Workday, Inc. - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - August 24, 2016

Attached files

file filename
8-K - 8-K - Workday, Inc.wday-07312016x8k.htm


Exhibit 99.1

Investor Relations Contact:
James Redfern
(650) 463-6288
James.Redfern@Workday.com

Media Contact:
Eric Glass
(415) 432-3056
Eric.Glass@Workday.com



Workday Announces Fiscal 2017 Second Quarter Financial Results

Total Revenues of $377.7 Million, Up 34% Year Over Year

Subscription Revenues of $306.2 Million, Up 37% Year Over Year

PLEASANTON, CA - (August 24, 2016) - Workday, Inc. (NYSE: WDAY), a leader in enterprise cloud applications for finance and human resources, today announced results for the fiscal second quarter ended July 31, 2016.

•
Total revenues were $377.7 million, an increase of 34% from the second quarter of fiscal 2016. Subscription revenues were $306.2 million, an increase of 37% from the same period last year.

•
Operating loss was $86.9 million, or negative 23.0% of revenues, compared to an operating loss of $67.6 million, or negative 23.9% of revenues, in the same period last year. Non-GAAP operating profit for the second quarter was $5.9 million, or 1.6% of revenues, compared to a non-GAAP operating loss of $0.7 million, or negative 0.3% of revenues, in the same period last year.1 

•
Net loss per basic and diluted share was $0.55, compared to a net loss per basic and diluted share of $0.37 in the second quarter of fiscal 2016. Non-GAAP net loss per basic and diluted share was $0.04, compared to a non-GAAP net income per basic and diluted share of $0.02 for the same period last year. 1 

•
Operating cash flows for the second quarter were $6.3 million and free cash flows were negative $20.3 million. For the trailing twelve months, operating cash flows were $319.0 million and free cash flows were $178.1 million. 2 

•
Cash, cash equivalents and marketable securities were approximately $2.1 billion as of July 31, 2016. Unearned revenues were $979.1 million, a 43.3% increase from the same period last year.

“We delivered record second quarter results with solid customer momentum and strong competitive win rates,” said Aneel Bhusri, co-founder and CEO, Workday. “The results were well balanced across our key initiatives as we saw consistent strength across product lines, industries, and geographies and we are proud to welcome our new largest customer based in the APJ region.”

"We are very pleased with our strong second quarter results," said Robynne Sisco, chief financial officer, Workday. "We again generated record quarterly revenues and strong trailing twelve month operating cash flows. Looking ahead, we anticipate third quarter subscription revenues to be within a range of $331 to $333 million and third quarter total revenues to be $398 to $400 million."

Recent Highlights
•
Workday had the second strongest quarter for new Workday Financial Management customers in company history, and the strongest quarter for new Workday Financial Management customers in EMEA.

•
Workday continued to see strong global adoption of Workday Human Capital Management, including an expanded partnership with IBM to support its entire global workforce; Kering and Repsol based in the EMEA region; and Samsung, Qantas, and Air New Zealand based in the APJ region.








•
Workday achieved the highest and furthest position in the leaders quadrant of the first-ever Gartner Magic Quadrant for Cloud Human Capital Management Suites for Midmarket and Large Enterprises.(a) 

•
Workday acquired Platfora, a leading provider of operational analytics and data discovery tools that enable companies to visually interact with and analyze petabyte-scale data in seconds.

Workday plans to host a conference call today to review its second 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.

(a) Gartner "Magic Quadrant for Cloud HCM Suites for Midmarket and Large Enterprises," by Ron Hanscome, Chris Pang, Jeff Freyermuth, Helen Poitevin, Melanie Lougee, Sam Grinter, 16 June 2016.

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 third quarter revenue projections. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," 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 April 30, 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)
 
July 31,
2016
 
January 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
405,529

 
$
300,087

Marketable securities
1,662,381

 
1,669,372

Accounts receivable, net
248,658

 
293,407

Deferred costs
22,664

 
21,817

Prepaid expenses and other current assets
90,858

 
77,625

Total current assets
2,430,090

 
2,362,308

Property and equipment, net
255,118

 
214,158

Deferred costs, noncurrent
32,488

 
30,074

Goodwill and acquisition-related intangible assets, net
68,623

 
65,816

Other assets
43,485

 
57,738

Total assets
$
2,829,804

 
$
2,730,094

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,135

 
$
19,605

Accrued expenses and other current liabilities
58,880

 
43,122

Accrued compensation
76,693

 
91,211

Unearned revenue
854,845

 
768,741

Total current liabilities
1,007,553

 
922,679

Convertible senior notes, net
520,765

 
507,476

Unearned revenue, noncurrent
124,269

 
130,988

Other liabilities
36,371

 
32,794

Total liabilities
1,688,958

 
1,593,937

Stockholders’ equity:
 
 
 
Common stock
198

 
193

Additional paid-in capital
2,444,172

 
2,247,454

Accumulated other comprehensive income (loss)
(2,588
)
 
799

Accumulated deficit
(1,300,936
)
 
(1,112,289
)
Total stockholders’ equity
1,140,846

 
1,136,157

Total liabilities and stockholders’ equity
$
2,829,804

 
$
2,730,094






Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Subscription services
$
306,228

 
$
223,742

 
$
586,231

 
$
424,735

Professional services
71,495

 
58,954

 
136,922

 
108,918

Total revenues
377,723

 
282,696

 
723,153

 
533,653

Costs and expenses(1):
 
 
 
 
 
 
 
Costs of subscription services
51,379

 
35,287

 
100,579

 
67,069

Costs of professional services
66,473

 
56,792

 
125,900

 
102,924

Product development
161,886

 
115,345

 
303,664

 
214,680

Sales and marketing
139,177

 
106,430

 
266,668

 
201,325

General and administrative
45,705

 
36,482

 
86,888

 
68,699

Total costs and expenses
464,620

 
350,336

 
883,699

 
654,697

Operating loss
(86,897
)
 
(67,640
)
 
(160,546
)
 
(121,044
)
Other expense, net
(21,193
)
 
(3,779
)
 
(27,031
)
 
(11,015
)
Loss before provision for (benefit from) income taxes
(108,090
)
 
(71,419
)
 
(187,577
)
 
(132,059
)
Provision for (benefit from) income taxes
(65
)
 
(1,998
)
 
1,070

 
(1,080
)
Net loss
$
(108,025
)
 
$
(69,421
)
 
$
(188,647
)
 
$
(130,979
)
Net loss per share, basic and diluted
$
(0.55
)
 
$
(0.37
)
 
$
(0.96
)
 
$
(0.70
)
Weighted-average shares used to compute net loss per share, basic and diluted
197,223

 
189,360

 
195,887

 
188,382


(1)      Costs and expenses include share-based compensation expenses as follows:
 
 
 
 
Costs of subscription services
$
4,968

 
$
3,173

 
$
9,365

 
$
5,221

Costs of professional services
5,969

 
5,144

 
11,262

 
8,598

Product development
38,314

 
28,632

 
71,282

 
49,443

Sales and marketing
20,844

 
13,222

 
39,846

 
21,587

General and administrative
18,127

 
14,593

 
34,702

 
27,189





Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2016
 
2015
 
2016
 
2015
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(108,025
)
 
$
(69,421
)
 
$
(188,647
)
 
$
(130,979
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
26,662

 
19,888

 
52,786

 
38,457

Share-based compensation expenses
88,222

 
64,764

 
166,457

 
112,038

Amortization of deferred costs
6,140

 
7,735

 
12,013

 
12,360

Amortization of debt discount and issuance costs
6,690

 
6,336

 
13,289

 
12,586

Gain on sale of cost method investment
(65
)
 
(3,220
)
 
(65
)
 
(3,220
)
Impairment of cost method investment
15,000

 
—

 
15,000

 
—

Other
1,918

 
(2,119
)
 
1,600

 
(1,382
)
Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Accounts receivable
(55,992
)
 
(27,570
)
 
45,055

 
32,147

Deferred costs
(10,486
)
 
(7,082
)
 
(15,274
)
 
(10,583
)
Prepaid expenses and other assets
(11,902
)
 
(7,806
)
 
(12,678
)
 
(15,476
)
Accounts payable
1,542

 
1,428

 
(180
)
 
4,180

Accrued expense and other liabilities
(6,517
)
 
2,590

 
(972
)
 
6,915

Unearned revenue
53,071

 
29,665

 
79,340

 
50,344

Net cash provided by (used in) operating activities
6,258

 
15,188

 
167,724

 
107,387

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of marketable securities
(557,180
)
 
(476,470
)
 
(1,191,136
)
 
(862,045
)
Maturities of marketable securities
539,315

 
429,186

 
1,164,903

 
710,593

Sales of available-for-sale securities
28,652

 
19,524

 
28,852

 
29,524

Business combinations, net of cash acquired
(3,670
)
 
(7,961
)
 
(3,670
)
 
(7,961
)
Owned real estate projects
(6,788
)
 
—

 
(25,774
)
 
—

Capital expenditures, excluding owned real estate projects
(26,539
)
 
(25,469
)
 
(61,017
)
 
(53,789
)
Purchases of cost method investments
(200
)
 
(15,750
)
 
(300
)
 
(15,750
)
Sale of cost method investment
315

 
3,538

 
315

 
3,538

Change in restricted cash
(4,000
)
 
—

 
(4,000
)
 
—

Other
(684
)
 
—

 
(296
)
 
—

Net cash provided by (used in) investing activities
(30,779
)
 
(73,402
)
 
(92,123
)
 
(195,890
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from issuance of common stock from employee equity plans
25,395

 
19,172

 
28,776

 
22,736

Principal payments on capital lease obligations
—

 
(1,016
)
 
—

 
(2,464
)
Other
195

 
362

 
571

 
779

Net cash provided by (used in) financing activities
25,590

 
18,518

 
29,347

 
21,051

Effect of exchange rate changes
(144
)
 
(210
)
 
494

 
(162
)
Net increase (decrease) in cash and cash equivalents
925

 
(39,906
)
 
105,442

 
(67,614
)
Cash and cash equivalents at the beginning of period
404,604

 
270,484

 
300,087

 
298,192

Cash and cash equivalents at the end of period
$
405,529

 
$
230,578

 
$
405,529

 
$
230,578

Supplemental cash flow data
 
 
 
 
 
 
 
Cash paid for interest
$
3,241

 
$
3,211

 
$
3,245

 
$
3,244

Cash paid for taxes
3,566

 
418

 
4,147

 
1,034

Non-cash investing and financing activities:
 
 
 
 
 
 
 
Vesting of early exercise stock options
$
460

 
$
472

 
$
920

 
$
944

Property and equipment, accrued but not paid
11,426

 
18,642

 
11,426

 
18,642

Non-cash additions to property and equipment
394

 
323

 
915

 
2,183





Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended July 31, 2016
(in thousands, except percentages and per share data)
(unaudited)
 
GAAP
 
Share-Based Compensation Expenses
 
Other Operating Expenses(2)
 
Amortization of Debt Discount and Issuance Costs
 
Non-GAAP
Costs and expenses:
 
 
 
 
 
 
 
 
 
Costs of subscription services
$
51,379

 
$
(4,968
)
 
$
(133
)
 
$
—

 
$
46,278

Costs of professional services
66,473

 
(5,969
)
 
(226
)
 
—

 
60,278

Product development
161,886

 
(38,314
)
 
(2,566
)
 
—

 
121,006

Sales and marketing
139,177

 
(20,844
)
 
(707
)
 
—

 
117,626

General and administrative
45,705

 
(18,127
)
 
(924
)
 
—

 
26,654

Operating income (loss)
(86,897
)
 
88,222

 
4,556

 
—

 
5,881

Operating margin
(23.0
)%
 
23.4
%
 
1.2
%
 
—
%
 
1.6
%
Other income (expense), net
(21,193
)
 
—

 
—

 
6,690

 
(14,503
)
Income (loss) before provision for (benefit from) income taxes
(108,090
)
 
88,222

 
4,556

 
6,690

 
(8,622
)
Provision for (benefit from) income taxes
(65
)
 
—

 
—

 
—

 
(65
)
Net income (loss)
$
(108,025
)
 
$
88,222

 
$
4,556

 
$
6,690

 
$
(8,557
)
Net income (loss) per share (1)
$
(0.55
)
 
$
0.45

 
$
0.02

 
$
0.04

 
$
(0.04
)
(1) 
Calculated based upon 197,223 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 $3.2 million, and amortization of acquisition-related intangible assets of $1.4 million recorded as part of product development expenses.
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended July 31, 2015
(in thousands, except percentages and per share data)
(unaudited)
 
GAAP
 
Share-Based Compensation Expenses
 
Other Operating Expenses(2)
 
Amortization of Debt Discount and Issuance Costs
 
Non-GAAP
Costs and expenses:
 
 
 
 
 
 
 
 
 
Costs of subscription services
$
35,287

 
$
(3,173
)
 
$
(76
)
 
$
—

 
$
32,038

Costs of professional services
56,792

 
(5,144
)
 
(170
)
 
—

 
51,478

Product development
115,345

 
(28,632
)
 
(1,068
)
 
—

 
85,645

Sales and marketing
106,430

 
(13,222
)
 
(327
)
 
—

 
92,881

General and administrative
36,482

 
(14,593
)
 
(516
)
 
—

 
21,373

Operating income (loss)
(67,640
)
 
64,764

 
2,157

 
—

 
(719
)
Operating margin
(23.9
)%
 
22.9
%
 
0.7
%
 
—
%
 
(0.3
)%
Other income (expense), net
(3,779
)
 
—

 
—

 
6,336

 
2,557

Income (loss) before provision for (benefit from) income taxes
(71,419
)
 
64,764

 
2,157

 
6,336

 
1,838

Provision for (benefit from) income taxes
(1,998
)
 
—

 
—

 
—

 
(1,998
)
Net income (loss)
$
(69,421
)
 
$
64,764

 
$
2,157

 
$
6,336

 
$
3,836

Net income (loss) per share (1)
$
(0.37
)
 
$
0.34

 
$
0.01

 
$
0.04

 
$
0.02

(1) 
GAAP net loss per share calculated based upon 189,360 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 202,450 diluted weighted-average shares of common stock.
(2) 
Other operating expenses include total employer payroll tax-related items on employee stock transactions of $1.8 million, and amortization of acquisition-related intangible assets of $0.4 million recorded as part of product development expenses.




Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Six Months Ended July 31, 2016
(in thousands, except percentages and per share data)
(unaudited)
 
GAAP
 
Share-Based Compensation Expenses
 
Other Operating Expenses(2)
 
Amortization of Debt Discount and Issuance Costs
 
Non-GAAP
Costs and expenses:
 
 
 
 
 
 
 
 
 
Costs of subscription services
$
100,579

 
$
(9,365
)
 
$
(452
)
 
$
—

 
$
90,762

Costs of professional services
125,900

 
(11,262
)
 
(716
)
 
—

 
113,922

Product development
303,664

 
(71,282
)
 
(6,360
)
 
—

 
226,022

Sales and marketing
266,668

 
(39,846
)
 
(1,797
)
 
—

 
225,025

General and administrative
86,888

 
(34,702
)
 
(1,736
)
 
—

 
50,450

Operating income (loss)
(160,546
)
 
166,457

 
11,061

 
—

 
16,972

Operating margin
(22.2
)%
 
23.0
%
 
1.5
%
 
—
%
 
2.3
%
Other income (expense), net
(27,031
)
 
—

 
—

 
13,289

 
(13,742
)
Income (loss) before provision for (benefit from) income taxes
(187,577
)
 
166,457

 
11,061

 
13,289

 
3,230

Provision for (benefit from) income taxes
1,070

 
—

 
—

 
—

 
1,070

Net income (loss)
$
(188,647
)
 
$
166,457

 
$
11,061

 
$
13,289

 
$
2,160

Net income (loss) per share (1)
$
(0.96
)
 
$
0.85

 
$
0.06

 
$
0.06

 
$
0.01

(1)  
GAAP net loss per share calculated based upon 195,887 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 206,531 diluted weighted-average shares of common stock.
(2)
Other operating expenses include total employer payroll tax-related items on employee stock transactions of $8.3 million, and amortization of acquisition-related intangible assets of $2.7 million recorded as part of product development expenses.
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Six Months Ended July 31, 2015
(in thousands, except percentages and per share data)
(unaudited)
 
GAAP
 
Share-Based Compensation Expenses
 
Other Operating Expenses(2)
 
Amortization of Debt Discount and Issuance Costs
 
Non-GAAP
Costs and expenses:
 
 
 
 
 
 
 
 
 
Costs of subscription services
$
67,069

 
$
(5,221
)
 
$
(262
)
 
$
—

 
$
61,586

Costs of professional services
102,924

 
(8,598
)
 
(524
)
 
—

 
93,802

Product development
214,680

 
(49,443
)
 
(3,381
)
 
—

 
161,856

Sales and marketing
201,325

 
(21,587
)
 
(958
)
 
—

 
178,780

General and administrative
68,699

 
(27,189
)
 
(1,103
)
 
—

 
40,407

Operating income (loss)
(121,044
)
 
112,038

 
6,228

 
—

 
(2,778
)
Operating margin
(22.7
)%
 
21.0
%
 
1.2
%
 
—
%
 
(0.5
)%
Other income (expense), net
(11,015
)
 
—

 
—

 
12,586

 
1,571

Income (loss) before provision for (benefit from) income taxes
(132,059
)
 
112,038

 
6,228

 
12,586

 
(1,207
)
Provision for (benefit from) income taxes
(1,080
)
 
—

 
—

 
—

 
(1,080
)
Net income (loss)
$
(130,979
)
 
$
112,038

 
$
6,228

 
$
12,586

 
$
(127
)
Net income (loss) per share (1)
$
(0.70
)
 
$
0.59

 
$
0.03

 
$
0.08

 
$
—

(1)
Calculated based upon 188,382 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 $5.5 million, and amortization of acquisition-related intangible assets of $0.7 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 July 31,
 
Six Months Ended July 31,
 
2016
 
2015
 
2016
 
2015
Net cash provided by (used in) operating activities
$
6,258

 
$
15,188

 
$
167,724

 
$
107,387

Capital expenditures, excluding owned real estate projects
(26,539
)
 
(25,469
)
 
(61,017
)
 
(53,789
)
Free cash flows
$
(20,281
)
 
$
(10,281
)
 
$
106,707

 
$
53,598

 
 
 
 
 
 
 
 
 
Trailing Twelve Months Ended
July 31,
 
 
 
 
 
2016
 
2015
 
 
 
 
Net cash provided by (used in) operating activities
$
318,974

 
$
196,704

 
 
 
 
Capital expenditures, excluding owned real estate projects
(140,895
)
 
(119,153
)
 
 
 
 
Free cash flows
$
178,079

 
$
77,551

 
 
 
 





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.



Workday, Inc. Reports