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 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. 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 in Europe and the Asia-Pacific region, by investing in product development and customer support to address the business needs of targeted local markets, increasing our sales organization and marketing programs, acquiring and leasing additional office space, and expanding our ecosystem of 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.

We regularly evaluate acquisition and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings, and expect to continue making acquisitions and investments in the future. While we remain focused on improving 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 and helping to deliver additional innovation and solutions, will drive additional customer subscriptions and continued growth in revenues. Due to our ability to leverage our 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

Recent macroeconomic events including higher inflation, the U.S. Federal Reserve raising interest rates, instability in the global banking system, as well as geopolitical factors and the remaining effects of the COVID-19 pandemic, have negatively impacted the global economy, disrupted global supply chains, and created continued uncertainty, volatility, and disruption of financial markets. Despite this, we are confident in the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy and help our customers on their human resources and finance digital transformation journeys. Demand for our products remains strong and we continue to achieve solid new subscription bookings.

Our near-term revenues are relatively predictable as a result of our subscription-based business model. We have experienced, and may continue to experience, the lengthening of certain sales cycles and moderation of revenue growth rates, particularly within net new opportunities, and have provided certain customers with more flexible payment terms. If the economic uncertainty continues, we may also experience a negative impact on customer renewals, customer collections, sales and marketing efforts, customer deployments, product development, or other financial metrics. Any of these factors could harm our business, financial condition, and operating results. For further discussion of the potential impacts of recent macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this report.

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,
			2023						2022						Change						2023						2022						Change
Total revenues			$	1,865,675					$	1,599,103					17		%				$	5,336,753					$	4,569,558					17		%
Subscription services revenues			$	1,691,116					$	1,432,393					18		%				$	4,842,964					$	4,071,804					19		%
GAAP operating income (loss)			$	87,855					$	(26,321)					434		%				$	104,312					$	(133,242)					178		%
Non-GAAP operating income (1)			$	462,098					$	314,234					47		%				$	1,279,474					$	904,344					41		%
GAAP operating margin			4.7		%				(1.6)		%				630 bps						2.0		%				(2.9)		%				490 bps
Non-GAAP operating margin (1)			24.8		%				19.7		%				510 bps						24.0		%				19.8		%				420 bps
Operating cash flows			$	450,775					$	408,668					10		%				$	1,153,355					$	962,743					20		%
Free cash flows (1)			$	390,827					$	349,822					12		%				$	969,190					$	676,284					43		%
																					As of October 31,
																					2023						2022						% Change
Total subscription revenue backlog																					$	18,445,597					$	14,095,906					31		%
12-month subscription revenue backlog																					$	6,047,482					$	4,962,071					22		%
24-month subscription revenue backlog																					$	10,576,013					$	8,622,191					23		%
Cash, cash equivalents, and marketable securities																					$	6,879,984					$	5,492,085					25		%
Headcount																					18,369						17,522						5		%

(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 91% of our total revenues for the three and nine months ended October 31, 2023, and represented 96% of our total unearned revenue as of October 31, 2023. 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 each 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, and may provide certain customers flexible payment terms. Amounts that have been invoiced are initially recorded as unearned revenue.

Our professional services 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 continue to develop, we expect these partners to increasingly contract directly with our subscription customers.

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

Sales and marketing expenses. 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 expenses. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses.

Results of Operations

Revenues

Our total revenues for the three and nine months ended October 31, 2023, and 2022, were as follows (in thousands, except percentages):

			Three Months Ended October 31,																		Nine Months Ended October 31,
			2023						2022						% Change						2023						2022						% Change
Subscription services			$	1,691,116					$	1,432,393					18		%				$	4,842,964					$	4,071,804					19		%
Professional services			174,559						166,710						5		%				493,789						497,754						(1)		%
Total revenues			$	1,865,675					$	1,599,103					17		%				$	5,336,753					$	4,569,558					17		%

Total revenues were $1.9 billion for the three months ended October 31, 2023, compared to $1.6 billion for the prior year period, an increase of $267 million, or 17%. Subscription services revenues were $1.7 billion for the three months ended October 31, 2023, compared to $1.4 billion for the prior year period, an increase of $259 million, or 18%. The increase in subscription services revenues was primarily due to an increased number of new customers, expansion of our product offerings provided to existing customers, and strong customer renewals, with gross and net retention rates over 95% and over 100%, respectively. Professional services revenues were $175 million for the three months ended October 31, 2023, compared to $167 million for the prior year period, an increase of $8 million, or 5%. The increase in professional services revenues was primarily due to variations in project size and mix of deployment and integration services provided.

Total revenues were $5.3 billion for the nine months ended October 31, 2023, compared to $4.6 billion for the prior year period, an increase of $767 million, or 17%. Subscription services revenues were $4.8 billion for the nine months ended October 31, 2023, compared to $4.1 billion for the prior year period, an increase of $771 million, or 19%. The increase in subscription services revenues was primarily due to an increased number of new customers, expansion of our product offerings provided to existing customers, and strong customer renewals, with gross and net retention rates over 95% and over 100%, respectively. Professional services revenues were $494 million for the nine months ended October 31, 2023, compared to $498 million for the prior year period, a decrease of $4 million, or 1%. The decrease in professional services revenues was primarily due to variations in project size and mix of deployment and integration services provided and continuing to expand and leverage our service partners.

Subscription Revenue Backlog

As of October 31, 2023, our total subscription revenue backlog was $18.4 billion, with $6.0 billion and $10.6 billion expected to be recognized in revenues over the next 12 and 24 months, respectively. As of October 31, 2022, our total subscription revenue backlog was $14.1 billion, with $5.0 billion and $8.6 billion expected to be recognized in revenues over the next 12 and 24 months, respectively. The increase in subscription revenue backlog was primarily driven by an increased number of new customers, duration of customer contracts, expansion of our product offerings provided to existing customers, and strong customer renewals.

Operating Expenses

GAAP operating expenses were $1.8 billion for the three months ended October 31, 2023, compared to $1.6 billion for the prior year period, an increase of $152 million, or 9%. The increase in GAAP operating expenses included increases of $133 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $22 million related to marketing programs, and $18 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to an increase in the estimated useful lives of our data center equipment from 3 years to 5 years, effective beginning fiscal 2024 (“change in useful lives of data center equipment”).

GAAP operating expenses were $5.2 billion for the nine months ended October 31, 2023, compared to $4.7 billion for the prior year period, an increase of $530 million, or 11%. The increase in GAAP operating expenses included increases of $453 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $58 million in third-party expenses for hardware maintenance and data center capacity, and $37 million related to marketing programs, offset by a decrease of $68 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses were $1.4 billion for the three months ended October 31, 2023, compared to $1.3 billion for the prior year period, an increase of $119 million, or 9%. The increase in non-GAAP operating expenses included increases of $94 million in employee-related expenses primarily due to higher average headcount, $22 million related to marketing programs, and $18 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses were $4.1 billion for the nine months ended October 31, 2023, compared to $3.7 billion for the prior year period, an increase of $392 million, or 11%. The increase in non-GAAP operating expenses included increases of $309 million in employee-related expenses primarily due to higher average headcount, $58 million in third-party expenses for hardware maintenance and data center capacity, and $37 million related to marketing programs, offset by a decrease of $68 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

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

			Three Months Ended October 31, 2023
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses (1)						Non-GAAP Operating Expenses (2)
Costs of subscription services			$	263,840					$	(30,543)					$	(9,140)					$	224,157
Costs of professional services			181,400						(28,738)						(1,097)						151,565
Product development			618,736						(162,025)						(3,006)						453,705
Sales and marketing			537,816						(64,805)						(10,438)						462,573
General and administrative			176,028						(63,146)						(1,305)						111,577
Total costs and expenses			$	1,777,820					$	(349,257)					$	(24,986)					$	1,403,577

			Three Months Ended October 31, 2022
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses (1)						Non-GAAP Operating Expenses (2)
Costs of subscription services			$	259,397					$	(25,598)					$	(14,100)					$	219,699
Costs of professional services			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

			Nine Months Ended October 31, 2023
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses (1)						Non-GAAP Operating Expenses (2)
Costs of subscription services			$	758,551					$	(89,793)					$	(39,500)					$	629,258
Costs of professional services			552,233						(87,532)						(5,537)						459,164
Product development			1,828,870						(493,934)						(18,806)						1,316,130
Sales and marketing			1,580,639						(211,560)						(35,222)						1,333,857
General and administrative			512,148						(187,810)						(5,468)						318,870
Total costs and expenses			$	5,232,441					$	(1,070,629)					$	(104,533)					$	4,057,279

			Nine Months Ended October 31, 2022
			GAAP Operating Expenses						Share-Based Compensation Expenses						Other Operating Expenses (1)						Non-GAAP Operating Expenses (2)
Costs of subscription services			$	737,301					$	(76,918)					$	(45,022)					$	615,361
Costs of professional services			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)					$	(103,877)					$	3,665,214

(1)Other operating expenses include amortization of acquisition-related intangible assets of $16 million and $21 million for the three months ended October 31, 2023, and 2022, respectively, and $58 million and $64 million for the nine months ended October 31, 2023, and 2022, respectively. In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $9 million and $5 million for the three months ended October 31, 2023, and 2022, respectively, and $46 million and $40 million for the nine months ended October 31, 2023, and 2022, respectively.

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

Costs of Subscription Services

GAAP operating expenses in costs of subscription services were $264 million for the three months ended October 31, 2023, compared to $259 million for the prior year period, an increase of $4 million, or 2%. The increase in costs of subscription services included increases of $15 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, and $13 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

GAAP operating expenses in costs of subscription services were $759 million for the nine months ended October 31, 2023, compared to $737 million for the prior year period, an increase of $21 million, or 3%. The increase in costs of subscription services included increases of $40 million in third-party expenses for hardware maintenance and data center capacity, $37 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, and $11 million in facilities and IT-related expenses, offset by a decrease of $66 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses in costs of subscription services were $224 million for the three months ended October 31, 2023, compared to $220 million for the prior year period, an increase of $4 million, or 2%. The increase in costs of subscription services included increases of $13 million in third-party expenses for hardware maintenance and data center capacity and $10 million in employee-related expenses primarily due to higher average headcount, offset by a decrease of $21 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating expenses in costs of subscription services were $629 million for the nine months ended October 31, 2023, compared to $615 million for the prior year period, an increase of $14 million, or 2%. The increase in costs of subscription services included increases of $40 million in third-party expenses for hardware maintenance and data center capacity, $24 million in employee-related expenses primarily due to higher average headcount, and $11 million in facilities and IT-related expenses, offset by a decrease of $66 million in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

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 $181 million for the three months ended October 31, 2023, compared to $176 million for the prior year period, an increase of $5 million, or 3%. The increase in costs of professional services included an increase of $9 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

GAAP operating expenses in costs of professional services were $552 million for the nine months ended October 31, 2023, compared to $524 million for the prior year period, an increase of $28 million, or 5%. The increase in costs of professional services included an increase of $38 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, offset by a decrease of $7 million in professional services and subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $152 million for the three months ended October 31, 2023, compared to $149 million for the prior year period, an increase of $2 million, or 2%. The increase in costs of professional services included an increase of $6 million in employee-related expenses primarily due to higher average headcount.

Non-GAAP operating expenses in costs of professional services were $459 million for the nine months ended October 31, 2023, compared to $439 million for the prior year period, an increase of $20 million, or 5%. The increase in costs of professional services included an increase of $30 million in employee-related expenses primarily due to higher average headcount, offset by a decrease of $7 million in professional services and 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 subscription customers continues to grow.

Product Development

GAAP operating expenses in product development were $619 million for the three months ended October 31, 2023, compared to $566 million for the prior year period, an increase of $53 million, or 9%. The increase in product development expenses included an increase of $46 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

GAAP operating expenses in product development were $1.8 billion for the nine months ended October 31, 2023, compared to $1.7 billion for the prior year period, an increase of $174 million, or 11%. The increase in product development expenses included an increase of $142 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

Non-GAAP operating expenses in product development were $454 million for the three months ended October 31, 2023, compared to $415 million for the prior year period, an increase of $39 million, or 9%. The increase in product development expenses included an increase of $32 million in employee-related expenses primarily due to higher average headcount.

Non-GAAP operating expenses in product development were $1.3 billion for the nine months ended October 31, 2023, compared to $1.2 billion for the prior year period, an increase of $128 million, or 11%. The increase in product development expenses included an increase of $96 million in employee-related expenses primarily due to higher average headcount.

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 $538 million for the three months ended October 31, 2023, compared to $470 million for the prior year period, an increase of $68 million, or 14%. The increase in sales and marketing expenses included increases of $40 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $19 million related to marketing programs, and $9 million in travel expenses.

GAAP operating expenses in sales and marketing were $1.6 billion for the nine months ended October 31, 2023, compared to $1.4 billion for the prior year period, an increase of $222 million, or 16%. The increase in sales and marketing expenses included increases of $161 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $34 million related to marketing programs, and $17 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $463 million for the three months ended October 31, 2023, compared to $400 million for the prior year period, an increase of $63 million, or 16%. The increase in sales and marketing expenses included increases of $35 million in employee-related expenses primarily due to higher average headcount, $19 million related to marketing programs, and $9 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $1.3 billion for the nine months ended October 31, 2023, compared to $1.1 billion for the prior year period, an increase of $189 million, or 16%. The increase in sales and marketing expenses included increases of $127 million in employee-related expenses primarily due to higher average headcount, $34 million related to marketing programs, and $17 million in travel 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 awareness of our brand and product offerings to attract new and existing customers.

General and Administrative

GAAP operating expenses in general and administrative were $176 million for the three months ended October 31, 2023, compared to $154 million for the prior year period, an increase of $22 million, or 15%. The increase in general and administrative expenses included an increase of $24 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

GAAP operating expenses in general and administrative were $512 million for the nine months ended October 31, 2023, compared to $428 million for the prior year period, an increase of $84 million, or 20%. The increase in general and administrative expenses included an increase of $75 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount.

Non-GAAP operating expenses in general and administrative were $112 million for the three months ended October 31, 2023, compared to $102 million for the prior year period, an increase of $10 million, or 10%. The increase in general and administrative expenses included an increase of $12 million in employee-related expenses primarily due to higher average headcount.

Non-GAAP operating expenses in general and administrative were $319 million for the nine months ended October 31, 2023, compared to $277 million for the prior year period, an increase of $42 million, or 15%. The increase in general and administrative expenses included an increase of $32 million in employee-related expenses primarily due to higher average headcount.

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

Operating Margin

GAAP operating margin improved from (1.6)% for the three months ended October 31, 2022, to 4.7% for the three months ended October 31, 2023, primarily due to an increase in revenues, the moderation of operating expenses, and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

GAAP operating margin improved from (2.9)% for the nine months ended October 31, 2022, to 2.0% for the nine months ended October 31, 2023, primarily due to an increase in revenues, the moderation of operating expenses, and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating margin improved from 19.7% for the three months ended October 31, 2022, to 24.8% for the three months ended October 31, 2023, primarily due to an increase in revenues, offset by the moderation of operating expenses and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

Non-GAAP operating margin improved from 19.8% for the nine months ended October 31, 2022, to 24.0% for the nine months ended October 31, 2023, primarily due to an increase in revenues, offset by the moderation of operating expenses and a decrease in depreciation expense related to equipment in our data centers primarily due to the change in useful lives of data center equipment.

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

			Three Months Ended October 31, 2023
			GAAP						Share-Based Compensation Expenses						Other Operating Expenses						Non-GAAP (1)
Operating income (loss)			$	87,855					$	349,257					$	24,986					$	462,098
Operating margin			4.7		%				18.7		%				1.4		%				24.8		%

			Three Months Ended October 31, 2022
			GAAP						Share-Based Compensation Expenses						Other Operating 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		%

			Nine Months Ended October 31, 2023
			GAAP						Share-Based Compensation Expenses						Other Operating Expenses						Non-GAAP (1)
Operating income (loss)			$	104,312					$	1,070,629					$	104,533					$	1,279,474
Operating margin			2.0		%				20.1		%				1.9		%				24.0		%

			Nine Months Ended October 31, 2022
			GAAP						Share-Based Compensation Expenses						Other Operating 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		%

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

Other Income (Expense), Net

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

			Three Months Ended October 31,												Nine Months Ended October 31,
			2023						2022						2023						2022
Total other income (expense), net			$	41,388					$	4,163					$	113,652					$	(48,789)

Other income, net for the three months ended October 31, 2023, primarily consisted of interest income of $79 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of $28 million related to the Senior Notes and net losses of $14 million on our equity investments.

Other income, net for the three months ended October 31, 2022, primarily consisted of 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 primarily related to the Senior Notes.

Other income, net for the nine months ended October 31, 2023, primarily consisted of interest income of $211 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of $83 million related to the Senior Notes and net losses of $22 million on our equity investments.

Other expense, net for the nine months ended October 31, 2022, primarily consisted of interest expense of $74 million primarily related to the Senior Notes and net losses of $19 million on our equity investments, offset by interest income of $50 million on our marketable securities from higher investment balances and rising interest rates.

Liquidity and Capital Resources

As of October 31, 2023, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $6.9 billion, which were primarily held for working capital purposes. Our cash equivalents and marketable securities are composed of, in order from largest to smallest, U.S. treasury securities, corporate bonds, commercial paper, 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.

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.

Our long-term future capital requirements depend on many factors, including the effects of macroeconomic trends, customer growth rates, subscription renewal activity, headcount growth, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the timing and costs associated with the construction or acquisition of additional facilities, and our investment and acquisition activities. As part of our strategy, we may choose to seek additional debt or equity financing.

Our cash flows for the three and nine months ended October 31, 2023, and 2022, were as follows (in thousands):

			Three Months Ended October 31,												Nine Months Ended October 31,
			2023						2022						2023						2022
Net cash provided by (used in):
Operating activities			$	450,775					$	408,668					$	1,153,355					$	962,743
Investing activities			(172,009)						(168,063)						(1,270,328)						(2,125,799)
Financing activities			(149,558)						(1,149,073)						(201,314)						1,211,716
Effect of exchange rate changes			(787)						(920)						(698)						(1,750)
Net increase (decrease) in cash, cash equivalents, and restricted cash			$	128,421					$	(909,388)					$	(318,985)					$	46,910

Operating Activities

Cash provided by operating activities was $451 million and $409 million for the three months ended October 31, 2023, and 2022, respectively. The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections and interest received from marketable debt securities, some of which is included in the Prepaid expenses and other assets caption on the Condensed Consolidated Statement of Cash Flows. Increases were partially offset by higher cash operating expenses, including the mid-year payout of our fiscal 2024 performance-based cash bonus program which did not occur in the prior fiscal year.

Cash provided by operating activities was $1.2 billion and $963 million for the nine months ended October 31, 2023, and 2022, respectively. The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections and interest received from marketable debt securities. The improvement was offset by higher cash operating expenses, including payouts under our new performance-based cash bonus program, an interest payment on our Senior Notes that did not occur in the prior fiscal year due to the timing of our debt offering, and payments related to the workforce realignment announced in the fourth quarter of fiscal 2023.

Investing Activities

Cash used in investing activities for the three months ended October 31, 2023, was $172 million, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $149 million and capital expenditures for data center and office space projects of $59 million, offset by proceeds of $46 million from sales of marketable securities.

Cash used in investing activities for the three months ended October 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 nine months ended October 31, 2023, was $1.3 billion, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $1.2 billion and capital expenditures for data center and office space projects of $181 million, offset by proceeds of $93 million from sales of marketable securities.

Cash used in investing activities for the nine months ended October 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.

We expect capital expenditures will be approximately $250 million in fiscal 2024. This includes investments in our office facilities, corporate IT infrastructure, and customer data centers to support our continued growth.

Financing Activities

Cash used in financing activities was $150 million for the three months ended October 31, 2023, which was primarily due to repurchases of common stock under the Share Repurchase Program of $145 million.

Cash used in financing activities was $1.1 billion for the three months ended October 31, 2022, which was primarily due to the principal payment of $1.1 billion in connection with the conversion of our 2022 Notes.

Cash used in financing activities was $201 million for the nine months ended October 31, 2023, which was primarily due to due to repurchases of common stock under the Share Repurchase Program of $283 million, offset by $82 million in proceeds from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $1.2 billion for the nine months ended October 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.

Free Cash Flows

In evaluating our performance internally, we focus on long-term, sustainable growth in free cash flows. We define free cash flows, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus total capital expenditures. See “Non-GAAP Financial Measures” below for further information.

Free cash flows improved to $391 million for the three months ended October 31, 2023, compared to $350 million for the prior year period. The improvement was primarily due to increases in sales and the related cash collections and interest received from marketable debt securities, partially offset by higher cash operating expenses, including the mid-year payout of our fiscal 2024 performance-based cash bonus program which did not occur in the prior fiscal year.

Free cash flows improved to $969 million for the nine months ended October 31, 2023, compared to $676 million for the prior year period. The improvement was primarily due to increases in sales and the related cash collections, interest received from marketable debt securities, and a reduction in capital expenditures for data center and office space projects. The improvement was offset by higher cash operating expenses, including payouts under our new performance-based cash bonus program, an interest payment on our Senior Notes that did not occur in the prior fiscal year due to the timing of our debt offering, and payments related to the workforce realignment announced in the fourth quarter of fiscal 2023.

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

			Three Months Ended October 31,												Nine Months Ended October 31,
			2023						2022						2023						2022
Net cash provided by (used in) operating activities			$	450,775					$	408,668					$	1,153,355					$	962,743
Less: Total capital expenditures (1)			(59,948)						(58,846)						(184,165)						(286,459)
Free cash flows			$	390,827					$	349,822					$	969,190					$	676,284

(1)Total capital expenditures consists of Capital expenditures, excluding owned real estate projects of $59 million, $59 million, $181 million, and $286 million for the three and nine months ended October 31, 2023, and 2022, respectively, and Owned real estate projects of $1 million, $0.2 million, $3 million, and $0.4 million for the three and nine months ended October 31, 2023, and 2022, respectively.

Share Repurchase Program

In November 2022, our Board of Directors authorized the repurchase of up to $500 million of our outstanding shares of Class A common stock. The Share Repurchase Program has a term of 18 months, may be suspended or discontinued at any time, and does not obligate us to acquire any amount of Class A common stock. For further information, see Note 13, Stockholders’ Equity, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Contractual Obligations

Our contractual obligations primarily consist of borrowings under our Senior Notes, leases for office space and co-location facilities for data center capacity, agreements for third-party hosted infrastructure platforms for business operations, and other purchase obligations entered into in the ordinary course of business. 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, 2023.

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 ended January 31, 2023. During the three and nine months ended October 31, 2023, there were no significant changes to our critical accounting policies and estimates, other than the change in useful lives of our data center equipment as described in Note 1. Overview and Basis of Presentation, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

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

Non-GAAP Operating Expenses, Non-GAAP Operating Income (Loss), and Non-GAAP Operating Margin

We use the non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.

Our non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin exclude the components listed below. For the reasons set forth below, we believe that excluding these components provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business.

• Share-Based Compensation Expenses. Although share-based compensation is an important aspect of the compensation of our employees and executives, we believe it is useful to exclude share-based compensation expenses to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. Share-based compensation expenses are determined using a number of factors, including our stock price, volatility, and forfeiture rates that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients.

• Other Operating Expenses. Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of ongoing operations. Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

Free Cash Flows

We define free cash flows as net cash provided by (used in) operating activities minus total capital expenditures. We use free cash flows as a measure of financial progress in our business, as it balances operating results, cash management, and capital efficiency. We believe information regarding free cash flows provides investors and others with an enhanced view of cash flow generation from the ongoing operations of our business.

Limitations on the Use of Non-GAAP Financial Measures

A limitation of our non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), non-GAAP operating margin, and free cash flows is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Further, the non-GAAP financial measure of non-GAAP operating expenses has certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP financial measure of total operating expenses. In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll tax-related items, the cash salary expense included in operating expenses would be higher, which would affect our cash position.

We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.

See “Results of Operations—Operating Expenses” and “Results of Operations—Operating Margin” for reconciliations from the most directly comparable GAAP financial measures of GAAP operating expenses, GAAP operating income (loss), and GAAP operating margin, to the non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin, for the three and nine months ended October 31, 2023, and 2022.

See “Liquidity and Capital Resources—Free Cash Flows” for a reconciliation from the most comparable GAAP financial measure, Net cash provided by (used in) operating activities, to the non-GAAP financial measure, free cash flow, for the three and nine months ended October 31, 2023, and 2022.