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Workday Announces Fiscal 2017 Third Quarter Financial Results

Total Revenues of $409.6 Million, Up 34.2% Year Over Year; Subscription Revenues of $335.7 Million, Up 38.3% Year Over Year

PLEASANTON, CA -- (Marketwired) -- 12/01/16 -- Workday, Inc. (NYSE: WDAY), a leader in enterprise cloud applications for finance and human resources, today announced results for the fiscal third quarter ended October 31, 2016.

  • Total revenues were $409.6 million, an increase of 34.2% from the third quarter of fiscal 2016. Subscription revenues were $335.7 million, an increase of 38.3% from the same period last year.

  • Operating loss was $109.9 million, or negative 26.8% of revenues, compared to an operating loss of $70.2 million, or negative 23.0% of revenues, in the same period last year. Non-GAAP operating profit for the third quarter was $4.0 million, or 1.0% of revenues, compared to a non-GAAP operating profit of $0.8 million, or 0.3% of revenues, in the same period last year.(1)

  • Net loss per basic and diluted share was $0.57, compared to a net loss per basic and diluted share of $0.41 in the third quarter of fiscal 2016. Non-GAAP net income per diluted share was $0.03, compared to a non-GAAP break-even for the same period last year.(1)

  • Operating cash flows for the third quarter were $71.5 million and free cash flows were $43.9 million. For the trailing twelve months, operating cash flows were $337.7 million and free cash flows were $207.2 million.(2)

  • Cash, cash equivalents and marketable securities were approximately $1.9 billion as of October 31, 2016. Unearned revenues were $1.0 billion, a 42.6% increase from the same period last year.

"We had a strong third quarter and saw healthy demand across all major geographies and industries," said Aneel Bhusri, co-founder and CEO, Workday. "We continue to lead with product differentiation, technology innovation, and real customer success, and believe these are significant differentiators for Workday in the market."

"We are very pleased with our third quarter results," said Robynne Sisco, chief financial officer, Workday. "Looking ahead, we anticipate fiscal 2017 subscription revenues to be within a range of $1.282 to $1.285 billion and fiscal 2017 total revenues to be within a range of $1.560 to $1.563 billion."

Recent Highlights

  • Workday held its 10th annual customer conference, Workday Rising, bringing together more than 7,000 members of the Workday community for education and collaboration in Chicago.

  • Workday announced the general availability of Workday Learning, Workday Planning, and Workday Student -- three major products that enable customers to replace outdated systems that were disconnected from how organizations want and need to operate.

  • In response to customer demand, Workday unveiled plans to deliver Data-as-a-Service, a new service that gives customers the option to contribute their Workday data that will be anonymized and aggregated into useful metrics and trends representative of its collective customer community.

  • Workday closed its acquisition of Platfora, a leading provider of operational analytics and data discovery tools with a team and technology that has been folded into the core of Workday in order to enrich the analytics in Workday Financial Management and Workday HCM.

  • Underscoring its strong, ongoing commitment to privacy and protecting customers' data, Workday was one of the first companies to be recognized as complying with the Department of Commerce's Privacy Shield principles for the transfer of European personal data to the United States.

Workday plans to host a conference call today to review its third quarter financial results and to discuss its financial outlook. The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via webcast or through the company's Investor Relations website at www.workday.com/investorrelations. The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 45 days.

(1) Non-GAAP operating profit (loss) and non-GAAP net income (loss) per share exclude share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization expense for acquisition-related intangible assets, and debt discount and issuance costs associated with convertible notes. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

(2) Free cash flows are defined as operating cash flows minus capital expenditures (excluding owned real estate projects). See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

About Workday
Workday is a leading provider of enterprise cloud applications for finance and human resources. Founded in 2005, Workday delivers financial management, human capital management, and analytics applications designed for the world's largest companies, educational institutions, and government agencies. More than 1,000 organizations, ranging from medium-sized businesses to Fortune 50 enterprises, have selected Workday.

Use of Non-GAAP Financial Measures
Reconciliations of non-GAAP financial measures to Workday's financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled "About Non-GAAP Financial Measures."

Forward-Looking Statements
This press release contains forward-looking statements including, among other things, statements regarding Workday's fiscal year revenue projections. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plans," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. Risks include, but are not limited to: (i) breaches in our security measures, unauthorized access to our customers' data or disruptions in our data center operations; (ii) our ability to manage our growth effectively; (iii) competitive factors, including pricing pressures, industry consolidation, entry of new competitors and new applications and marketing initiatives by our competitors; (iv) the development of the market for enterprise cloud services; (v) acceptance of our applications and services by customers; (vi) adverse changes in general economic or market conditions; (vii) delays or reductions in information technology spending; (viii) our limited operating history, which makes it difficult to predict future results; and (ix) changes in sales may not be immediately reflected in our results due to our subscription model. Further information on risks that could affect Workday's results is included in our filings with the Securities and Exchange Commission (SEC), including our Form 10-Q for the quarter ended July 31, 2016 and our future reports that we may file with the SEC from time to time, which could cause actual results to vary from expectations. Workday assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

Any unreleased services, features, or functions referenced in this document, our website or other press releases or public statements that are not currently available are subject to change at Workday's discretion and may not be delivered as planned or at all. Customers who purchase Workday services should make their purchase decisions based upon services, features, and functions that are currently available.

© 2016. Workday, Inc. All rights reserved. Workday and the Workday logo are registered trademarks of Workday, Inc. All other brand and product names are trademarks or registered trademarks of their respective holders.


                               Workday, Inc.
                   Condensed Consolidated Balance Sheets
                               (in thousands)
                                (unaudited)

                                                  October 31,   January 31,
                                                      2016          2016
                                                 ------------  ------------
Assets
Current assets:
  Cash and cash equivalents                      $    386,557  $    300,087
  Marketable securities                             1,527,238     1,669,372
  Accounts receivable, net                            268,945       293,407
  Deferred costs                                       23,067        21,817
  Prepaid expenses and other current assets            88,788        77,625
                                                 ------------  ------------
Total current assets                                2,294,595     2,362,308
Property and equipment, net                           334,265       214,158
Deferred costs, noncurrent                             33,551        30,074
Goodwill and acquisition-related intangible
 assets, net                                          212,087        65,816
Other assets                                           48,071        57,738
                                                 ------------  ------------
Total assets                                     $  2,922,569  $  2,730,094
                                                 ============  ============
Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                               $     28,374  $     19,605
  Accrued expenses and other current liabilities       66,075        43,122
  Accrued compensation                                103,206        91,211
  Unearned revenue                                    900,441       768,741
                                                 ------------  ------------
Total current liabilities                           1,098,096       922,679
Convertible senior notes, net                         527,547       507,476
Unearned revenue, noncurrent                          123,179       130,988
Other liabilities                                      36,288        32,794
                                                 ------------  ------------
Total liabilities                                   1,785,110     1,593,937
Stockholders' equity:
  Common stock                                            200           193
  Additional paid-in capital                        2,549,639     2,247,454
  Accumulated other comprehensive income                2,622           799
  Accumulated deficit                              (1,415,002)   (1,112,289)
                                                 ------------  ------------
Total stockholders' equity                          1,137,459     1,136,157
                                                 ------------  ------------
Total liabilities and stockholders' equity       $  2,922,569  $  2,730,094
                                                 ============  ============



                               Workday, Inc.
              Condensed Consolidated Statements of Operations
                   (in thousands, except per share data)
                                (unaudited)

                               Three Months Ended       Nine Months Ended
                                   October 31,             October 31,
                             ----------------------  ----------------------
                                2016        2015        2016        2015
                             ----------  ----------  ----------  ----------
Revenues:
  Subscription services      $  335,722  $  242,700  $  921,953  $  667,435
  Professional services          73,860      62,566     210,782     171,484
                             ----------  ----------  ----------  ----------
Total revenues                  409,582     305,266   1,132,735     838,919
Costs and expenses(1):
  Costs of subscription
   services                      54,645      39,791     155,224     106,860
  Costs of professional
   services                      72,240      61,963     198,140     164,887
  Product development           185,311     124,020     488,975     338,700
  Sales and marketing           149,549     111,658     416,217     312,983
  General and administrative     57,721      38,008     144,609     106,707
                             ----------  ----------  ----------  ----------
Total costs and expenses        519,466     375,440   1,403,165   1,030,137
                             ----------  ----------  ----------  ----------
Operating loss                 (109,884)    (70,174)   (270,430)   (191,218)
Other expense, net               (3,105)     (6,722)    (30,136)    (17,737)
                             ----------  ----------  ----------  ----------
Loss before provision for
 (benefit from) income taxes   (112,989)    (76,896)   (300,566)   (208,955)
Provision for (benefit from)
 income taxes                     1,077         915       2,147        (165)
                             ----------  ----------  ----------  ----------
Net loss                     $ (114,066) $  (77,811) $ (302,713) $ (208,790)
                             ==========  ==========  ==========  ==========
Net loss per share, basic
 and diluted                 $    (0.57) $    (0.41) $    (1.54) $    (1.10)
                             ==========  ==========  ==========  ==========
Weighted-average shares used
 to compute net loss per
 share, basic and diluted       199,479     190,727     197,093     189,185
                             ==========  ==========  ==========  ==========

(1) Costs and expenses include share-based compensation expenses as
 follows:
    Costs of subscription
     services                $    5,472  $    3,203  $   14,837  $    8,424
    Costs of professional
     services                     7,436       5,424      18,698      14,022
    Product development          45,968      29,547     117,250      78,990
    Sales and marketing          22,597      15,321      62,443      36,908
    General and
     administrative              24,982      15,164      59,684      42,353



                               Workday, Inc.
              Condensed Consolidated Statements of Cash Flows
                               (in thousands)
                                (unaudited)

                            Three Months Ended         Nine Months Ended
                                October 31,               October 31,
                         ------------------------  ------------------------
                             2016         2015         2016         2015
                         -----------  -----------  -----------  -----------
Cash flows from
 operating activities
Net loss                 $  (114,066) $   (77,811) $  (302,713) $  (208,790)
Adjustments to reconcile
 net loss to net cash
 provided by (used in)
 operating activities:
  Depreciation and
   amortization               30,453       22,260       83,239       60,717
  Share-based
   compensation expenses     100,098       68,659      266,555      180,697
  Amortization of
   deferred costs              6,507        5,389       18,520       17,749
  Amortization of debt
   discount and issuance
   costs                       6,782        6,422       20,071       19,008
  Gain on sale of cost
   method investment              --           --          (65)      (3,220)
  Impairment of cost
   method investment              --           --       15,000           --
  Other                           78           48        1,678       (1,334)
  Changes in operating
   assets and
   liabilities, net of
   business
   combinations:
    Accounts receivable      (20,360)     (14,727)      24,695       17,420
    Deferred costs            (7,973)      (8,744)     (23,247)     (19,327)
    Prepaid expenses and
     other assets             (1,425)      (9,522)     (14,103)     (24,998)
    Accounts payable           2,260       (3,719)       2,080          461
    Accrued expense and
     other liabilities        30,591       29,785       29,619       36,700
    Unearned revenue          38,514       34,719      117,854       85,063
                         -----------  -----------  -----------  -----------
Net cash provided by
 (used in) operating
 activities                   71,459       52,759      239,183      160,146
Cash flows from
 investing activities
Purchases of marketable
 securities                 (380,620)    (623,377)  (1,571,756)  (1,485,422)
Maturities of marketable
 securities                  449,592      551,270    1,614,495    1,261,863
Sales of available-for-
 sale securities              63,340       69,187       92,192       98,711
Business combinations,
 net of cash acquired       (144,209)     (23,475)    (147,879)     (31,436)
Owned real estate
 projects                    (59,705)          --      (85,479)          --
Capital expenditures,
 excluding owned real
 estate projects             (27,518)     (37,893)     (88,535)     (91,682)
Purchases of cost method
 investments                      --         (700)        (300)     (16,450)
Sale of cost method
 investment                       --           --          315        3,538
Change in restricted
 cash                          3,900           --         (100)          --
Other                             --           --         (296)          --
                         -----------  -----------  -----------  -----------
Net cash provided by
 (used in) investing
 activities                  (95,220)     (64,988)    (187,343)    (260,878)
Cash flows from
 financing activities
Proceeds from issuance
 of common stock from
 employee equity plans         4,491        2,360       33,267       25,096
Principal payments on
 capital lease
 obligations                      --         (663)          --       (3,127)
Other                            435          246        1,006        1,025
                         -----------  -----------  -----------  -----------
Net cash provided by
 (used in) financing
 activities                    4,926        1,943       34,273       22,994
Effect of exchange rate
 changes                        (137)        (399)         357         (561)
                         -----------  -----------  -----------  -----------
Net increase (decrease)
 in cash and cash
 equivalents                 (18,972)     (10,685)      86,470      (78,299)
Cash and cash
 equivalents at the
 beginning of period         405,529      230,578      300,087      298,192
                         -----------  -----------  -----------  -----------
Cash and cash
 equivalents at the end
 of period               $   386,557  $   219,893  $   386,557  $   219,893
                         ===========  ===========  ===========  ===========
Supplemental cash flow
 data
Cash paid for interest   $        48  $         8  $     3,293  $     3,252
Cash paid for income
 taxes                           655          618        4,802        1,652
Non-cash investing and
 financing activities:
  Vesting of early
   exercise stock
   options               $       445  $       472  $     1,365  $     1,416
  Property and
   equipment, accrued
   but not paid               25,917       17,237       25,917       17,237
  Non-cash additions to
   property and
   equipment                      67        4,308          982        6,491



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                    Three Months Ended October 31, 2016
           (in thousands, except percentages and per share data)
                                (unaudited)

                                                      Amortization
                                                         of Debt
                             Share-Based     Other    Discount and
                            Compensation   Operating    Issuance
                    GAAP      Expenses    Expenses(2)     Costs    Non-GAAP
                 ---------  ------------  ----------- ------------ --------
Costs and
 expenses:
Costs of
 subscription
 services        $  54,645  $     (5,472) $      (118)$         -- $ 49,055
Costs of
 professional
 services           72,240        (7,436)        (171)          --   64,633
Product
 development       185,311       (45,968)      (5,792)          --  133,551
Sales and
 marketing         149,549       (22,597)        (661)          --  126,291
General and
 administrative     57,721       (24,982)        (713)          --   32,026
Operating income
 (loss)           (109,884)      106,455        7,455           --    4,026
Operating margin     (26.8)%        26.0%         1.8%          --%     1.0%
Other income
 (expense), net     (3,105)           --           --        6,782    3,677
Income (loss)
 before
 provision for
 (benefit from)
 income taxes     (112,989)      106,455        7,455        6,782    7,703
Provision for
 (benefit from)
 income taxes        1,077            --           --           --    1,077
Net income
 (loss)          $(114,066) $    106,455  $     7,455 $      6,782 $  6,626
Net income
 (loss) per
 share (1)       $   (0.57) $       0.53  $      0.04 $       0.03 $   0.03

(1) GAAP net loss per share calculated based upon 199,479 basic and diluted
    weighted-average shares of common stock. Non-GAAP net income per share
    calculated based upon 209,924 diluted weighted-average shares of common
    stock.
(2) Other operating expenses include total employer payroll tax-related
    items on employee stock transactions of $2.6 million, and amortization
    of acquisition-related intangible assets of $4.9 million recorded as
    part of product development expenses.



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                    Three Months Ended October 31, 2015
           (in thousands, except percentages and per share data)
                                (unaudited)

                                                      Amortization
                                                         of Debt
                            Share-Based     Other     Discount and
                           Compensation   Operating     Issuance
                   GAAP      Expenses    Expenses(2)      Costs    Non-GAAP
                ---------  ------------  -----------  ------------ --------
Costs and
 expenses:
Costs of
 subscription
 services       $  39,791  $     (3,203) $       (64) $         -- $ 36,524
Costs of
 professional
 services          61,963        (5,424)        (107)           --   56,432
Product
 development      124,020       (29,547)      (1,594)           --   92,879
Sales and
 marketing        111,658       (15,321)        (196)           --   96,141
General and
 administrative    38,008       (15,164)        (396)           --   22,448
Operating
 income (loss)    (70,174)       68,659        2,357            --      842
Operating
 margin             (23.0)%        22.5%         0.8%           --%     0.3%
Other income
 (expense), net    (6,722)           --           --         6,422     (300)
Income (loss)
 before
 provision for
 (benefit from)
 income taxes     (76,896)       68,659        2,357         6,422      542
Provision for
 (benefit from)
 income taxes         915            --           --            --      915
Net income
 (loss)         $ (77,811) $     68,659  $     2,357  $      6,422 $   (373)
Net income
 (loss) per
 share (1)      $   (0.41) $       0.36  $      0.01  $       0.04 $     --

(1) Calculated based upon 190,727 basic and diluted weighted-average shares
    of common stock.
(2) Other operating expenses include total employer payroll tax-related
    items on employee stock transactions of $1.3 million, and amortization
    of acquisition-related intangible assets of $1.1 million recorded as
    part of product development expenses.



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                     Nine Months Ended October 31, 2016
           (in thousands, except percentages and per share data)
                                (unaudited)

                                                      Amortization
                                                         of Debt
                            Share-Based     Other     Discount and
                           Compensation   Operating     Issuance
                   GAAP      Expenses    Expenses(2)      Costs    Non-GAAP
                ---------  ------------  -----------  ------------ --------
Costs and
 expenses:
Costs of
 subscription
 services       $ 155,224  $    (14,837) $      (570) $         -- $139,817
Costs of
 professional
 services         198,140       (18,698)        (887)           --  178,555
Product
 development      488,975      (117,250)     (12,152)           --  359,573
Sales and
 marketing        416,217       (62,443)      (2,458)           --  351,316
General and
 administrative   144,609       (59,684)      (2,449)           --   82,476
Operating
 income (loss)   (270,430)      272,912       18,516            --   20,998
Operating
 margin             (23.9)%        24.1%         1.7%           --%     1.9%
Other income
 (expense), net   (30,136)           --           --        20,071  (10,065)
Income (loss)
 before
 provision for
 (benefit from)
 income taxes    (300,566)      272,912       18,516        20,071   10,933
Provision for
 (benefit from)
 income taxes       2,147            --           --            --    2,147
Net income
 (loss)         $(302,713) $    272,912  $    18,516  $     20,071 $  8,786
Net income
 (loss) per
 share (1)      $   (1.54) $       1.38  $      0.09  $       0.11 $   0.04

(1) GAAP net loss per share calculated based upon 197,093 basic and diluted
    weighted-average shares of common stock. Non-GAAP net income per share
    calculated based upon 207,685 diluted weighted-average shares of common
    stock.
(2) Other operating expenses include total employer payroll tax-related
    items on employee stock transactions of $10.9 million, and amortization
    of acquisition-related intangible assets of $7.6 million recorded as
    part of product development expenses.



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                    Nine Months Ended October 31, 2015
           (in thousands, except percentages and per share data)
                                (unaudited)

                                                     Amortization
                                                        of Debt
                           Share-Based     Other     Discount and
                          Compensation   Operating     Issuance
                  GAAP      Expenses    Expenses(2)      Costs    Non-GAAP
               ---------  ------------  -----------  ------------ --------
Costs and
 expenses:
Costs of
 subscription
 services      $ 106,860  $     (8,424) $      (326) $         -- $ 98,110
Costs of
 professional
 services        164,887       (14,022)        (631)           --  150,234
Product
 development     338,700       (78,990)      (4,975)           --  254,735
Sales and
 marketing       312,983       (36,908)      (1,154)           --  274,921
General and
 administrative  106,707       (42,353)      (1,499)           --   62,855
Operating
 income (loss)  (191,218)      180,697        8,585            --   (1,936)
Operating
 margin            (22.8)%        21.6%         1.0%           --%    (0.2)%
Other income
 (expense),
 net             (17,737)           --           --        19,008    1,271
Income (loss)
 before
 provision for
 (benefit
 from) income
 taxes          (208,955)      180,697        8,585        19,008     (665)
Provision for
 (benefit
 from) income
 taxes              (165)           --           --            --     (165)
Net income
 (loss)        $(208,790) $    180,697  $     8,585  $     19,008 $   (500)
Net income
 (loss) per
 share (1)     $   (1.10) $       0.95  $      0.05  $       0.10 $     --

(1) Calculated based upon 189,185 basic and diluted weighted-average shares
    of common stock.
(2) Other operating expenses include total employer payroll tax-related
    items on employee stock transactions of $6.8 million, and amortization
    of acquisition-related intangible assets of $1.8 million recorded as
    part of product development expenses.



                               Workday, Inc.
    Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
                       (A Non-GAAP Financial Measure)
                               (in thousands)
                                (unaudited)

                                  Three Months Ended     Nine Months Ended
                                      October 31,           October 31,
                                 --------------------  --------------------
                                    2016       2015       2016       2015
                                 ---------  ---------  ---------  ---------
Net cash provided by (used in)
 operating activities            $  71,459  $  52,759  $ 239,183  $ 160,146
Capital expenditures, excluding
 owned real estate projects        (27,518)   (37,893)   (88,535)   (91,682)
                                 ---------  ---------  ---------  ---------
  Free cash flows                $  43,941  $  14,866  $ 150,648  $  68,464
                                 =========  =========  =========  =========

                                    Trailing Twelve
                                     Months Ended
                                      October 31,
                                 --------------------
                                    2016       2015
                                 ---------  ---------
Net cash provided by (used in)
 operating activities            $ 337,674  $ 208,421
Capital expenditures, excluding
 owned real estate projects       (130,520)  (129,347)
                                 ---------  ---------
  Free cash flows                $ 207,154  $  79,074
                                 =========  =========

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Workday's results, we have disclosed the following non-GAAP financial measures: non-GAAP operating income (loss), non-GAAP net income (loss) per share and free cash flows. Workday has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. The non-GAAP financial measures of non-GAAP operating income (loss) and non-GAAP net income (loss) per share differ from GAAP in that they exclude share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization of acquisition-related intangible assets, and non-cash interest expense related to our convertible senior notes. Free cash flows differ from GAAP cash flows from operating activities in that it treats capital expenditures (excluding owned real estate projects) as a reduction to cash flows.

Workday's management uses these non-GAAP financial measures 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 Workday's financial performance and the ability of operations to generate cash. Management believes these non-GAAP financial measures reflect Workday's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in Workday's business, as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Workday's operating results and future prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Additionally, management believes information regarding free cash flows provides investors and others with an important perspective on the cash flows generated by normal recurring activities to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures, after our owned real estate projects.

Management believes excluding the following items from the GAAP Condensed Consolidated Statement of Operations is useful to investors and others in assessing Workday's operating performance due to the following factors:

  • Share-based compensation expenses. Although share-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude share-based compensation expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. For restricted stock unit awards, the amount of share-based compensation expenses is not reflective of the value ultimately received by the grant recipients. Moreover, determining the fair value of certain of the share-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related share-based awards. Unlike cash compensation, the value of stock options and shares offered under our Employee Stock Purchase Plan, which are elements of our ongoing share-based compensation expenses, is determined using a complex formula that incorporates factors, such as market volatility and forfeiture rates, that are beyond our control.

  • 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.

  • Amortization of debt discount and issuance costs. Under GAAP, we are required to separately account for liability (debt) and equity (conversion option) components of the convertible senior notes that were issued in private placements in June 2013. Accordingly, for GAAP purposes we are required to recognize the effective interest expense on our convertible senior notes and amortize the issuance costs over the term of the notes. The difference between the effective interest expense and the contractual interest expense, and the amortization expense of issuance costs are excluded from management's assessment of our operating performance because management believes that these non-cash expenses are not indicative of ongoing operating performance. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the company's operational performance.

Additionally, we believe that the non-GAAP financial measure, free cash flows, is meaningful to investors because we review cash flows generated from or used in operations after deducting certain capital expenditures that are considered to be an ongoing operational component of our business. Capital expenditures deducted from cash flows from operations do not include purchases of land and buildings, and construction costs of our new development center and of other owned buildings. We exclude these owned real estate projects as they are infrequent, non-recurring in nature and distinctly separate from our ongoing business operations. This provides an enhanced view of cash available to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures, after our owned real estate projects.

The use of non-GAAP operating income (loss) and non-GAAP net income (loss) per share measures has certain limitations as they do not reflect all items of income and expense that affect Workday's operations. Workday compensates 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. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review Workday's financial information in its entirety and not rely on a single financial measure.

Investor Relations Contact:
James Redfern
(650) 463-6288
[email protected]

Media Contact:
Eric Glass
(415) 432-3056
[email protected]

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