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 is the enterprise AI platform that operates at the core of human resources, finance, and information technology. We deliver cloud-based, AI-powered applications for human capital management ("HCM"), financial management, spend management, and planning. Our diverse customer base includes emerging, medium-sized, and large global organizations within numerous industries, including financial services, government, healthcare, higher education, hospitality, manufacturing, professional and business services, retail, technology and media, and transportation. Workday helps customers deliver better employee experiences, increase productivity, improve operational efficiencies, and provide insights for faster, data-driven decision-making.
We have achieved significant growth since our inception in 2005, when we pioneered HCM in the cloud. As a result of our innovation and commitment to customer success, today we are a Fortune 500 company with more than 11,500 customers around the world. As we continue to grow, we are focused on driving sustainable, long-term subscription revenue growth by adding new customers and expanding our relationships with existing customers through increased adoption of our suite of solutions. Central to this effort is investing in strategic growth areas including developing innovative AI solutions, expanding internationally, growing our partner ecosystem, deepening our presence in industry verticals and the emerging and medium enterprise market, and exploring strategic acquisitions to complement our organic innovation. Our investments across these targeted growth areas may require additional costs, but we remain committed to optimizing resource allocation and realizing a return on our investments. Over time, we believe these investments will support revenue growth and a more scalable business.
We are focused on expanding our operating margin by driving scale and building efficiencies across the business through investments in people, processes, and systems. As a result of our focus on expanding operating margin, we expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues will decrease over the longer term as we grow our revenues and invest in a disciplined manner to support our long-term growth objectives.
Financial Results Overview
The following table provides an overview of our key metrics (in millions, except percentages, basis points, and headcount data):
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
|
2026 | |
2025 | |
Change |
|
Total revenues |
$ |
2,542 | | |
$ |
2,240 | | |
13 |
% |
|
Subscription services revenues |
$ |
2,354 | | |
$ |
2,059 | | |
14 |
% |
| | | | | |
|
GAAP operating income |
$ |
338 | | |
$ |
39 | | |
762 |
% |
Non-GAAP operating income (1) | $ |
809 | | |
$ |
677 | | |
19 |
% |
| | | | | |
|
GAAP operating margin |
13.3 |
% | |
1.8 |
% | |
1,154 bps |
Non-GAAP operating margin (1) | 31.8 |
% | |
30.2 |
% | |
159 bps |
| | | | | |
|
Operating cash flows |
$ |
696 | | |
$ |
457 | | |
52 |
% |
Free cash flows (1) | $ |
616 | | |
$ |
421 | | |
46 |
% |
| | | | | |
|
As of April 30, | | |
|
2026 | |
2025 | |
Change |
|
Total subscription revenue backlog |
$ |
27,294 | | |
$ |
24,621 | | |
11 |
% |
|
12-month subscription revenue backlog |
$ |
8,806 | | |
$ |
7,627 | | |
15 |
% |
| | | | | |
|
Cash, cash equivalents, and marketable securities |
$ |
4,353 | | |
$ |
7,970 | | |
(45) |
% |
| | | | | |
|
Headcount |
20,834 | | |
20,515 | | |
2 |
% |
(1)See "Non-GAAP Financial Measures" below for further information.
Impact of Current Economic Conditions
Recent macroeconomic events including increased tariffs, elevated inflation and energy prices, and fluctuating interest rates and foreign currency exchange rates, as well as geopolitical instability and conflicts, continue to impact the global economy and create uncertainty, volatility, and disruption of financial markets. As a result, we have experienced, and may continue to experience, a moderation of revenue growth rates due to deal scrutiny and the lengthening of certain sales cycles, particularly within net new opportunities, as well as reduced growth in headcount-level commitments upon renewals of existing customers. The extended sales cycles are particularly evident in the government, higher education, and healthcare industries which are tied to federal funding. Further, we have provided, and may continue to provide, certain customers with more flexible payment terms. 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.
Components of Results of Operations
Revenues
We derive our revenues from subscription services and professional services. Subscription services revenues primarily consist of fees that provide customers access to our cloud applications, with standard and enhanced customer support. Professional services revenues include fees for deployment services, optimization services, and training.
Subscription services revenues accounted for approximately 93% of our total revenues for the three months ended April 30, 2026, and represented 97% of our total unearned revenue as of April 30, 2026. 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, 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 for subscription services. We may provide certain customers flexible payment terms and the timing of revenue recognition may differ from the timing of invoicing to our customers.
Our professional services consulting engagements are billed on a time and materials or fixed price basis. We generally invoice our customers as the work is performed for time and materials arrangements, and in advance for fixed price arrangements. 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 for services engagements.
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, business combinations, and seasonality.
Costs and Expenses
Costs of subscription services revenues. Costs of subscription services revenues consist primarily of expenses associated with hosting our applications and delivering standard and enhanced customer support services. These costs include employee-related expenses, expenses related to data center capacity and third-party hosted infrastructure, depreciation of our data center equipment, amortization of certain acquisition-related intangible assets, and allocated overhead.
Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, subcontractor expenses, travel expenses, and allocated overhead.
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, as well as expenses related to third-party hosted infrastructure, and allocated overhead.
Sales and marketing expenses. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs, travel expenses, amortization of certain acquisition-related intangible assets, and allocated overhead. 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 primarily of employee-related expenses for our finance and accounting, legal, human resources, and information systems personnel, as well as professional services fees, allocated overhead, and other corporate expenses.
We allocate shared costs, such as facilities, IT, benefits, and recruiting, primarily based on headcount. As such, overhead expenses are reflected in each of the costs and expenses categories.
Restructuring expenses. Restructuring expenses are associated with a formal restructuring program and consist of charges related to workforce reductions, including employee transition, severance payments, and share-based compensation, as well as charges associated with the closure of facilities and other exit and disposal activities.
Results of Operations
Revenues
Our total revenues were as follows (in millions, except percentages):
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
|
2026 | |
2025 | |
% Change |
|
Subscription services |
$ |
2,354 | | |
$ |
2,059 | | |
14 |
% |
|
Professional services |
188 | | |
181 | | |
4 |
% |
|
Total revenues |
$ |
2,542 | | |
$ |
2,240 | | |
13 |
% |
Total revenues were $2.5 billion for the three months ended April 30, 2026, compared to $2.2 billion for the prior year period, an increase of $302 million, or 13%. Subscription services revenues were $2.4 billion for the three months ended April 30, 2026, compared to $2.1 billion for the prior year period, an increase of $295 million, or 14%. Approximately 60% of the increase in subscription services revenues was attributable to expansion within our customers that existed as of the beginning of the comparable prior year period, and the remaining 40% was attributable to customers added after the beginning of the comparable prior year period. Professional services revenues were $188 million for the three months ended April 30, 2026, compared to $181 million for the prior year period, an increase of $7 million, or 4%. Professional services revenues remained relatively flat as we continued to expand and leverage our service providers.
Gross Revenue Retention Rate
Our growth in subscription services revenues attributable to existing customers is further reflected by our gross revenue retention rate of approximately 97% as of April 30, 2026. Our gross revenue retention rate measures the percentage of recurring revenue retained from existing customers and is calculated by taking total annual recurring revenue ("ARR") of our customers as of the corresponding prior period-end and comparing that to ARR from that same set of customers as of the current period-end. The metric takes into account recurring revenues lost to product or customer churn but does not account for additional revenue earned from add-ons or net expansions, which include volume and price adjustments. Our high gross revenue retention rate demonstrates our ability to maintain our existing customer base and drive strong overall customer satisfaction.
Our gross revenue retention rate is based on ARR, which represents the annualized value of active subscription contracts as of the end of each period. Each subscription contract is annualized by dividing the total contract value by the number of days in the contract term and then multiplying by 365. We exclude certain subscription contracts from the calculation, including contracts with terms less than one year that are distinct from our core product offering, such as contracts for tenants which are used for implementation and testing. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, ARR is only adjusted if the customer churns. We calculate ARR on a constant currency basis using exchange rates set at the beginning of each fiscal year.
Subscription Revenue Backlog
As of April 30, 2026, our total subscription revenue backlog was $27.3 billion, with $8.8 billion expected to be recognized in revenues over the next 12 months. As of April 30, 2025, our total subscription revenue backlog was $24.6 billion, with $7.6 billion expected to be recognized in revenues over the next 12 months. The increase in subscription revenue backlog was primarily driven by expansion within our existing customer base, sales to new customers, and timing of renewals for existing customers.
Costs and Expenses
Our costs and expenses were as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
|
Costs of subscription services |
$ |
412 | | |
$ |
350 | |
|
Costs of professional services |
192 | | |
187 | |
|
Product development |
705 | | |
663 | |
|
Sales and marketing |
679 | | |
623 | |
|
General and administrative |
216 | | |
212 | |
Restructuring | 0 | | |
166 | |
|
Total costs and expenses |
$ |
2,204 | | |
$ |
2,201 | |
Total costs and expenses were $2.2 billion for the three months ended April 30, 2026, compared to $2.2 billion for the prior year period, an increase of $4 million, or 0.2%. The increase in total costs and expenses included increases of $60 million in employee-related expenses, $51 million in third-party hosted infrastructure expenses, $36 million in facilities and IT-related expenses, $15 million in amortization of acquisition-related intangible assets, and $11 million in amortization of deferred sales commissions, offset by a reduction of $166 million in restructuring expenses.
Costs of Subscription Services
Costs of subscription services were $412 million for the three months ended April 30, 2026, compared to $350 million for the prior year period, an increase of $62 million, or 18%. The increase in costs of subscription services included increases of $47 million in third-party hosted infrastructure expenses and $11 million in amortization of acquisition-related intangible assets.
We expect costs of subscription services will continue to increase in absolute dollars as we improve and expand our technical operations infrastructure, including third-party hosted infrastructure, and as we grow our enhanced customer support services.
Costs of Professional Services
Costs of professional services were $192 million for the three months ended April 30, 2026, compared to $187 million for the prior year period, an increase of $5 million, or 3%. Costs of professional services remained relatively flat.
We expect costs of professional services as a percentage of total revenues to continue to decline as we expand and leverage our service partners to deploy our applications and focus on growing our subscription revenues.
Product Development
Product development expenses were $705 million for the three months ended April 30, 2026, compared to $663 million for the prior year period, an increase of $42 million, or 6%. The increase in product development expenses included increases of $31 million in employee-related expenses and $16 million in facilities and IT-related expenses.
We expect product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.
Sales and Marketing
Sales and marketing expenses were $679 million for the three months ended April 30, 2026, compared to $623 million for the prior year period, an increase of $56 million, or 9%. The increase in sales and marketing expenses included increases of $22 million in employee-related expenses, $11 million in amortization of deferred sales commissions, and $11 million in facilities and IT-related expenses.
We expect sales and marketing expenses to increase in absolute dollars as we continue to invest domestically and internationally to expand awareness of our brand and product offerings to attract new and existing customers.
General and Administrative
General and administrative expenses were $216 million for the three months ended April 30, 2026, compared to $212 million for the prior year period, an increase of $4 million, or 2%. General and administrative expenses remained relatively flat.
We expect general and administrative expenses will continue to increase in absolute dollars as we continue to grow our business and invest in our people, processes, and systems to support our global operations.
Restructuring
There were no restructuring expenses recognized during the three months ended April 30, 2026.
Restructuring expenses were $166 million for the three months ended April 30, 2025, of which $132 million related to employee transition, severance payments, employee benefits, and share-based compensation, and $34 million related to an impairment of office space.
Share-based Compensation
Costs and expenses include share-based compensation expense as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
|
Costs of subscription services |
$ |
37 | | |
$ |
42 | |
|
Costs of professional services |
26 | | |
30 | |
|
Product development |
184 | | |
183 | |
|
Sales and marketing |
90 | | |
92 | |
|
General and administrative |
72 | | |
70 | |
Restructuring | 0 | | |
42 | |
|
Total share-based compensation expense |
$ |
409 | | |
$ |
459 | |
Percentage of total revenues | 16.1 |
% | |
20.5 |
% |
Share-based compensation expense decreased by $50 million for the three months ended April 30, 2026, compared to the prior year period, primarily due to a reduction in restructuring expenses.
Equity compensation is an important element of our compensation philosophy. While we expect share-based compensation expense to grow in absolute dollars as we expand our global workforce, we expect it to decline as a percentage of total revenues.
Operating Income and Operating Margin
GAAP operating income was $338 million, or 13.3% of revenues, for the three months ended April 30, 2026, compared to the prior year GAAP operating income of $39 million, or 1.8% of revenues. The increase is primarily due to our revenue growth outpacing headcount growth, a reduction in restructuring expenses, and moderation of operating expenses, including share-based compensation.
Non-GAAP operating income was $809 million, or 31.8% of revenues, for the three months ended April 30, 2026, compared to the prior year non-GAAP operating income of $677 million, or 30.2% of revenues. The increase is primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.
Reconciliations of our GAAP to non-GAAP operating income and operating margin were as follows (in millions, except percentages). See "Non-GAAP Financial Measures" below for further information.
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
|
Operating income |
$ |
338 | | |
$ |
39 | |
Share-based compensation expense (1) | 409 | | |
417 | |
|
Employer payroll tax-related items on employee stock transactions |
19 | | |
27 | |
|
Amortization of acquisition-related intangible assets |
36 | | |
21 | |
Acquisition-related costs | 7 | | |
7 | |
Restructuring costs | 0 | | |
166 | |
|
Non-GAAP operating income |
$ |
809 | | |
$ |
677 | |
| | | |
|
Operating margin |
13.3 |
% | |
1.8 |
% |
Share-based compensation expense (1) | 16.1 |
% | |
18.6 |
% |
|
Employer payroll tax-related items on employee stock transactions |
0.7 |
% | |
1.2 |
% |
|
Amortization of acquisition-related intangible assets |
1.4 |
% | |
0.9 |
% |
Acquisition-related costs | 0.3 |
% | |
0.3 |
% |
Restructuring costs | 0.0 |
% | |
7.4 |
% |
|
Non-GAAP operating margin |
31.8 |
% | |
30.2 |
% |
(1)Share-based compensation expense in the GAAP to non-GAAP reconciliation tables above excludes share-based compensation associated with restructuring activities of $42 million for the three months ended April 30, 2025. These expenses are included in Restructuring costs.
Other Income, Net
Other income, net was as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
Total other income, net | $ |
17 | | |
$ |
64 | |
Other income, net decreased by $47 million for the three months ended April 30, 2026, primarily due to lower interest income following the liquidation of marketable debt securities in the prior fiscal year to fund acquisition activities and share repurchases.
Provision For Income Taxes
The provision for income taxes was as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
Provision for income taxes | $ |
133 | | |
$ |
35 | |
The income tax provision for the three months ended April 30, 2026, was primarily attributable to earnings in the U.S. and profitable foreign jurisdictions, and incremental tax expense from share-based compensation awards where the tax deduction realized was lower than the compensation expense recognized.
The income tax provision for the three months ended April 30, 2025, was primarily attributable to earnings in the U.S. and profitable foreign jurisdictions.
For further information, seeNote 16, Income Taxes, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Liquidity and Capital Resources
As of April 30, 2026, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $4.4 billion, which were primarily held for working capital and general corporate purposes. Our cash equivalents and marketable securities are primarily composed of, in order from largest to smallest, corporate bonds, U.S. treasury securities, U.S. agency obligations, money market funds, asset-backed securities, and supranational securities.
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, share repurchase, and debt repayment needs over the next 12 months and beyond.
Our long-term future capital requirements depend on many factors, including the effects of macroeconomic trends, customer growth rates, subscription renewal activity, headcount growth, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, infrastructure development, and our investment and acquisition activities. As part of our strategy, we may choose to seek additional debt or equity financing, which may not be available on terms favorable to us or at all. Additionally, our cash provided by operating activities could be affected by various risks and uncertainties, including the "Risk Factors" included in Part II, Item 1A of this report.
Our cash flows were as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
|
Net cash provided by (used in): | | | |
|
Operating activities |
$ |
696 | | |
$ |
457 | |
|
Investing activities |
97 | | |
(523) | |
|
Financing activities |
(1,733) | | |
(501) | |
|
Effect of exchange rate changes |
(1) | | |
1 | |
|
Net decrease in cash, cash equivalents, and restricted cash |
$ |
(941) | | |
$ |
(566) | |
Operating Activities
Cash provided by operating activities was $696 million and $457 million for the three months ended April 30, 2026, and 2025, respectively. The improvement in cash provided by operating activities was primarily driven by higher cash collections of $463 million mainly due to increased sales, partially offset by increased employee-related payments of $90 million, increased supplier payments of $66 million to support our continued growth, and decreased interest income of $30 million.
Investing Activities
Cash provided by investing activities was $97 million for the three months ended April 30, 2026, which primarily resulted from net inflows of $127 million related to marketable debt securities activity and inflows of $41 million from the exit of non-marketable equity investments, offset by capital expenditures of $80 million mainly for office space projects.
Cash used in investing activities was $523 million for the three months ended April 30, 2025, which primarily resulted from a net outflow of $483 million related to marketable debt securities activity and capital expenditures of $36 million mainly for office space projects.
We expect capital expenditures will be approximately $270 million in fiscal 2027, primarily related to investments in our office facilities to support our continued growth.
Financing Activities
Cash used in financing activities was $1.7 billion for the three months ended April 30, 2026, which primarily resulted from repurchases of common stock of $1.6 billion under our share repurchase programs and taxes paid of $146 million related to net share settlement of equity awards.
Cash used in financing activities was $501 million for the three months ended April 30, 2025, which primarily resulted from repurchases of common stock of $290 million under our share repurchase programs and taxes paid of $211 million related to net share settlement of equity awards.
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 operating activities minus capital expenditures. See "Non-GAAP Financial Measures" below for further information.
Free cash flows were $616 million for the three months ended April 30, 2026, compared to $421 million for the prior year period. The improvement was primarily driven by higher cash collections of $463 million mainly due to increased sales, partially offset by increased employee-related payments of $90 million, increased supplier payments of $66 million to support our continued growth, increased capital expenditures of $44 million, and decreased interest income of $30 million.
Reconciliation of our GAAP net cash provided by operating activities to non-GAAP free cash flows is as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended April 30, |
|
2026 | |
2025 |
|
Net cash provided by operating activities |
$ |
696 | | |
$ |
457 | |
|
Less: Capital expenditures |
(80) | | |
(36) | |
|
Free cash flows |
$ |
616 | | |
$ |
421 | |
Share Repurchase Programs
We repurchase shares of our Class A common stock under share repurchase programs authorized by our Board of Directors. Under these programs, in accordance with applicable securities laws and other restrictions, we may repurchase shares of our Class A common stock through open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act, in privately negotiated transactions, or by other means. The timing and total amount of share repurchases will depend upon business, economic, and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The share repurchase programs have no expiration date, may be suspended or discontinued at any time, and do not obligate us to acquire any amount of Class A common stock.
Share repurchase programs authorized by our Board of Directors that were active during the periods presented were as follows (in millions):
| | | | | | | | | | | | | | |
Authorization Date | |
Amount Authorized | |
Authorization Completion Date |
November 2022 | | $ |
500 | | | Q1 fiscal 2025 |
February 2024 | | 500 | | | Q3 fiscal 2025 |
August 2024 | | 1,000 | | | Q3 fiscal 2026 |
May 2025 | | 1,000 | | |
Q4 fiscal 2026 |
|
September 2025 | |
4,000 | | | |
As of April 30, 2026, we were authorized to repurchase a remaining $1.3 billion of our outstanding shares of Class A common stock under our share repurchase programs.
For further information, seeNote 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, agreements for third-party hosted infrastructure platforms for business operations, leases for office space and co-location facilities for data center capacity, 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, 2026.
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 income, non-GAAP operating margin, and free cash flows meet the definition of non-GAAP financial measures.
Non-GAAP Operating Income and Non-GAAP Operating Margin
We use the non-GAAP financial measures of non-GAAP operating income 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 financial 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 income 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 expense. Share-based compensation primarily consists of non-cash expenses for employee restricted stock units ("RSUs") and our employee stock purchase plan ("ESPP"). Although share-based compensation is an important aspect of the compensation of our employees and executives, this expense is determined using a number of factors, including our stock price, volatility, and forfeiture rates, that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expense is not reflective of the value ultimately received by the grant recipients.
•Employer payroll tax-related items on employee stock transactions. We exclude the employer payroll tax-related items on employee stock transactions in order to show the full effect that excluding share-based compensation expense has on our operating results. Similar to share-based compensation expense, this tax expense is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.
•Amortization of acquisition-related intangible assets. 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 the related amortization can vary significantly and are unique to each acquisition and thus we do not believe this activity is reflective of our ongoing operations. Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP financial measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.
•Acquisition-related costs. Acquisition-related costs include direct transaction costs, such as due diligence and advisory fees, and certain compensation and integration-related expenses. We exclude the effects of acquisition-related costs as we believe these transaction-specific expenses are inconsistent in amount and frequency and do not correlate to the operation of our business.
•Restructuring costs. Restructuring costs are associated with a formal restructuring plan and are primarily related to workforce reductions, the closure of facilities, and other exit and disposal activities. We exclude these expenses because they are not reflective of ongoing business and operating results.
Free Cash Flows
We define free cash flows as net cash provided by operating activities minus capital expenditures. We use free cash flows as a measure of financial progress in our business, as it balances operating results, cash management, and capital efficiency. 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 income, 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, these non-GAAP financial measures have certain limitations as they do not reflect all items of expense or cash that affect our operations and are reflected in the corresponding GAAP financial measures. In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position.
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 Income and Operating Margin" for reconciliations from the most directly comparable GAAP financial measures of GAAP operating income and GAAP operating margin, to the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin, for the three months ended April 30, 2026, and 2025.
See "Liquidity and Capital Resources-Free Cash Flows" for a reconciliation from the most comparable GAAP financial measure, net cash provided by operating activities, to the non-GAAP financial measure, free cash flows, for the three months ended April 30, 2026, and 2025.
Critical Accounting 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, judgments, 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, judgments, and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the following accounting policies include specific estimates that 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
•Income taxes
•Business combinations, goodwill, and acquisition-related intangible assets
For a further discussion of our critical accounting estimates, refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2026. During the three months ended April 30, 2026, there were no significant changes to our critical accounting estimates.
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