Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Quarterly Report on Form 10-Q.

Overview

Workday delivers financial management, spend management, human capital management, planning, and analytics and benchmarking applications designed for the world’s largest companies, educational institutions, and government agencies. 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 businesses and operations. Our diverse customer base includes medium-sized and large, global companies within numerous industry categories, including technology, financial services, business and professional services, healthcare and life sciences, manufacturing, retail, and hospitality, as well as educational institutions, government agencies, and nonprofit organizations.

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 have incurred operating losses on a GAAP basis in each fiscal year since our inception in 2005, 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 and to address customers’ evolving needs. In addition, we plan to continue to expand our ability to sell our applications globally, particularly in Europe and Asia, by investing in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, 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 as we plan for future growth. We are also investing in personnel to support our growing customer base.

We regularly evaluate acquisition and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings. For example, we acquired Adaptive Insights in fiscal 2019, Scout in fiscal 2020, and Peakon and Zimit in fiscal 2022. We expect to continue making such acquisitions and investments in the future. 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.

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 the rate of professional services revenue growth to decline over time and continue to be lower than subscription revenue growth.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic is having unpredictable impacts on global societies, economies, financial markets, and business practices. In response to 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 of our customer, industry, implementation partner, analyst, investor, and employee events and converted others to virtual-only experiences. Most of these operational changes remain in effect and we continue to prioritize the health and safety of our employees, customers, and partners. While the majority of our employees continue to work remotely, in the second and third quarters of fiscal 2022, we began to reopen our offices and are allowing employees to return to the office on a voluntary basis with enhanced safety protocols in place.

The COVID-19 pandemic has created uncertainty in most industries and impacted our ability to generate new business. Despite the increased uncertainty, 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. We continue to achieve solid new subscription bookings as demand for our products remains strong. Our operating margins for the nine months ended October 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth as well as the moderation of operating expenses in response to the COVID-19 pandemic. We do not anticipate the extent of the favorable margin impact experienced in the three and nine months ended October 31, 2021, to continue long-term as we remain committed to investing in our business to drive top line growth and to support our customer base.

Our near-term revenues are relatively predictable as a result of our subscription-based business model. However, if the economic uncertainty increases, we may experience a negative impact on new business, customer renewals, sales and marketing efforts, revenue growth rates, customer deployments, customer solvency, product development, or other financial metrics, similar to what we experienced at the onset of the pandemic. 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 on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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 88% of our total revenues for each of the three and nine-month periods ended October 31, 2021, and represented 96% of our total unearned revenue as of October 31, 2021. 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.

Our consulting engagements are generally 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 decline over time.

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, data center expenses, 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. We continue to focus our product development efforts on adding new features and applications, increasing functionality, and enhancing 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, 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 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 October 31, 2021, and 2020, were as follows (in thousands, except percentages):

			Three Months Ended October 31,																		Nine Months Ended October 31,
			2021						2020						% Change						2021						2020						% Change
Subscription services			$	1,171,517					$	968,547					21%						$	3,317,140					$	2,782,201					19%
Professional services			155,746						137,413						13%						445,517						404,111						10%
Total revenues			$	1,327,263					$	1,105,960					20%						$	3,762,657					$	3,186,312					18%

Total revenues were $1.3 billion for the three months ended October 31, 2021, compared to $1.1 billion during the prior year period, an increase of $221 million, or 20%. Subscription services revenues were $1.2 billion for the three months ended October 31, 2021, compared to $969 million for the prior year period, an increase of $203 million, or 21%. The increase in subscription services revenues was primarily due to an increased number of customer contracts as compared to the prior year period. Professional services revenues were $156 million for the three months ended October 31, 2021, compared to $137 million for the prior year period, an increase of $18 million, or 13%. The increase in professional services revenues was primarily due to Workday performing deployment and integration services for a greater number of customers than in the prior year period.

Total revenues were $3.8 billion for the nine months ended October 31, 2021, compared to $3.2 billion during the prior year period, an increase of $576 million, or 18%. Subscription services revenues were $3.3 billion for the nine months ended October 31, 2021, compared to $2.8 billion for the prior year period, an increase of $535 million, or 19%. The increase in subscription services revenues was primarily due to an increased number of customer contracts as compared to the prior year period. Professional services revenues were $446 million for the nine months ended October 31, 2021, compared to $404 million for the prior year period, an increase of $41 million, or 10%. The increase in professional services revenues was primarily due 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 $1.3 billion for the three months ended October 31, 2021, compared to $1.1 billion for the prior year period, an increase of $183 million, or 16%. The increase in GAAP operating expenses included increases of $97 million in employee-related expenses including share-based compensation, $21 million in facilities and IT-related expenses, $20 million related to marketing programs, $13 million in third-party expenses for hardware maintenance and data center capacity, $10 million in professional services and subcontractor expenses, and $9 million in depreciation expense related to equipment in our data centers.

GAAP operating expenses were $3.8 billion for the nine months ended October 31, 2021, compared to $3.4 billion for the prior year period, an increase of $417 million, or 12%. The increase in GAAP operating expenses included increases of $310 million in employee-related expenses including share-based compensation, $59 million related to marketing programs, $35 million in professional services and subcontractor expenses, $32 million in facilities and IT-related expenses, $31 million in third-party expenses for hardware maintenance and data center capacity, and $28 million in depreciation expense related to equipment in our data centers, offset by a decrease of $79 million related to a cash bonus paid to non-executive employees in the first quarter of fiscal 2021 to help accommodate unforeseen costs brought on by the COVID-19 pandemic (“COVID-19 one-time employee bonus”) that was not paid in fiscal 2022.

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

Non-GAAP operating expenses were $995 million for the three months ended October 31, 2021, compared to $838 million for the prior year period, an increase of $157 million, or 19%. The increase in non-GAAP operating expenses included increases of $77 million in employee-related expenses, $21 million in facilities and IT-related expenses, $20 million related to marketing programs, $13 million in third-party expenses for hardware maintenance and data center capacity, $10 million in professional services and subcontractor expenses, and $9 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses were $2.9 billion for the nine months ended October 31, 2021, compared to $2.5 billion for the prior year period, an increase of $320 million, or 13%. The increase in non-GAAP operating expenses included increases of $225 million in employee-related expenses, $59 million related to marketing programs, $35 million in professional services and subcontractor expenses, $32 million in facilities and IT-related expenses, $31 million in third-party expenses for hardware maintenance and data center capacity, and $28 million in depreciation expense related to equipment in our data centers, offset by a decrease of $79 million related to related to the COVID-19 one-time employee bonus.

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

			Three Months Ended October 31, 2021
			GAAP Operating Expenses						Share-Based Compensation Expenses (1)						Other Operating Expenses (2)						Non-GAAP Operating Expenses (3)
Costs of subscription services			$	200,700					$	(21,340)					$	(12,859)					$	166,501
Costs of professional services			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)					$	(27,186)					$	995,014

			Three Months Ended October 31, 2020
			GAAP Operating Expenses						Share-Based Compensation Expenses (1)						Other Operating Expenses (2)						Non-GAAP Operating Expenses (3)
Costs of subscription services			$	152,396					$	(16,767)					$	(7,811)					$	127,818
Costs of professional services			142,785						(27,349)						(824)						114,612
Product development			419,962						(128,423)						(4,006)						287,533
Sales and marketing			302,870						(54,077)						(8,352)						240,441
General and administrative			102,024						(33,216)						(1,355)						67,453
Total costs and expenses			$	1,120,037					$	(259,832)					$	(22,348)					$	837,857

			Nine Months Ended October 31, 2021
			GAAP Operating Expenses						Share-Based Compensation Expenses (1)						Other Operating Expenses (2)						Non-GAAP Operating Expenses (3)
Costs of subscription services			$	575,646					$	(62,478)					$	(40,195)					$	472,973
Costs of professional services			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)					$	(117,582)					$	2,850,091

			Nine Months Ended October 31, 2020
			GAAP Operating Expenses						Share-Based Compensation Expenses (1)						Other Operating Expenses (2)						Non-GAAP Operating Expenses (3)
Costs of subscription services			$	442,666					$	(45,484)					$	(26,298)					$	370,884
Costs of professional services			442,422						(74,467)						(4,843)						363,112
Product development			1,282,127						(378,950)						(20,710)						882,467
Sales and marketing			897,924						(150,881)						(26,841)						720,202
General and administrative			296,461						(97,958)						(5,111)						193,392
Total costs and expenses			$	3,361,600					$	(747,740)					$	(83,803)					$	2,530,057

(1)Share-based compensation expenses were $281 million and $260 million for the three months ended October 31, 2021, and 2020, respectively, and $810 million and $748 million for the nine months ended October 31, 2021, and 2020, respectively. The increase in share-based compensation expenses includes the impact of RSUs granted to existing and new employees.

(2)Other operating expenses include amortization of acquisition-related intangible assets of $20 million and $14 million for the three months ended October 31, 2021, and 2020, respectively, and $57 million and $46 million for the nine months ended October 31, 2021, and 2020, respectively. In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $7 million and $8 million for the three months ended October 31, 2021, and 2020, respectively, and $60 million and $38 million for the nine months ended October 31, 2021, and 2020, 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 $201 million for the three months ended October 31, 2021, compared to $152 million for the prior year period, an increase of $48 million, or 32%. The increase in costs of subscription services included increases of $20 million in employee-related expenses including share-based compensation, $9 million in depreciation expense related to equipment in our data centers, and $8 million in third-party expenses for hardware maintenance and data center capacity.

GAAP operating expenses in costs of subscription services were $576 million for the nine months ended October 31, 2021, compared to $443 million for the prior year period, an increase of $133 million, or 30%. The increase in costs of subscription services included increases of $64 million in employee-related expenses including share-based compensation, $28 million in depreciation expense related to equipment in our data centers, and $20 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $5 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in costs of subscription services were $167 million for the three months ended October 31, 2021, compared to $128 million for the prior year period, an increase of $39 million, or 30%. The increase in costs of subscription services included increases of $15 million in employee-related expenses, $9 million in depreciation expense related to equipment in our data centers, and $8 million in third-party expenses for hardware maintenance and data center capacity.

Non-GAAP operating expenses in costs of subscription services were $473 million for the nine months ended October 31, 2021, compared to $371 million for the prior year period, an increase of $102 million, or 28%. The increase in costs of subscription services included increases of $45 million in employee-related expenses, $28 million in depreciation expense related to equipment in our data centers, and $20 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $5 million related to the COVID-19 one-time employee bonus.

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

See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in costs of professional services were $159 million for the three months ended October 31, 2021, compared to $143 million for the prior year period, an increase of $16 million, or 11%. The increase in costs of professional services was primarily due to an increase of $11 million in employee-related expenses including share-based compensation.

GAAP operating expenses in costs of professional services were $463 million for the nine months ended October 31, 2021, compared to $442 million for the prior year period, an increase of $20 million, or 5%. The increase in costs of professional services included an increase of $34 million in employee-related expenses including share-based compensation, offset by decreases of $12 million related to the COVID-19 one-time employee bonus and $7 million in subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $129 million for the three months ended October 31, 2021, compared to $115 million for the prior year period, an increase of $14 million, or 12%. The increase in costs of professional services was primarily due to an increase of $9 million in employee-related expenses.

Non-GAAP operating expenses in costs of professional services were $370 million for the nine months ended October 31, 2021, compared to $363 million for the prior year period, an increase of $7 million, or 2%. The increase in costs of professional services included an increase of $21 million in employee-related expenses, offset by decreases of $12 million related to the COVID-19 one-time employee bonus and $7 million in subcontractor expenses.

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

Product Development

See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in product development were $456 million for the three months ended October 31, 2021, compared to $420 million for the prior year period, an increase of $36 million, or 8%. The increase in product development expenses was primarily due to an increase of $30 million in employee-related expenses including share-based compensation.

GAAP operating expenses in product development were $1.3 billion for the nine months ended October 31, 2021, compared to $1.3 billion for the prior year period, an increase of $59 million, or 5%. The increase in product development expenses included an increase of $84 million in employee-related expenses including share-based compensation, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in product development were $317 million for the three months ended October 31, 2021, compared to $288 million for the prior year period, an increase of $30 million, or 10%. The increase in product development expenses was primarily due to an increase of $23 million in employee-related expenses.

Non-GAAP operating expenses in product development were $921 million for the nine months ended October 31, 2021, compared to $882 million for the prior year period, an increase of $38 million, or 4%. The increase in product development expenses included an increase of $58 million in employee-related expenses, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

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

See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in sales and marketing were $366 million for the three months ended October 31, 2021, compared to $303 million for the prior year period, an increase of $63 million, or 21%. The increase in sales and marketing expenses included increases of $29 million in employee-related expenses including share-based compensation and $20 million related to marketing programs.

GAAP operating expenses in sales and marketing were $1.1 billion for the nine months ended October 31, 2021, compared to $898 million for the prior year period, an increase of $153 million, or 17%. The increase in sales and marketing expenses included increases of $91 million in employee-related expenses including share-based compensation and $59 million related to marketing programs, offset by decrease of $25 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in sales and marketing were $301 million for the three months ended October 31, 2021, compared to $240 million for the prior year period, an increase of $61 million, or 25%. The increase in sales and marketing expenses included increases of $27 million in employee-related expenses and $20 million related to marketing programs.

Non-GAAP operating expenses in sales and marketing were $856 million for the nine months ended October 31, 2021, compared to $720 million for the prior year period, an increase of $136 million, or 19%. The increase in sales and marketing expenses included increases of $78 million in employee-related expenses and $59 million related to marketing programs, offset by decrease of $25 million related to the COVID-19 one-time employee bonus.

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

See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in general and administrative were $122 million for the three months ended October 31, 2021, compared to $102 million for the prior year period, an increase of $20 million, or 19%. The increase in general and administrative expenses included increases of $8 million in employee-related expenses including share-based compensation and $4 million in professional services expenses.

GAAP operating expenses in general and administrative were $347 million for the nine months ended October 31, 2021, compared to $296 million for the prior year period, an increase of $51 million, or 17%. The increase in general and administrative expenses included increases of $37 million in employee-related expenses including share-based compensation and $22 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in general and administrative were $81 million for the three months ended October 31, 2021, compared to $67 million for the prior year period, an increase of $14 million, or 21%. The increase in general and administrative expenses included increases of $4 million in professional services expenses and $2 million in employee-related expenses.

Non-GAAP operating expenses in general and administrative were $230 million for the nine months ended October 31, 2021, compared to $193 million for the prior year period, an increase of $37 million, or 19%. The increase in general and administrative expenses included increases of $23 million in employee-related expenses and $22 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

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 (1.3)% for the three months ended October 31, 2020, to 1.8% for the three months ended October 31, 2021. Our GAAP operating margins for the three months ended October 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth and moderation of operating expenses in response to the COVID-19 pandemic.

GAAP operating margins improved from (5.5)% for the nine months ended October 31, 2020, to (0.4)% for the nine months ended October 31, 2021. Our GAAP operating margins for the nine months ended October 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal 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. 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 24.2% for the three months ended October 31, 2020, to 25.0% for the three months ended October 31, 2021. Our non-GAAP operating margins for the three months ended October 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth and moderation of operating expenses in response to the COVID-19 pandemic.

Non-GAAP operating margins improved from 20.6% for the nine months ended October 31, 2020, to 24.3% for the nine months ended October 31, 2021. Our non-GAAP operating margins for the nine months ended October 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal year.

Reconciliations of our GAAP to non-GAAP operating margins were as follows:

			Three Months Ended October 31, 2021
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses						Non-GAAP Operating Expenses (1)
Operating margin			1.8%						21.2%						2.0%						25.0%

			Three Months Ended October 31, 2020
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses						Non-GAAP Operating Expenses (1)
Operating margin			(1.3)%						23.5%						2.0%						24.2%

			Nine Months Ended October 31, 2021
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses						Non-GAAP Operating Expenses (1)
Operating margin			(0.4)%						21.5%						3.2%						24.3%

			Nine Months Ended October 31, 2020
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses						Non-GAAP Operating Expenses (1)
Operating margin			(5.5)%						23.5%						2.6%						20.6%

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

Other Income (Expense), Net

We had other income, net of $22 million for the three months ended October 31, 2021, as compared to other expense, net of $9 million for the prior year period. This increase in other income was primarily related to net gains of $21 million recognized on our equity investments, of which $12 million was due to the remeasurement of our prior equity interest in Zimit upon acquisition, and a decrease in interest expense of $11 million due to the adoption of ASU No. 2020-06.

We had other income, net of $115 million for the nine months ended October 31, 2021, as compared to other expense, net of $31 million for the prior year period. This increase in other income was primarily related to net gains of $122 million recognized on our equity investments, of which $94 million was due to an equity investment that completed its IPO during the prior quarter and $12 million was due to the remeasurement of our prior equity interest in Zimit upon acquisition. Additionally, there was a decrease in interest expense of $41 million from the adoption of ASU No. 2020-06 and the conversion of the 2020 Notes in the second quarter of fiscal 2021, offset by a decrease of $12 million in interest income on marketable securities resulting from lower prevailing interest rates.

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

Our non-GAAP operating expenses and non-GAAP operating margins exclude the components listed below. 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. 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.

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, 2021, and 2020.

Liquidity and Capital Resources

As of October 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $3.6 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, money market funds, U.S. agency obligations, and marketable equity investments. We have financed our operations primarily through customer payments, issuance of debt, and sales of our common stock.

We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to the remaining term of contracted noncancelable subscription agreements, which are not reflected on the balance sheet, and, if necessary, our borrowing capacity under our Revolving Credit Facility that provides for $750 million of unsecured financing, will be sufficient to meet our working capital, capital expenditure, and debt repayment needs over the next 12 months.

Our long-term future capital requirements depend on many factors, including the effects of the COVID-19 pandemic, 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. 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 cash flows for the three and nine months ended October 31, 2021, and 2020, were as follows (in thousands):

			Three Months Ended October 31,												Nine Months Ended October 31,
			2021						2020						2021						2020
Net cash provided by (used in):
Operating activities			$	384,654					$	293,802					$	1,035,555					$	714,695
Investing activities			(166,859)						(462,666)						(1,167,907)						(942,651)
Financing activities			(7,523)						(5,906)						47,767						564,205
Effect of exchange rate changes			50						40						(85)						546
Net increase (decrease) in cash, cash equivalents, and restricted cash			$	210,322					$	(174,730)					$	(84,670)					$	336,795

Operating Activities

Cash provided by operating activities was $385 million and $294 million for the three months ended October 31, 2021, and 2020, respectively. The improvement in cash flow provided by operating activities was primarily due to increases in sales and related cash collections and moderation of operating expenses in response to the COVID-19 pandemic.

Cash provided by operating activities was $1.0 billion and $715 million for the nine months ended October 31, 2021, and 2020, respectively. The improvement in cash flow provided by operating activities was primarily due to increases in sales and related cash collections and moderation of operating expenses in response to the COVID-19 pandemic.

We expect our business to continue to generate sufficient operating cash flows; however, if the COVID-19 pandemic 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 ended October 31, 2021, was $167 million, which was primarily comprised of a net cash outflow related to acquisition activity of $61 million, capital expenditures for data center and office space projects of $33 million, purchases of non-marketable equity and other investments of $27 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the three months ended October 31, 2020, was $463 million, which was primarily due to capital expenditures for data center and office space projects of $78 million and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the nine months ended October 31, 2021, was $1.2 billion, which was primarily comprised of net cash outflows related to acquisition activity of $740 million, capital expenditures mainly for data center projects of $191 million, the purchase of leased office space within our corporate headquarters of $171 million, purchases of non-marketable equity and other investments of $85 million, and the timing of purchases and maturities of marketable securities. These payments were partially offset by proceeds of $27 million from sales of marketable securities.

Cash used in investing activities for the nine months ended October 31, 2020, was $943 million, which was primarily due to capital expenditures for data center and office space projects of $205 million, purchases of non-marketable equity and other investments of $63 million, and the timing of purchases and maturities of marketable securities.

We expect capital expenditures, excluding owned real estate projects, will be approximately $270 million for fiscal 2022. These capital outlays will largely be used to support our customer growth and continued business expansion. We do not expect to make additional investments in owned real estate projects during fiscal 2022.

Financing Activities

Cash used in financing activities was $8 million for the three months ended October 31, 2021, which was primarily due to a payment on the Term Loan of $9 million, partially offset by proceeds of $2 million from the issuance of common stock from employee equity plans.

Cash used in financing activities was $6 million for the three months ended October 31, 2020, which was primarily due to a payment on the Term Loan of $9 million, partially offset by proceeds of $4 million from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $48 million for the nine months ended October 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.

Cash provided by financing activities was $564 million for the nine months ended October 31, 2020, which was primarily due to proceeds of $748 million from borrowing on the Term Loan and $78 million from the issuance of common stock from employee equity plans, partially offset by the principal payment of $250 million in connection with the conversion of the 2020 Notes.

Our 2022 Notes are convertible at the option of the holders during the fourth quarter of fiscal 2022 since the trigger for early conversion was met. Through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material. We may receive additional conversion requests that require settlement in the fourth quarter of fiscal 2022. For further information, see Note 11, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Contractual Obligations

Our contractual obligations primarily consist of borrowings under our Credit Agreement, our convertible senior notes, leases for office space and co-location facilities for data center capacity, and agreements for third-party hosted infrastructure platforms for business operations. We do not consider outstanding purchase orders to be contractual obligations as they represent authorizations to purchase rather than binding agreements. Except for those disclosed below, there have been 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 ended January 31, 2021, filed with the SEC on March 2, 2021.

Credit Agreement

In April 2020, we entered into a Credit Agreement pursuant to which the lenders extended to Workday a senior unsecured Term Loan in an aggregate principal amount of $750 million and an unsecured Revolving Credit Facility in an aggregate principal amount of $750 million. The Term Loan matures on April 2, 2025, and provides for quarterly repayment in installments of the principal amount at a rate of 1.25% of the principal amount per quarter through January 2022, and 2.50% of the principal amount per quarter thereafter. The Revolving Credit Facility may be borrowed, repaid, and reborrowed until April 2, 2025, at which time all amounts borrowed must be repaid. The Term Loan and Revolving Credit Facility bear interest at the interest rates described in Note 11, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Convertible Senior Notes

In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022. We are not required to make principal payments under the 2022 Notes prior to maturity. If the 2022 Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay $1.15 billion in principal on October 1, 2022. The 2022 Notes are convertible at the option of the holders during the fourth quarter of fiscal 2022. Through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material. We may receive additional conversion requests that require settlement in the fourth quarter of fiscal 2022. We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 11, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Operating Leases

We have entered into operating lease agreements for our office space, data centers, and other property and equipment with various expiration dates. These lease agreements often provide us with an option to renew. As of October 31, 2021, future contractual lease payments, excluding imputed interest, were $313 million.

Third-Party Hosted Infrastructure Platforms for Business Operation

We have entered into noncancelable agreements with third-party hosted infrastructure platform vendors with various expiration dates. During the second quarter of fiscal 2022, we entered into a six-year, $420 million agreement for the use of cloud services. As of October 31, 2021, future noncancelable minimum payments under these agreements were approximately $761 million.

Purchase Obligations

As of October 31, 2021, we have entered into noncancelable agreements to purchase $162 million of data center equipment during the remainder of fiscal 2022 and fiscal 2023. We have also entered into a ten-year sporting event sponsorship agreement with future noncancelable minimum payments of approximately $144 million.

Off-Balance Sheet Arrangements

Through October 31, 2021, 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 accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates 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 and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require further updates to our estimates or judgments or require us to further revise the carrying value of our assets or liabilities as of October 31, 2021. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies involve a high degree of judgment 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

For a further discussion of our critical accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 2, 2021. We no longer consider estimates related to our convertible senior notes to be a critical accounting policy due to the adoption of ASU No. 2020-06 effective February 1, 2021, which simplified the accounting for convertible instruments. There were no other significant changes to our critical accounting policies and estimates during the nine months ended October 31, 2021.