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 in Part I, Item 1 of this report.
Overview
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, with a substantial amount of our growth coming from new customers. Our current financial focus is on growing our revenues and expanding both our customer base and our footprint within our existing customers. While we have a history of GAAP operating losses, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. We 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 inEurope andAsia-Pacific , by investing in product development and customer support to address the business needs of local markets, increasing our sales organization and marketing programs, acquiring and leasing additional office space, and expanding our ecosystem of service partners to support local deployments. We expect to make further significant investments in our data center capacity and equipment and third-party hosted infrastructure platforms as we plan for future growth. We are also investing in personnel to support our growing customer base. 26
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We regularly evaluate acquisition and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings. For example, in fiscal 2022, we acquiredPeakon ApS , a continuous listening platform that captures real-time employee sentiment, Zimit, a configure, price, quote solution built for services industries, and VNDLY, a cloud-based external workforce and vendor management technology. We expect to continue making such acquisitions and investments in the future. While we remain focused on improving operating margin, these acquisitions and investments will increase our costs on an absolute basis in the near term. 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, will drive additional customer subscriptions and continued growth in revenues. Due to our ability to leverage the expanding partner ecosystem, we expect the rate of professional services revenue growth to decline over time and continue to be lower than subscription revenue growth.
Impact of Current Economic Conditions and the COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted
global supply chains, and created significant volatility and disruption of
financial markets. Additionally, other recent macroeconomic events including
rising inflation, the
Despite the continuing uncertainty associated with these events, we are
confident in the long-term overall health of our business, the strength of our
product offerings, and our ability to continue to execute on our strategy and
help our customers on their human resources and finance digital transformation
journeys. Demand for our products remains strong, and we continue to achieve
solid new subscription bookings.
At the beginning of the COVID-19 pandemic, we temporarily closed the majority of
our offices; required most of our employees to work remotely; implemented travel
restrictions; and postponed certain customer, industry, implementation partner,
analyst, investor, and employee events and converted others to virtual-only
experiences. During fiscal 2023, we have welcomed back our employees to our
offices and resumed travel and in-person events in accordance with applicable
regional guidance. We continue to prioritize employee and community health and
safety.
Our near-term revenues are relatively predictable as a result of our
subscription-based business model. Recently, we have started to experience, and
may continue to experience, the lengthening of certain sales cycles,
particularly within net new opportunities. If the economic uncertainty
continues, we may also experience a negative impact on customer renewals, sales
and marketing efforts, revenue growth rates, customer deployments, customer
collections, product development, or other financial metrics. Any of these
factors could harm our business, financial condition, and operating results. For
further discussion of the potential impacts of the COVID-19 pandemic and recent
macroeconomic events on our business, financial condition, and operating
results, see "Risk Factors" included in Part II, Item 1A of this report.
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Financial Results Overview
The following table provides an overview of our key metrics (in thousands, except percentages, basis points, and headcount data):
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 Change 2022 2021 Change
Total revenues $ 1,599,103 $ 1,327,263 20 % $ 4,569,558 $ 3,762,657 21 %
Subscription services revenues $ 1,432,393 $ 1,171,517 22 % $ 4,071,804 $ 3,317,140 23 %
GAAP operating income (loss) $ (26,321) $ 23,945 (210) % $ (133,242) $ (15,488) 760 %
Non-GAAP operating income (1) $ 314,234 $ 332,249 (5) % $ 904,344 $ 912,566 (1) %
GAAP operating margin (1.6) % 1.8 % (340 bps) (2.9) % (0.4) % (250 bps)
Non-GAAP operating margin (1) 19.7 % 25.0 % (530 bps) 19.8 % 24.3 % (450 bps)
Operating cash flows $ 408,668 $ 384,654 6 % $ 962,743 $ 1,035,555 (7) %
As of October 31,
2022 2021 % Change
Total subscription revenue
backlog $ 14,095,906 $ 10,973,331 28 %
24-month subscription revenue
backlog $ 8,622,191 $ 7,118,050 21 %
Cash, cash equivalents, and
marketable securities $ 5,492,085 $ 3,554,981 54 %
Headcount 17,522 14,210 23 %
(1) See "Non-GAAP Financial Measures" below for further information.
Components of Results of Operations
Revenues
We 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 revenues include fees for deployment services, optimization services, and training. Subscription services revenues accounted for approximately 90% of our total revenues for the three and nine months endedOctober 31, 2022 , and represented 96% of our total unearned revenue as ofOctober 31, 2022 . Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the specific applications subscribed to by each customer, and the price of our applications. The mix of applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. 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 services 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 noncancelable. We generally invoice our customers annually in advance. Amounts that have been invoiced are initially recorded as unearned revenue. 28
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Our consulting engagements are billed on a time and materials basis or a fixed price basis. For contracts billed on a time and materials basis, revenues are recognized over time as the professional services are performed. For contracts billed on a fixed price basis, revenues are recognized over time based on the proportion of the professional services performed. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As the Workday-related consulting practices of our partner firms continues to develop, we expect these partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenues, we expect our professional services revenues as a percentage of total revenues to continue to decline over time. Subscription Revenue Backlog 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. Costs and Expenses Costs of subscription services revenues. Costs of subscription services revenues consist primarily of employee-related expenses associated with hosting our applications and providing customer support, expenses related to data centers and computing infrastructure operated by third parties, and depreciation of computer equipment and software. Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, subcontractor expenses, and travel expenses. Product development. Product development expenses consist primarily of employee-related expenses 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. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs, and travel expenses. Marketing programs consist of advertising, events, corporate communications, brand awareness, brand ambassador campaigns, and product marketing activities. Sales commissions are considered incremental costs of obtaining a contract with a customer. Sales commissions for new revenue contracts are capitalized and amortized on a straight-line basis over a period of benefit that we have determined to be five years.
General and administrative. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses.
Results of Operations Revenues
Our total revenues for the three and nine months ended
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 % Change 2022 2021 % Change
Subscription services $ 1,432,393 $ 1,171,517 22 % $ 4,071,804 $ 3,317,140 23 %
Professional services 166,710 155,746 7 % 497,754 445,517 12 %
Total revenues $ 1,599,103 $ 1,327,263 20 % $ 4,569,558 $ 3,762,657 21 %
Total revenues were $1.6 billion for the three months ended October 31, 2022 ,
compared to $1.3 billion for the prior year period, an increase of $272 million ,
or 20%. Subscription services revenues were $1.4 billion for the three months
ended October 31, 2022 , compared to $1.2 billion for the prior year period, an
increase of $261 million , or 22%. The increase in subscription services revenues
was primarily due to an increased number of customer contracts and strong
customer renewals, with gross revenue retention over 95%. Professional services
revenues were $167 million for the three months ended October 31, 2022 , compared
to $156 million for the prior year period, an increase of $11 million , or 7%.
The increase in professional services revenues was primarily due to Workday
performing deployment and integration services for a greater number of
customers.
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Total revenues were$4.6 billion for the nine months endedOctober 31, 2022 , compared to$3.8 billion for the prior year period, an increase of$807 million , or 21%. Subscription services revenues were$4.1 billion for the nine months endedOctober 31, 2022 , compared to$3.3 billion for the prior year period, an increase of$755 million , or 23%. The increase in subscription services revenues was primarily due to an increased number of customer contracts and strong customer renewals, with gross revenue retention over 95%. Professional services revenues were$498 million for the nine months endedOctober 31, 2022 , compared to$446 million for the prior year period, an increase of$52 million , or 12%. The increase in professional services revenues was primarily due to Workday performing deployment and integration services for a greater number of customers.
Subscription Revenue Backlog
Our total subscription revenue backlog as ofOctober 31, 2022 , was$14.1 billion , with$8.6 billion expected to be recognized in revenues over the next 24 months. As ofOctober 31, 2021 , our total subscription revenue backlog was$11.0 billion , with$7.1 billion expected to be recognized in revenues over the next 24 months. The increase in subscription revenue backlog was primarily driven by the addition of new customers, expansion of our product offerings with existing customers, and the timing of renewals.
Operating Expenses
GAAP operating expenses were$1.6 billion for the three months endedOctober 31, 2022 , compared to$1.3 billion for the prior year period, an increase of$322 million , or 25%. The increase in GAAP operating expenses included$228 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$34 million in facilities and IT-related expenses,$20 million in third-party expenses for hardware maintenance and data center capacity,$9 million in travel expenses, and$8 million related to marketing programs. Included in employee-related expenses is a performance-based cash bonus program that we introduced in the fourth quarter of fiscal 2022 for all employees not covered under an existing incentive plan ("performance-based cash bonus program"). This program replaced our equity-based PRSU bonus program, resulting in a net increase to GAAP operating expenses of$7 million . GAAP operating expenses were$4.7 billion for the nine months endedOctober 31, 2022 , compared to$3.8 billion for the prior year period, an increase of$925 million , or 24%. The increase in GAAP operating expenses included$654 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$78 million in facilities and IT-related expenses,$52 million in third-party expenses for hardware maintenance and data center capacity,$43 million in travel expenses, and$39 million related to marketing programs. Included in employee-related expenses is the performance-based cash bonus program which replaced our equity-based PRSU bonus program, resulting in a net increase to GAAP operating expenses of$48 million . We use the non-GAAP financial measure of non-GAAP operating expenses to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. We also believe that non-GAAP operating expenses provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Non-GAAP operating expenses were calculated by excluding share-based compensation expenses and certain other expenses, which consist of employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. See "Non-GAAP Financial Measures" below for further information. Non-GAAP operating expenses were$1.3 billion for the three months endedOctober 31, 2022 , compared to$995 million for the prior year period, an increase of$290 million , or 29%. The increase in non-GAAP operating expenses included$197 million in employee-related expenses due to higher headcount and expense related to the performance-based cash bonus program of$31 million . Additionally, there were increases of$34 million in facilities and IT-related expenses,$20 million in third-party expenses for hardware maintenance and data center capacity,$9 million in travel expenses, and$8 million related to marketing programs. Non-GAAP operating expenses were$3.7 billion for the nine months endedOctober 31, 2022 , compared to$2.9 billion for the prior year period, an increase of$815 million , or 29%. The increase in non-GAAP operating expenses included$552 million in employee-related expenses due to higher headcount and expense related to the performance-based cash bonus program of$100 million . Additionally, there were increases of$78 million in facilities and IT-related expenses,$52 million in third-party expenses for hardware maintenance and data center capacity,$43 million in travel expenses, and$39 million related to marketing programs. 30
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Reconciliations of our GAAP to non-GAAP operating expenses were as follows (in thousands):
Three Months Ended
Share-Based Non-GAAP
GAAP Operating Compensation Other Operating Operating
Expenses Expenses Expenses (1) Expenses (2)
Costs of subscription services $ 259,397 $
(25,598)
176,396 (26,577) (623) 149,196
Product development 565,727 (149,279) (1,899) 414,549
Sales and marketing 470,196 (61,186) (9,206) 399,804
General and administrative 153,708 (51,556) (531) 101,621
Total costs and expenses $ 1,625,424 $ (314,196) $ (26,359) $ 1,284,869 Three Months Ended
Share-Based Non-GAAP
GAAP Operating Compensation Other Operating Operating
Expenses Expenses Expenses (1) Expenses (2)
Costs of subscription services $ 200,700 $
(21,340)
159,024 (29,105) (1,043) 128,876
Product development 455,615 (135,591) (2,870) 317,154
Sales and marketing 366,323 (55,645) (9,642) 301,036
General and administrative 121,656 (39,437) (772) 81,447
Total costs and expenses $ 1,303,318 $
(281,118)
Nine Months Ended
Share-Based Non-GAAP
GAAP Operating Compensation Other Operating Operating
Expenses Expenses Expenses (1) Expenses (2)
Costs of subscription services $ 737,301 $
(76,918)
524,398 (79,999) (5,297) 439,102
Product development 1,655,071 (449,764) (17,146) 1,188,161
Sales and marketing 1,358,198 (180,233) (32,640) 1,145,325
General and administrative 427,832 (146,795) (3,772) 277,265
Total costs and expenses $ 4,702,800 $
(933,709)
Nine Months Ended
Share-Based Non-GAAP
GAAP Operating Compensation Other Operating Operating
Expenses Expenses Expenses (1) Expenses (2)
Costs of subscription services $ 575,646 $
(62,478)
462,652 (83,331) (9,211) 370,110
Product development 1,341,482 (395,345) (25,573) 920,564
Sales and marketing 1,050,974 (158,121) (36,512) 856,341
General and administrative 347,391 (111,197) (6,091) 230,103
Total costs and expenses $ 3,778,145 $
(810,472)
(1)Other operating expenses include amortization of acquisition-related intangible assets of$21 million and$20 million for the three months endedOctober 31, 2022 , and 2021, respectively, and$64 million and$57 million for the nine months endedOctober 31, 2022 , and 2021, respectively. In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of$5 million and$7 million for the three months endedOctober 31, 2022 , and 2021, respectively, and$40 million and$60 million for the nine months endedOctober 31, 2022 , and 2021, respectively.
(2)See "Non-GAAP Financial Measures" below for further information.
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Costs of Subscription Services
GAAP operating expenses in costs of subscription services were$259 million for the three months endedOctober 31, 2022 , compared to$201 million for the prior year period, an increase of$59 million , or 29%. The increase in costs of subscription services included increases of$26 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$15 million in third-party expenses for hardware maintenance and data center capacity,$7 million in facilities and IT-related expenses, and$2 million in depreciation expense related to equipment in our data centers. GAAP operating expenses in costs of subscription services were$737 million for the nine months endedOctober 31, 2022 , compared to$576 million for the prior year period, an increase of$162 million , or 28%. The increase in costs of subscription services included increases of$77 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$38 million in third-party expenses for hardware maintenance and data center capacity,$20 million in facilities and IT-related expenses, and$10 million in depreciation expense related to equipment in our data centers. Non-GAAP operating expenses in costs of subscription services were$220 million for the three months endedOctober 31, 2022 , compared to$167 million for the prior year period, an increase of$53 million , or 32%. The increase in costs of subscription services included increases of$22 million in employee-related expenses primarily due to higher headcount,$15 million in third-party expenses for hardware maintenance and data center capacity,$7 million in facilities and IT-related expenses, and$2 million in depreciation expense related to equipment in our data centers. Non-GAAP operating expenses in costs of subscription services were$615 million for the nine months endedOctober 31, 2022 , compared to$473 million for the prior year period, an increase of$142 million , or 30%. The increase in costs of subscription services included increases of$64 million in employee-related expenses primarily due to higher headcount,$38 million in third-party expenses for hardware maintenance and data center capacity,$20 million in facilities and IT-related expenses, and$10 million in depreciation expense related to equipment in our data centers. We expect GAAP and non-GAAP operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our technical operations infrastructure, including our data centers and computing infrastructure operated by third parties.
Costs of Professional Services
GAAP operating expenses in costs of professional services were$176 million for the three months endedOctober 31, 2022 , compared to$159 million for the prior year period, an increase of$17 million , or 11%. The increase in costs of professional services was primarily due to an increase of$12 million in employee-related expenses, including share-based compensation, primarily due to higher headcount. GAAP operating expenses in costs of professional services were$524 million for the nine months endedOctober 31, 2022 , compared to$463 million for the prior year period, an increase of$62 million , or 13%. The increase in costs of professional services included increases of$39 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$9 million in professional services and subcontractor expenses, and$7 million in travel expenses. Non-GAAP operating expenses in costs of professional services were$149 million for the three months endedOctober 31, 2022 , compared to$129 million for the prior year period, an increase of$20 million , or 16%. The increase in costs of professional services was primarily due to an increase of$15 million in employee-related expenses primarily due to higher headcount. Non-GAAP operating expenses in costs of professional services were$439 million for the nine months endedOctober 31, 2022 , compared to$370 million for the prior year period, an increase of$69 million , or 19%. The increase in costs of professional services included increases of$46 million in employee-related expenses primarily due to higher headcount,$9 million in professional services and subcontractor expenses, and$7 million in travel expenses. We expect GAAP and non-GAAP costs of professional services as a percentage of total revenues to continue to decline as we continue to rely on our service partners to deploy our applications and as the number of our customers continues to grow. 32
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Product Development
GAAP operating expenses in product development were$566 million for the three months endedOctober 31, 2022 , compared to$456 million for the prior year period, an increase of$110 million , or 24%. The increase in product development expenses included increases of$91 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and$13 million in facilities and IT-related expenses. GAAP operating expenses in product development were$1.7 billion for the nine months endedOctober 31, 2022 , compared to$1.3 billion for the prior year period, an increase of$314 million , or 23%. The increase in product development expenses included increases of$272 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and$27 million in facilities and IT-related expenses. Non-GAAP operating expenses in product development were$415 million for the three months endedOctober 31, 2022 , compared to$317 million for the prior year period, an increase of$97 million , or 31%. The increase in product development expenses included increases of$78 million in employee-related expenses primarily due to higher headcount and$13 million in facilities and IT-related expenses. Non-GAAP operating expenses in product development were$1.2 billion for the nine months endedOctober 31, 2022 , compared to$921 million for the prior year period, an increase of$268 million , or 29%. The increase in product development expenses included increases of$226 million in employee-related expenses primarily due to higher headcount and$27 million in facilities and IT-related expenses.
We expect GAAP and non-GAAP product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.
Sales and Marketing
GAAP operating expenses in sales and marketing were$470 million for the three months endedOctober 31, 2022 , compared to$366 million for the prior year period, an increase of$104 million , or 28%. The increase in sales and marketing expenses included increases of$74 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$9 million in facilities and IT-related expenses,$7 million in travel expenses, and$6 million related to marketing programs. GAAP operating expenses in sales and marketing were$1.4 billion for the nine months endedOctober 31, 2022 , compared to$1.1 billion for the prior year period, an increase of$307 million , or 29%. The increase in sales and marketing expenses included increases of$204 million in employee-related expenses, including share-based compensation, primarily due to higher headcount,$36 million related to marketing programs,$25 million in travel expenses, and$21 million in facilities and IT-related expenses. Non-GAAP operating expenses in sales and marketing were$400 million for the three months endedOctober 31, 2022 , compared to$301 million for the prior year period, an increase of$99 million , or 33%. The increase in sales and marketing expenses included increases of$69 million in employee-related expenses primarily due to higher headcount,$9 million in facilities and IT-related expenses,$7 million in travel expenses, and$6 million related to marketing programs. Non-GAAP operating expenses in sales and marketing were$1.1 billion for the nine months endedOctober 31, 2022 , compared to$856 million for the prior year period, an increase of$289 million , or 34%. The increase in sales and marketing expenses included increases of$186 million in employee-related expenses primarily due to higher headcount,$36 million related to marketing programs,$25 million in travel expenses, and$21 million in facilities and IT-related expenses. We expect GAAP and non-GAAP sales and marketing expenses to increase in absolute dollars as we continue to invest in our domestic and international selling and marketing activities to expand brand awareness and attract new customers.
General and Administrative
GAAP operating expenses in general and administrative were$154 million for the three months endedOctober 31, 2022 , compared to$122 million for the prior year period, an increase of$32 million , or 26%. The increase in general and administrative expenses included increases of$24 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and$3 million in facilities and IT-related expenses. GAAP operating expenses in general and administrative were$428 million for the nine months endedOctober 31, 2022 , compared to$347 million for the prior year period, an increase of$80 million , or 23%. The increase in general and administrative expenses included increases of$63 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and$6 million in facilities and IT-related expenses. 33
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Non-GAAP operating expenses in general and administrative were$102 million for the three months endedOctober 31, 2022 , compared to$81 million for the prior year period, an increase of$20 million , or 25%. The increase in general and administrative expenses included increases of$13 million in employee-related expenses primarily due to higher headcount and$3 million in facilities and IT-related expenses. Non-GAAP operating expenses in general and administrative were$277 million for the nine months endedOctober 31, 2022 , compared to$230 million for the prior year period, an increase of$47 million , or 20%. The increase in general and administrative expenses included increases of$29 million in employee-related expenses primarily due to higher headcount and$6 million in facilities and IT-related expenses.
We expect GAAP and non-GAAP general and administrative expenses will continue to increase in absolute dollars as we further invest in our infrastructure and support our global expansion.
Operating Margin
GAAP operating margin declined from 1.8% for the three months endedOctober 31, 2021 , to (1.6)% for the three months endedOctober 31, 2022 , primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues. GAAP operating margin declined from (0.4)% for the nine months endedOctober 31, 2021 , to (2.9)% for the nine months endedOctober 31, 2022 , primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues. We use the non-GAAP financial measure of non-GAAP operating margin to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP operating margin reflects our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. We also believe that non-GAAP operating margin provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
Non-GAAP operating margin was calculated using GAAP revenues and non-GAAP operating expenses. See "Non-GAAP Financial Measures" below for further information.
Non-GAAP operating margin declined from 25.0% for the three months endedOctober 31, 2021 , to 19.7% for the three months endedOctober 31, 2022 , primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues. Non-GAAP operating margin declined from 24.3% for the nine months endedOctober 31, 2021 , to 19.8% for the nine months endedOctober 31, 2022 , primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues. 34
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Reconciliations of our GAAP to non-GAAP operating income (loss) and operating margin were as follows (in thousands, except percentages):
Three Months Ended October 31, 2022
Share-Based
Compensation Other Operating
GAAP Expenses Expenses Non-GAAP (1)
Operating income (loss) $ (26,321) $ 314,196 $ 26,359 $ 314,234
Operating margin (1.6) % 19.6 % 1.7 % 19.7 %
Three Months Ended
Share-Based
Compensation Other Operating
GAAP Expenses Expenses Non-GAAP (1)
Operating income (loss) $ 23,945 $ 281,118 $ 27,186 $ 332,249
Operating margin 1.8 % 21.2 % 2.0 % 25.0 %
Nine
Months Ended
Share-Based Other
Compensation Operating
GAAP Expenses Expenses Non-GAAP (1)
Operating income (loss) $ (133,242) $ 933,709 $ 103,877 $ 904,344
Operating margin (2.9) % 20.4 % 2.3 % 19.8 %
Nine Months Ended
Share-Based Other
Compensation Operating
GAAP Expenses Expenses Non-GAAP (1)
Operating income (loss) $ (15,488) $ 810,472 $ 117,582 $ 912,566
Operating margin (0.4) % 21.5 % 3.2 % 24.3 %
(1)See "Non-GAAP Financial Measures" below for further information.
Other Income (Expense), Net
Other income, net was$4 million for the three months endedOctober 31, 2022 , which was primarily due to interest income of$31 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of$30 million on our debt primarily related to the Senior Notes entered into during the fiscal year. Other income, net was$22 million for the three months endedOctober 31, 2021 , which was primarily due to gains of$25 million on our equity investments, of which$12 million related to a non-cash gain related to our acquisition of Zimit. Other expense, net was$49 million for the nine months endedOctober 31, 2022 , which was primarily due to interest expense of$74 million on our debt primarily related to the Senior Notes and losses of$19 million on our equity investments. Expenses were offset by interest income of$50 million on our marketable securities from higher investment balances and rising interest rates. Other income, net was$115 million for the nine months endedOctober 31, 2021 , which was primarily due to gains of$125 million on our equity investments, the majority of which related to an equity investment that completed its initial public offering ("IPO"), offset by interest expense of$12 million on our debt.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), "Use of non-GAAP financial measures in Commission
filings," defines and prescribes the conditions for use of non-GAAP financial
information. Our measures of non-GAAP operating expenses, non-GAAP operating
income (loss), and non-GAAP operating margin meet the definition of non-GAAP
financial measures.
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Non-GAAP Operating Expenses, Non-GAAP Operating Income (Loss), and Non-GAAP Operating Margin
Our non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin exclude the components listed below. For the reasons set forth below, management believes that excluding these components provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business. •Share-Based Compensation Expenses. Although share-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude share-based compensation expenses to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. Share-based compensation expenses are determined using a number of factors, including our stock price, volatility, and forfeiture rates that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients. •Other Operating Expenses. Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of ongoing operations. Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP measures, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.
Limitations on the Use of Non-GAAP Financial Measures
A limitation of our non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Further, the non-GAAP financial measure of non-GAAP operating expenses has certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP financial measure of total operating expenses. In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll tax-related items, the cash salary expense included in operating expenses would be higher, which would affect our cash position. We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
See "Results of Operations-Operating Expenses" and "Results of
Operations-Operating Margin" for reconciliations from the most directly
comparable GAAP financial measures, GAAP operating expenses, GAAP operating
income (loss), and GAAP operating margin, to the non-GAAP financial measures,
non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP
operating margin, for the three and nine months ended
Liquidity and Capital Resources
As ofOctober 31, 2022 , our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling$5.5 billion , which were primarily held for working capital purposes. Our cash equivalents and marketable securities are composed primarily of, in order from largest to smallest,U.S. treasury securities, commercial paper, corporate bonds,U.S. agency obligations, money market funds, and marketable equity investments. We have financed our operations primarily through customer payments, issuance of debt, and sales of our common stock. 36
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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 Condensed 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. As part of our strategy, we may enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future. We may also choose to seek additional debt or equity financing. Our long-term future capital requirements depend on many factors, including the effects of macroeconomic trends, customer growth rates, subscription renewal activity, headcount growth, timing and extent of development efforts, expansion of sales and marketing activities, introduction of new and enhanced services offerings, timing of construction or acquisition of additional facilities, investments, and acquisition activities.
Our cash flows for the three and nine months ended
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 2022 2021
Net cash provided by (used in):
Operating activities $ 408,668 $
384,654
(168,063) (166,859) (2,125,799) (1,167,907)
Financing activities (1,149,073) (7,523) 1,211,716 47,767
Effect of exchange rate changes (920) 50 (1,750) (85)
Net increase (decrease) in cash, cash $ (909,388) $
210,322
Operating Activities
Cash provided by operating activities was$409 million and$385 million for the three months endedOctober 31, 2022 , and 2021, respectively. The increase in cash provided by operating activities resulted from increases in sales and related cash collections, offset by increased payments made to support return to office and in-person events and other growth investments across the business, and an interest payment on our Senior Notes. Cash provided by operating activities was$963 million and$1.0 billion for the nine months endedOctober 31, 2022 , and 2021, respectively. The decline in cash provided by operating activities resulted from increased payments made to support return to office and in-person events and other growth investments across the business, the new employee performance-based cash bonus program for all employees not covered under an existing incentive plan, and an interest payment on our Senior Notes, offset by increases in sales and related cash collections. We expect our business to continue to generate sufficient operating cash flows; however, if the economic uncertainty caused by the COVID-19 pandemic and recent macroeconomic events worsens or is prolonged, our customers may request payment timing concessions, which could materially impact the timing and predictability of our operating cash flows in any given period.
Investing Activities
Cash used in investing activities for the three months endedOctober 31, 2022 , was$168 million , which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of$130 million and capital expenditures for data center and office space projects of$59 million , offset by proceeds of$20 million from sales of marketable securities. Cash used in investing activities for the three months endedOctober 31, 2021 , was$167 million , which primarily resulted from cash consideration for the acquisition of Zimit, net of cash acquired, of$61 million , a cash outflow from the timing of purchases and maturities of marketable securities of$48 million , capital expenditures for data center and office space projects of$33 million , and purchases of non-marketable equity and other investments of$27 million . Cash used in investing activities for the nine months endedOctober 31, 2022 , was$2.1 billion , which primarily resulted from purchases of marketable securities, net of maturities, of$1.9 billion using the proceeds from the Senior Notes offering, capital expenditures for data center and office space projects of$286 million , and purchases of non-marketable equity and other investments of$20 million . These payments were partially offset by proceeds of$53 million from sales of marketable securities and$12 million from sales and maturities of non-marketable securities. 37
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Cash used in investing activities for the nine months endedOctober 31, 2021 , was$1.2 billion , which primarily resulted from cash consideration for the acquisition of Peakon and Zimit, net of cash acquired, of$740 million , capital expenditures primarily for data center projects of$191 million , the purchase of leased office space within our corporate headquarters from an affiliate of our Co-Founder and CEO Emeritus,David Duffield , of$171 million , purchases of non-marketable equity and other investments of$85 million , and a cash outflow from the timing of purchases and maturities of marketable securities of$14 million . These payments were partially offset by proceeds of$27 million from sales of marketable securities.
We expect capital expenditures will be approximately
Financing Activities
Cash used in financing activities was
Cash used in financing activities was$8 million for the three months endedOctober 31, 2021 , which was primarily due to a payment of$9 million on the term loan under the 2020 Credit Agreement, partially offset by proceeds of$2 million from the issuance of common stock from employee equity plans. Cash provided by financing activities was$1.2 billion for the nine months endedOctober 31, 2022 , which was primarily due to proceeds of$3.0 billion from borrowings on the Senior Notes, net of debt discount of$22 million , and$85 million from the issuance of common stock from employee equity plans, offset by the principal payment of$1.1 billion in connection with the conversion of our 2022 Notes, repayment of the term loan under the 2020 Credit Agreement of$694 million , and payments for debt issuance costs associated with our Senior Notes of$7 million . Cash provided by financing activities was$48 million for the nine months endedOctober 31, 2021 , which was primarily due to proceeds of$76 million from the issuance of common stock from employee equity plans, offset by payments of$28 million on the term loan under the 2020 Credit Agreement.
Contractual Obligations
Except for the fiscal 2023 debt transactions discussed in Note 10, Debt,
of
the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, which include the issuance of$3.0 billion of Senior Notes, the modification to our revolving credit facility, the extinguishment of the term loan under the 2020 Credit Agreement, and the conversion of the 2022 Notes, there were no material changes outside the ordinary course of business to our contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 .
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, judgements, and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates, judgements, and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies involve a high degree of judgement and complexity, and are the most critical to aid in fully understanding and evaluating our financial condition and operating results:
•Revenue recognition •Deferred commissions •Business combinations, goodwill, and acquisition-related intangible assets •Non-marketable equity investments For a further discussion of our critical accounting policies, refer to our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 . There were no significant changes to our critical accounting policies and estimates during the nine months endedOctober 31, 2022 . 38
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