ended October 31, 2019 , compared to $1.7 billion for the prior year
period, an increase of $0.6 billion or 32%. The increase in subscription
services revenues was due primarily to an increased number of customer contracts
as compared to the prior year period. Professional services revenues were $394
million for the nine months ended October 31, 2019 , compared to $321 million for
the prior year period, an increase of $73 million or 23%. The increase in
professional services revenues was due primarily to Workday performing
deployment and integration services for a greater number of customers than in
the prior year period.
Operating Expenses
GAAP operating expenses were $1.0 billion for the three months ended October 31,
2019 , compared to $0.9 billion for the prior year period, an increase of $0.1
billion , or 13%. The increase was primarily due to an increase of $0.1 billion
in employee-related costs driven by higher headcount.
GAAP operating expenses were $3.0 billion for the nine months ended October 31,
2019 , compared to $2.4 billion for the prior year period, an increase of $0.6
billion , or 27%. The increase was primarily due to an increase of $0.5 billion
in employee-related costs driven by higher headcount.
We use the non-GAAP financial measure of non-GAAP operating expenses to
understand and compare operating results across accounting periods, for internal
budgeting and forecasting purposes, for short- and long-term operating plans,
and to evaluate our financial performance. We believe that non-GAAP operating
expenses reflect our ongoing business in a manner that allows for meaningful
period-to-period comparisons and analysis of trends in our business, as they
exclude expenses that are not reflective of ongoing operating results. We also
believe that non-GAAP operating expenses provide useful information to investors
and others in understanding and evaluating our operating results and prospects
in the same manner as management and in comparing financial results across
accounting periods and to those of peer companies.
Non-GAAP operating expenses are 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.
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Non-GAAP operating expenses were$795 million for the three months endedOctober 31, 2019 , compared to$694 million for the prior year period, an increase of$101 million , or 15%. The increase was primarily due to an increase of$76 million in employee-related costs driven by higher headcount. Non-GAAP operating expenses were$2.3 billion for the nine months endedOctober 31, 2019 , compared to$1.8 billion for the prior year period, an increase of$0.5 billion , or 24%. The increase was primarily due to an increase of$0.3 billion in employee-related costs driven by higher headcount. Reconciliations of our GAAP to non-GAAP operating expenses were as follows (in thousands): Three Months Ended October 31, 2019 Share-Based Non-GAAP GAAP Operating Compensation Other Operating Operating Expenses Expenses (1) Expenses (2) Expenses (3) Costs of subscription services$ 122,305 $ (13,634 ) $ (7,593 ) $ 101,078 Costs of professional services 148,625 (22,249 ) (569 ) 125,807 Product development 401,742 (118,215 ) (4,420 ) 279,107 Sales and marketing 286,794 (47,142 ) (7,820 ) 231,832 General and administrative 88,884 (29,762 ) (1,453 ) 57,669 Total costs and expenses$ 1,048,350 $ (231,002 ) $ (21,855 ) $ 795,493 Three Months Ended October 31, 2018 Share-Based Non-GAAP GAAP Operating Compensation Other Operating Operating Expenses Expenses (1) Expenses (2) Expenses (3) Costs of subscription services$ 103,310 $ (10,205 ) $ (11,432 ) $ 81,673 Costs of professional services 119,691 (15,702 ) (495 ) 103,494 Product development 318,003 (86,304 ) (3,082 ) 228,617 Sales and marketing 246,156 (38,720 ) (7,717 ) 199,719 General and administrative 138,784 (57,993 ) (758 ) 80,033 Total costs and expenses$ 925,944 $ (208,924 )
Nine Months
Ended
Share-Based Non-GAAP
GAAP Operating Compensation Other Operating Operating
Expenses Expenses (1) Expenses (2) Expenses (3)
Costs of subscription services $ 355,935 $ (36,050 ) $ (31,992 ) $ 287,893
Costs of professional services 424,548 (57,390 ) (5,261 ) 361,897
Product development 1,127,695 (315,210 ) (23,431 ) 789,054
Sales and marketing 839,930 (128,686 ) (31,103 ) 680,141
General and administrative 258,932 (88,122 ) (6,772 ) 164,038
Total costs and expenses $ 3,007,040 $ (625,458 )
Nine Months
Ended
Share-Based Non-GAAP
GAAP Operating Compensation Other Operating Operating
Expenses Expenses (1) Expenses (2) Expenses (3)
Costs of subscription services $ 271,078 $ (26,603 ) $ (19,671 ) $ 224,804
Costs of professional services 330,124 (39,012 ) (2,715 ) 288,397
Product development 874,427 (230,169 ) (15,839 ) 628,419
Sales and marketing 641,391 (93,699 ) (11,336 ) 536,356
General and administrative 259,533 (99,163 ) (3,356 ) 157,014
Total costs and expenses $ 2,376,553 $ (488,646 ) $ (52,917 ) $ 1,834,990
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(1) Share-based compensation expenses were
three months ended
million and
2018, respectively. The increase in share-based compensation expenses
includes the impact of restricted stock units ("RSUs") granted to existing
and new employees and assumed Adaptive Insights awards.
(2) Other operating expenses include amortization of acquisition-related
intangible assets of
the nine months ended
other operating expenses include employer payroll tax-related items on
employee stock transactions of
months ended
respectively.
(3) See "Non-GAAP Financial Measures" below for further information.
Costs of Subscription Services See the table above for a reconciliation of GAAP to non-GAAP operating expenses. GAAP operating expenses in costs of subscription services were$122 million for the three months endedOctober 31, 2019 , compared to$103 million for the prior year period, an increase of$19 million , or 18%. The increase was primarily due to increases of$8 million in employee-related costs driven by higher headcount,$5 million in third-party costs for hardware maintenance and data center capacity, and$4 million in facility and IT-related expenses. GAAP operating expenses in costs of subscription services were$356 million for the nine months endedOctober 31, 2019 , compared to$271 million for the prior year period, an increase of$85 million , or 31%. The increase was primarily due to increases of$29 million in depreciation and amortization expense including our acquisition-related intangible assets,$24 million in employee-related costs driven by higher headcount, and$19 million in third-party costs for hardware maintenance and data center capacity. Non-GAAP operating expenses in costs of subscription services were$101 million for the three months endedOctober 31, 2019 , compared to$82 million for the prior year period, an increase of$19 million , or 24%. The increase was primarily due to increases of$6 million in depreciation expense related to equipment in our data centers,$5 million in third-party costs for hardware maintenance and data center capacity, and$4 million in employee-related costs driven by higher headcount. Non-GAAP operating expenses in costs of subscription services were$288 million for the nine months endedOctober 31, 2019 , compared to$225 million for the prior year period, an increase of$63 million , or 28%. The increase was primarily due to increases of$19 million in third-party costs for hardware maintenance and data center capacity,$18 million in depreciation expense related to equipment in our data centers, and$14 million in employee-related costs driven by higher headcount. We expect that GAAP and non-GAAP operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our data center capacity and operations. Costs of Professional Services See the table above for a reconciliation of GAAP to non-GAAP operating expenses. GAAP operating expenses in costs of professional services were$149 million for the three months endedOctober 31, 2019 , compared to$120 million for the prior year period, an increase of$29 million , or 24%. The increase was primarily due to additional costs to staff our deployment and integration engagements. GAAP operating expenses in costs of professional services were$425 million for the nine months endedOctober 31, 2019 , compared to$330 million for the prior year period, an increase of$95 million , or 29%. The increase was primarily due to additional costs to staff our deployment and integration engagements. Non-GAAP operating expenses in costs of professional services were$126 million for the three months endedOctober 31, 2019 , compared to$103 million for the prior year period, an increase of$23 million , or 22%. The increase was primarily due to additional costs to staff our deployment and integration engagements. Non-GAAP operating expenses in costs of professional services were$362 million for the nine months endedOctober 31, 2019 , compared to$288 million for the prior year period, an increase of$74 million , or 25%. The increase was primarily due to additional costs to staff our deployment and integration engagements. Going forward, 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. For fiscal 2020, we anticipate GAAP and non-GAAP professional services margins to be lower than fiscal 2019, as we invest in programs to ensure ongoing customer success. 31
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Product Development See the table above for a reconciliation of GAAP to non-GAAP operating expenses. GAAP operating expenses in product development were$402 million for the three months endedOctober 31, 2019 , compared to$318 million for the prior year period, an increase of$84 million , or 26%. The increase was primarily due to increases of$67 million in employee-related costs driven by higher headcount and$11 million in facility and IT-related expenses. GAAP operating expenses in product development were$1.1 billion for the nine months endedOctober 31, 2019 , compared to$0.9 billion for the prior year period, an increase of$0.2 billion , or 29%. The increase was primarily due to an increase of$0.2 billion in employee-related costs driven by higher headcount. Non-GAAP operating expenses in product development were$279 million for the three months endedOctober 31, 2019 , compared to$229 million for the prior year period, an increase of$50 million , or 22%. The increase was primarily due to increases of$34 million in employee-related costs driven by higher headcount and$11 million in facility and IT-related expenses. Non-GAAP operating expenses in product development were$789 million for the nine months endedOctober 31, 2019 , compared to$628 million for the prior year period, an increase of$161 million , or 26%. The increase was primarily due to an increase of$121 million in employee-related costs driven by higher headcount. We expect that 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 See the table above for a reconciliation of GAAP to non-GAAP operating expenses. GAAP operating expenses in sales and marketing were$287 million for the three months endedOctober 31, 2019 , compared to$246 million for the prior year period, an increase of$41 million , or 17%. The increase was primarily due to increases of$31 million in employee-related costs driven by higher headcount and higher commissionable sales volume,$4 million in facility and IT-related expenses, and$4 million related to marketing programs. GAAP operating expenses in sales and marketing were$840 million for the nine months endedOctober 31, 2019 , compared to$641 million for the prior year period, an increase of$199 million , or 31%. The increase was primarily due to increases of$151 million in employee-related costs driven by higher headcount and higher commissionable sales volume,$14 million related to marketing programs, and$14 million in facility and IT-related expenses. Non-GAAP operating expenses in sales and marketing were$232 million for the three months endedOctober 31, 2019 , compared to$200 million for the prior year period, an increase of$32 million , or 16%. The increase was primarily due to increases of$22 million in employee-related costs driven by higher headcount and higher commissionable sales volume,$4 million in facility and IT-related expenses, and$4 million related to marketing programs. Non-GAAP operating expenses in sales and marketing were$680 million for the nine months endedOctober 31, 2019 , compared to$536 million for the prior year period, an increase of$144 million , or 27%. The increase was primarily due to increases of$110 million in employee-related costs driven by higher headcount and higher commissionable sales volume,$14 million related to marketing programs, and$14 million in facility and IT-related expenses. We expect that GAAP and non-GAAP sales and marketing expenses will 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 See the table above for a reconciliation of GAAP to non-GAAP operating expenses. GAAP operating expenses in general and administrative were$89 million for the three months endedOctober 31, 2019 , compared to$139 million for the prior year period, a decrease of$50 million , or 36%. The decrease was primarily due to one-time transaction and integration-related costs related to the Adaptive Insights acquisition incurred in the prior year that did not recur in the current year. GAAP operating expenses in general and administrative were$259 million for the nine months endedOctober 31, 2019 , compared to$260 million for the prior year period, a decrease of$1 million . The decrease was primarily due to one-time transaction and integration-related costs related to the Adaptive Insights acquisition incurred in the prior year that did not recur in the current year. This decrease was partially offset by an increase in employee-related costs driven by higher headcount. 32
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Non-GAAP operating expenses in general and administrative were$58 million for the three months endedOctober 31, 2019 , compared to$80 million for the prior year period, a decrease of$22 million , or 28%. The decrease was primarily due to due to one-time transaction and integration-related costs related to the Adaptive Insights acquisition incurred in the prior year that did not recur in the current year. Non-GAAP operating expenses in general and administrative were$164 million for the nine months endedOctober 31, 2019 , compared to$157 million for the prior year period, an increase of$7 million , or 4%. The increase was primarily due to additional employee-related costs driven by higher headcount, partially offset by one-time transaction and integration-related costs related to the Adaptive Insights acquisition incurred in the prior year that did not recur in the current year. 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 Margins GAAP operating margins improved from (24.6)% for the three months endedOctober 31, 2018 , to (11.8)% for the three months endedOctober 31, 2019 . The improvement in our GAAP operating margins in the three months endedOctober 31, 2019 , was primarily due to higher subscription and professional services revenues and prior year costs attributable to the Adaptive Insights acquisition that did not recur in the current year. GAAP operating margins improved from (16.9)% for the nine months endedOctober 31, 2018 , to (13.4)% for the nine months endedOctober 31, 2019 . The improvement in our GAAP operating margins in the nine months endedOctober 31, 2019 , was primarily due to higher subscription and professional services revenues and prior year costs attributable to the Adaptive Insights acquisition that did not recur in the current year. We use the non-GAAP financial measure of non-GAAP operating margins to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP operating margins reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude expenses that are not reflective of ongoing operating results. We also believe that non-GAAP operating margins provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Non-GAAP operating margins are calculated using GAAP revenues and non-GAAP operating expenses. See "Non-GAAP Financial Measures" below for further information. Non-GAAP operating margins improved from 6.7% for the three months endedOctober 31, 2018 , to 15.2% for the three months endedOctober 31, 2019 . The improvement in our non-GAAP operating margins in the three months endedOctober 31, 2019 , was primarily due to higher subscription and professional services revenues and prior year costs attributable to the Adaptive Insights acquisition that did not recur in the current year. Non-GAAP operating margins improved from 9.8% for the nine months endedOctober 31, 2018 , to 13.9% for the nine months endedOctober 31, 2019 . The improvement in our non-GAAP operating margins in the nine months endedOctober 31, 2019 , was primarily due to higher subscription and professional services revenues and prior year costs attributable to the Adaptive Insights acquisition that did not recur in the current year. 33
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Reconciliations of our GAAP to non-GAAP operating margins were as follows:
Three Months Ended October 31, 2019
Non-GAAP
Share-Based Other Operating
GAAP Operating Compensation Operating Expenses
Expenses Expenses Expenses (1)
Operating margin (11.8 )% 24.6 % 2.4 % 15.2 %
Three Months Ended October 31, 2018
GAAP Share-Based Other
Operating Compensation Operating Non-GAAP Operating
Expenses Expenses Expenses Expenses (1)
Operating margin (24.6 )% 28.1 % 3.2 % 6.7 %
Nine Months Ended October 31, 2019
Non-GAAP
Share-Based Other Operating
GAAP Operating Compensation Operating Expenses
Expenses Expenses Expenses (1)
Operating margin (13.4 )% 23.6 % 3.7 % 13.9 %
Nine Months Ended October 31, 2018
Share-Based Other
GAAP Operating Compensation Operating Non-GAAP Operating
Expenses Expenses Expenses Expenses (1)
Operating margin (16.9 )% 24.0 % 2.7 % 9.8 %
(1) See "Non-GAAP Financial Measures" below for further information.
Other Income (Expense), Net Other income, net decreased$31 million for the three months endedOctober 31, 2019 , as compared to the prior year period. The decrease was primarily due to a decrease in net gains from our equity investments of$28 million . Other income, net decreased$21 million for the nine months endedOctober 31, 2019 , as compared to the prior year period. The decrease was primarily due to a decrease in net gains from our equity investments of$19 million . Liquidity and Capital Resources As ofOctober 31, 2019 , our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling$2.1 billion , which were primarily held for working capital purposes. Our cash equivalents and marketable securities are composed primarily ofU.S. treasury securities,U.S. agency obligations, corporate bonds, commercial paper, and money market funds. We have financed our operations primarily through customer payments, sales of equity securities, and issuance of debt. Our future capital requirements depend on many factors, including our customer growth rate, subscription renewal activity, the timing of construction of facilities inPleasanton, California , and the acquisition of additional facilities, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of our services, and acquisition activities. We may enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future. We also may choose to seek additional equity or debt financing. 34
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Our cash flows for the three and nine months ended
Three Months Ended October 31 ,
Nine Months Ended
2019 2018 2019 2018
Net cash provided by (used in):
Operating activities $ 258,002 $ 114,296 $ 567,484 $ 356,145
Investing activities 32,559 (1,268,079 ) (355,541 ) (640,358 )
Financing activities 1,602 2,704 62,915 (306,120 )
Effect of exchange rate changes 48 (213 ) (204 ) (795 )
Net increase (decrease) in cash,
274,654 $ (591,128 )
cash equivalents, and restricted
cash
Operating Activities
Cash provided by operating activities was $258 million and $114 million for the
three months ended October 31, 2019 , and 2018, respectively. The improvement in
cash flow provided by operating activities was primarily due to increases in
sales and the related cash collections, partially offset by higher cash
operating expenses driven by increased headcount.
Cash provided by operating activities was $567 million and $356 million for the
nine months ended October 31, 2019 , and 2018, respectively. The improvement in
cash flow provided by operating activities was primarily due to increases in
sales and the related cash collections, partially offset by higher cash
operating expenses driven by increased headcount.
Investing Activities
Cash provided by investing activities for the three months ended October 31,
2019 , was $33 million , which was primarily the result of the timing of purchases
and maturities of marketable securities, offset by capital expenditures for data
center and office space projects of $55 million , capital expenditures related to
owned real estate projects of $22 million , and purchases of non-marketable
equity and other investments of $10 million .
Cash used in investing activities for the three months ended October 31, 2018 ,
was $1.3 billion , which was primarily the result of a net cash outflow of $1.4
billion related to the Adaptive Insights acquisition, capital expenditures for
data center and office space projects of $55 million , capital expenditures
related to the construction of our development center of $35 million , and
purchases of non-marketable equity and other investments of $29 million . These
payments were partially offset by the timing of purchases and maturities of
marketable securities and proceeds of $18 million from sales and maturities of
non-marketable equity and other investments.
Cash used in investing activities for the nine months ended October 31, 2019 ,
was $356 million , which was primarily the result of capital expenditures for
data center and office space projects of $196 million , capital expenditures
related to owned real estate projects of $96 million , purchases of
non-marketable equity and other investments of $17 million , a net cash outflow
related to acquisition activity of $13 million , and the timing of purchases and
maturities of marketable securities. These payments were partially offset by
proceeds of $55 million from sales of marketable securities.
Cash used in investing activities for the nine months ended October 31, 2018 ,
was $640 million , which was primarily the result of a net cash outflow of $1.4
billion related to the Adaptive Insights acquisition, capital expenditures for
data center and office space projects of $158 million , capital expenditures
related to the construction of our development center of $110 million , and
purchases of non-marketable equity and other investments of $33 million . These
payments were partially offset by the timing of purchases and maturities of
marketable securities, proceeds of $946 million from sales of marketable
securities, and proceeds of $18 million from sales and maturities of
non-marketable equity and other investments. The sales of marketable securities
during fiscal 2019 were to prepare for the Adaptive Insights acquisition.
We expect capital expenditures related to owned real estate projects will be
approximately $110 million for fiscal 2020. We also expect capital expenditures,
excluding owned real estate projects, will be approximately $250 million for
fiscal 2020. These capital outlays will largely be used to expand the
infrastructure of our data centers and to build out additional office space to
support our growth.
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Financing Activities Cash provided by financing activities was$2 million for the three months endedOctober 31, 2019 , which was primarily due to proceeds from the issuance of common stock from employee equity plans. Cash provided by financing activities was$3 million for the three months endedOctober 31, 2018 , which was primarily due to proceeds from the issuance of common stock from employee equity plans. Cash provided by financing activities was$63 million for the nine months endedOctober 31, 2019 , which was primarily due to proceeds from the issuance of common stock from employee equity plans. Cash used in financing activities was$306 million for the nine months endedOctober 31, 2018 , which was primarily due to the principal payment of$350 million of 0.75% convertible senior notes, offset by proceeds from the issuance of common stock from employee equity plans. 36
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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 and non-GAAP operating margins meet the definition of a non-GAAP financial measure. Non-GAAP Operating Expenses and Non-GAAP Operating Margins We define non-GAAP operating expenses as our total operating expenses excluding the following components, which we believe are not reflective of our ongoing operational expenses. Similarly, the same components are also excluded from the calculation of non-GAAP operating margins. In each case, for the reasons set forth below, management believes that excluding the component provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business. • Share-based compensation expenses. Although share-based compensation is
an important aspect of the compensation of our employees and
executives, management believes it is useful to exclude share-based
compensation expenses to better understand the long-term performance of
our core business and to facilitate comparison of our results to those
of peer companies. 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. Forbusiness 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 our ongoing operations.
Limitations on the Use of Non-GAAP Financial Measures
A limitation of our non-GAAP financial measures of non-GAAP operating expenses
and non-GAAP operating margins 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 costs of
revenues and 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
Margins for reconciliations from the most directly comparable GAAP financial
measures, GAAP operating expenses and GAAP operating margins, to the non-GAAP
financial measures, non-GAAP operating expenses and non-GAAP operating margins,
for the three and nine months ended October 31, 2019 , and 2018.
Contractual Obligations
Our contractual obligations primarily consist of our convertible senior notes,
as well as obligations under leases for office space, co-location facilities for
data center capacity, and computing infrastructure platforms for business
operations. In June 2019 , we entered into a $500 million agreement for the use
of cloud services that superseded a previous agreement and expires in June 2025 .
During the remainder of fiscal 2020, we anticipate leasing additional office
space near our headquarters and in various other locations around the world to
support our growth. In addition, our existing lease agreements often provide us
with an option to renew. We expect our future operating lease obligations will
increase as we expand our operations.
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We are not required to make principal payments under the Notes prior to maturity. If the Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay$250 million in principal onJuly 15, 2020 and$1.15 billion in principal onOctober 1, 2022 . We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 10, Convertible Senior Notes, Net, of the notes to condensed consolidated financial statements. We do not consider outstanding purchase orders to be contractual obligations as they represent authorizations to purchase rather than binding agreements. Off-Balance Sheet Arrangements ThroughOctober 31, 2019 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. During the nine months endedOctober 31, 2019 , there were no significant changes to our critical accounting policies and estimates as described in the consolidated financial statements contained in the Annual Report on Form 10-K for the year endedJanuary 31, 2019 , filed with theSecurities and Exchange Commission ("SEC") onMarch 18, 2019 . 38
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