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EX-32.2 - EXHIBIT 32.2 - Workday, Inc.wday-10312017xex322.htm
EX-32.1 - EXHIBIT 32.1 - Workday, Inc.wday-10312017xex321.htm
EX-31.2 - EXHIBIT 31.2 - Workday, Inc.wday-10312017xex312.htm
EX-31.1 - EXHIBIT 31.1 - Workday, Inc.wday-10312017xex311.htm

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2017
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35680
 
 
 
Workday, Inc.
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
20-2480422
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
6230 Stoneridge Mall Road
Pleasanton, California 94588
(Address of principal executive offices)
Telephone Number (925) 951-9000
(Registrant’s telephone number, including area code) 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 31, 2017, there were approximately 210 million shares of the registrant’s common stock outstanding.
 
 
 



Workday, Inc.
 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Workday, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
October 31, 2017
 
January 31, 2017
 
 
*As Adjusted
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,336,984

 
$
539,923

Marketable securities
1,874,139

 
1,456,822

Trade and other receivables, net
349,309

 
409,780

Deferred costs
56,304

 
51,330

Prepaid expenses and other current assets
77,036

 
66,590

Total current assets
3,693,772

 
2,524,445

Property and equipment, net
487,234

 
365,877

Deferred costs, noncurrent
120,173

 
117,249

Acquisition-related intangible assets, net
34,305

 
48,787

Goodwill
158,418

 
158,354

Other assets
70,814

 
53,570

Total assets
$
4,564,716

 
$
3,268,282

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,837

 
$
26,824

Accrued expenses and other current liabilities
108,074

 
61,582

Accrued compensation
139,668

 
110,625

Unearned revenue
1,129,031

 
1,086,212

Current portion of convertible senior notes, net
336,936

 

Total current liabilities
1,749,546

 
1,285,243

Convertible senior notes, net
1,136,494

 
534,423

Unearned revenue, noncurrent
100,135

 
135,331

Other liabilities
38,267

 
36,677

Total liabilities
3,024,442

 
1,991,674

Stockholders’ equity:
 
 
 
Common stock
210

 
202

Additional paid-in capital
3,195,130

 
2,681,200

Accumulated other comprehensive income (loss)
(16,310
)
 
2,071

Accumulated deficit
(1,638,756
)
 
(1,406,865
)
Total stockholders’ equity
1,540,274

 
1,276,608

Total liabilities and stockholders’ equity
$
4,564,716

 
$
3,268,282

*
See Note 2 for a summary of adjustments.

See Notes to Condensed Consolidated Financial Statements
3



Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
 
 
*As Adjusted
 
 
*As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription services
$
463,568

 
$
337,910

 
$
1,297,831

 
$
924,148

Professional services
91,821

 
75,612

 
262,739

 
210,708

Total revenues
555,389

 
413,522

 
1,560,570

 
1,134,856

Costs and expenses (1):
 
 
 
 
 
 
 
Costs of subscription services
71,898

 
54,645

 
197,627

 
155,224

Costs of professional services
91,657

 
72,240

 
260,834

 
198,140

Product development
239,588

 
185,311

 
657,130

 
488,975

Sales and marketing
176,121

 
149,537

 
503,782

 
412,055

General and administrative
56,184

 
57,721

 
163,085

 
144,609

Total costs and expenses
635,448

 
519,454

 
1,782,458

 
1,399,003

Operating loss
(80,059
)
 
(105,932
)
 
(221,888
)
 
(264,147
)
Other income (expense), net
(3,742
)
 
(3,105
)
 
(4,467
)
 
(30,136
)
Loss before provision for (benefit from) income taxes
(83,801
)
 
(109,037
)
 
(226,355
)
 
(294,283
)
Provision for (benefit from) income taxes
1,745

 
1,077

 
5,767

 
2,147

Net loss
$
(85,546
)
 
$
(110,114
)
 
$
(232,122
)
 
$
(296,430
)
Net loss per share, basic and diluted
$
(0.41
)
 
$
(0.55
)
 
$
(1.12
)
 
$
(1.50
)
Weighted-average shares used to compute net loss per share, basic and diluted
209,188

 
199,479

 
206,715

 
197,093

(1)      Costs and expenses include share-based compensation expenses as follows:
 
 
 
 
Costs of subscription services
$
6,899

 
$
5,472

 
$
19,170

 
$
14,837

Costs of professional services
9,956

 
7,436

 
27,278

 
18,698

Product development
59,116

 
45,968

 
167,068

 
117,250

Sales and marketing
25,517

 
22,597

 
74,618

 
62,443

General and administrative
20,991

 
24,982

 
63,656

 
59,684

*
See Note 2 for a summary of adjustments.

See Notes to Condensed Consolidated Financial Statements
4



Workday, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
 
 
*As Adjusted
 
 
*As Adjusted
Net loss
$
(85,546
)
 
$
(110,114
)
 
$
(232,122
)
 
$
(296,430
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in foreign currency translation adjustment
(504
)
 
(322
)
 
462

 
111

Net change in unrealized gains (losses) on available-for-sale investments
(302
)
 
(392
)
 
(931
)
 
542

Net change in market value of effective foreign currency forward exchange contracts
6,693

 
5,924

 
(17,912
)
 
1,170

Other comprehensive income (loss), net of tax
5,887

 
5,210

 
(18,381
)
 
1,823

Comprehensive loss
$
(79,659
)
 
$
(104,904
)
 
$
(250,503
)
 
$
(294,607
)
*
See Note 2 for a summary of adjustments.

See Notes to Condensed Consolidated Financial Statements
5



Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
 
 
*As Adjusted
 
 
*As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(85,546
)
 
$
(110,114
)
 
$
(232,122
)
 
$
(296,430
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
34,982

 
30,453

 
102,380

 
83,239

Share-based compensation expenses
122,479

 
100,098

 
351,790

 
266,555

Amortization of deferred costs
14,519

 
11,561

 
42,165

 
32,917

Amortization of debt discount and issuance costs
12,257

 
6,782

 
25,992

 
20,071

Gain on sale of cost method investment
(194
)
 

 
(720
)
 
(65
)
Impairment of cost method investment
100

 

 
100

 
15,000

Other
(1,294
)
 
78

 
3,317

 
1,678

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Trade and other receivables, net
19,070

 
(20,693
)
 
59,463

 
25,289

Deferred costs
(19,245
)
 
(13,040
)
 
(50,063
)
 
(41,807
)
Prepaid expenses and other assets
(11,355
)
 
(3,686
)
 
(23,373
)
 
(11,368
)
Accounts payable
(7,383
)
 
2,260

 
2,830

 
2,080

Accrued expenses and other liabilities
59,171

 
30,591

 
49,788

 
29,619

Unearned revenue
6,470

 
37,266

 
7,632

 
114,117

Net cash provided by (used in) operating activities
144,031

 
71,556

 
339,179

 
240,895

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of marketable securities
(930,783
)
 
(380,620
)
 
(1,829,231
)
 
(1,571,756
)
Maturities of marketable securities
372,389

 
449,592

 
1,185,730

 
1,614,495

Sales of available-for-sale securities
32,886

 
63,340

 
222,823

 
92,192

Business combinations, net of cash acquired

 
(144,209
)
 

 
(147,879
)
Owned real estate projects
(27,616
)
 
(59,705
)
 
(80,151
)
 
(85,479
)
Capital expenditures, excluding owned real estate projects
(36,356
)
 
(27,518
)
 
(105,477
)
 
(88,535
)
Purchases of cost method investments
(5,272
)
 

 
(10,722
)
 
(300
)
Sale and maturities of cost method investments
294

 

 
1,026

 
315

Other
(1,000
)
 

 
(1,000
)
 
(296
)
Net cash provided by (used in) investing activities
(595,458
)
 
(99,120
)
 
(617,002
)
 
(187,243
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from borrowings on convertible senior notes, net of issuance costs
1,132,101

 

 
1,132,101

 

Proceeds from issuance of warrants
80,805

 

 
80,805

 

Purchase of convertible senior notes hedges
(175,530
)
 

 
(175,530
)
 

Proceeds from issuance of common stock from employee equity plans
1,974

 
4,491

 
36,501

 
33,267

Other
(36
)
 
435

 
(112
)
 
1,006

Net cash provided by (used in) financing activities
1,039,314

 
4,926

 
1,073,765

 
34,273

Effect of exchange rate changes
(322
)
 
(137
)
 
261

 
357

Net increase (decrease) in cash, cash equivalents and restricted cash
587,565

 
(22,775
)
 
796,203

 
88,282

Cash, cash equivalents and restricted cash at the beginning of period
750,532

 
411,144

 
541,894

 
300,087

Cash, cash equivalents and restricted cash at the end of period
$
1,338,097

 
$
388,369

 
$
1,338,097

 
$
388,369




See Notes to Condensed Consolidated Financial Statements
6



 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
Supplemental cash flow data
 
 
 
 
 
 
 
Cash paid for interest, net of amounts capitalized
$
18

 
$
48

 
$
64

 
$
2,704

Cash paid for income taxes
651

 
655

 
3,259

 
4,802

Non-cash investing and financing activities:
 
 
 
 
 
 
 
Vesting of early exercise stock options
$
106

 
$
445

 
$
670

 
$
1,365

Property and equipment, accrued but not paid
47,055

 
25,917

 
47,055

 
25,917

Non-cash additions to property and equipment
649

 
67

 
1,276

 
982

 
October 31, 2017
 
October 31, 2016
 
 
*As Adjusted
Reconciliation of cash, cash equivalents and restricted cash as shown in the statement of cash flows
 
 
 
Cash and cash equivalents
$
1,336,984

 
$
386,557

Restricted cash included in Other assets
1,113

 
1,712

Restricted cash included in Property and equipment, net

 
100

Total cash, cash equivalents and restricted cash
$
1,338,097

 
$
388,369

*    See Note 2 for a summary of adjustments.


See Notes to Condensed Consolidated Financial Statements
7



Workday, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1. Overview and Basis of Presentation
Company and Background
Workday provides financial management, human capital management, and analytics applications designed for the world's largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources. We were originally incorporated in March 2005 in Nevada and in June 2012, we reincorporated in Delaware. As used in this report, the terms "Workday," "registrant," "we," "us," and "our" mean Workday, Inc. and its subsidiaries unless the context indicates otherwise.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. The condensed consolidated financial statements include the results of Workday, Inc. and its wholly-owned subsidiaries. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the information contained herein reflects all adjustments necessary for a fair presentation of Workday’s results of operations, financial position and cash flows. All such adjustments are of a normal, recurring nature. The results of operations for the quarter ended October 31, 2017 shown in this report are not necessarily indicative of results to be expected for the full year ending January 31, 2018. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2017, filed with the SEC on March 20, 2017.
Effective February 1, 2017, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the "as adjusted" footnote.
Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, the determination of the period of benefit for deferred commissions, certain assumptions used in the valuation of equity awards, and the fair value of assets acquired and liabilities assumed through business combinations. Actual results could differ from those estimates and such differences could be material to our condensed consolidated financial position and results of operations.
Segment Information
We operate in one operating segment, cloud applications. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker, who is our chief executive officer, in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

8


Note 2. Accounting Standards and Significant Accounting Policies
Recently Adopted Accounting Pronouncements
ASU No. 2014-09
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("Topic 605"), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to Topic 606 and Subtopic 340-40 as the "new standard."
We early adopted the requirements of the new standard as of February 1, 2017, utilizing the full retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, trade and other receivables, and deferred commissions as detailed below. We applied the new standard using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts. Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract, which was generally three years or longer. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-line basis over a period of benefit that we have determined to be five years or the related contractual renewal period, depending on whether the contract is an initial or renewal contract, respectively.
ASU No. 2016-09
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, and classification in the statement of cash flows. As of February 1, 2017, we adopted the applicable provisions of ASU No. 2016-09 as follows:
The guidance requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense in the statement of operations when the awards vest or are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statement of cash flows. We adopted the guidance prospectively effective February 1, 2017. Amounts previously recorded to Additional paid-in capital related to windfall tax benefits prior to February 1, 2017 remain in Stockholders' equity.
The guidance eliminates the requirement that excess tax benefits must be realized (through a reduction in income taxes payable) before companies can recognize them. We have applied the modified retrospective transition method upon adoption. The previously unrecognized excess tax effects were recorded as a deferred tax asset in the amount of $448.0 million, of which $447.8 million was fully offset by a valuation allowance, and the remaining $0.2 million resulted in a cumulative-effect adjustment to Accumulated deficit as of February 1, 2017.
ASU No. 2016-18
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230), which requires that a statement of cash flows explain the change during the period for the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for our fiscal year beginning February 1, 2018. We early adopted ASU No. 2016-18 retrospectively, effective February 1, 2017. As a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the condensed consolidated statement of cash flows, net cash flows for the three months ended October 31, 2016 decreased by $4 million and net cash flows for the nine months ended October 31, 2016 increased by $2 million.

9


We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASU No. 2014-09 and ASU No. 2016-18. Select condensed consolidated balance sheet line items, which reflect the adoption of the new ASU's are as follows (in thousands):
 
January 31, 2017
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Assets
 
 
 
 
 
 
 
Trade and other receivables, net
$
383,908

 
$
25,872

 
a
 
$
409,780

Prepaid expenses and other current assets
88,336

 
(21,746
)
 
a
 
66,590

Deferred costs
27,537

 
23,793

 
a
 
51,330

Deferred costs, noncurrent
43,310

 
73,939

 
a
 
117,249

Liabilities
 
 
 
 
 
 
 
Unearned revenue
$
1,097,417

 
$
(11,205
)
 
a
 
$
1,086,212

Unearned revenue, noncurrent
135,970

 
(639
)
 
a
 
135,331

Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of the new ASUs are as follows (in thousands, except per share data):
 
Three Months Ended October 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription services
$
335,722

 
$
2,188

 
a
 
$
337,910

Professional services
73,860

 
1,752

 
a
 
75,612

Total revenues
409,582

 
3,940

 
a
 
413,522

Costs and expenses:
 
 


 
 
 
 
Sales and marketing
149,549

 
(12
)
 
a
 
149,537

Operating loss
(109,884
)
 
3,952

 
a
 
(105,932
)
Net loss
$
(114,066
)
 
$
3,952

 
a
 
$
(110,114
)
Net loss per share, basic and diluted
$
(0.57
)
 
$
0.02

 
a
 
$
(0.55
)
 
Nine Months Ended October 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription services
$
921,953

 
$
2,195

 
a
 
$
924,148

Professional services
210,782

 
(74
)
 
a
 
210,708

Total revenues
1,132,735

 
2,121

 
a
 
1,134,856

Costs and expenses:
 
 
 
 
 
 
 
Sales and marketing
416,217

 
(4,162
)
 
a
 
412,055

Operating loss
(270,430
)
 
6,283

 
a
 
(264,147
)
Net loss
$
(302,713
)
 
$
6,283

 
a
 
$
(296,430
)
Net loss per share, basic and diluted
$
(1.54
)
 
$
0.04

 
a
 
$
(1.50
)

10


Select unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of the new ASUs are as follows (in thousands):
 
Three Months Ended October 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(114,066
)
 
$
3,952

 
a
 
$
(110,114
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Amortization of deferred costs
6,507

 
5,054

 
a
 
11,561

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade and other receivables, net
(20,360
)
 
(333
)
 
a
 
(20,693
)
Deferred costs
(7,973
)
 
(5,067
)
 
a
 
(13,040
)
Prepaid expenses and other assets
(1,425
)
 
(2,261
)
 
a, b
 
(3,686
)
Unearned revenue
38,514

 
(1,248
)
 
a
 
37,266

Net cash provided by (used in) operating activities
71,459

 
97

 
b
 
71,556

Change in restricted cash
3,900

 
(3,900
)
 
b
 

Net cash provided by (used in) investing activities
(95,220
)
 
(3,900
)
 
b
 
(99,120
)
Net increase (decrease) in cash and cash equivalents
(18,972
)
 
(3,803
)
 
b
 
(22,775
)
Cash, cash equivalents and restricted cash at the beginning of period
405,529

 
5,615

 
b
 
411,144

Cash, cash equivalents and restricted cash at the end of period
$
386,557

 
$
1,812

 
b
 
$
388,369

 
Nine Months Ended October 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(302,713
)
 
$
6,283

 
a
 
$
(296,430
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Amortization of deferred costs
18,520

 
14,397

 
a
 
32,917

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade and other receivables, net
24,695

 
594

 
a
 
25,289

Deferred costs
(23,247
)
 
(18,560
)
 
a
 
(41,807
)
Prepaid expenses and other assets
(14,103
)
 
2,735

 
a, b
 
(11,368
)
Unearned revenue
117,854

 
(3,737
)
 
a
 
114,117

Net cash provided by (used in) operating activities
239,183

 
1,712

 
b
 
240,895

Change in restricted cash
(100
)
 
100

 
b
 

Net cash provided by (used in) investing activities
(187,343
)
 
100

 
b
 
(187,243
)
Net increase (decrease) in cash and cash equivalents
86,470

 
1,812

 
b
 
88,282

Cash, cash equivalents and restricted cash at the end of period
$
386,557

 
$
1,812

 
b
 
$
388,369

a
Adjusted to reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.
b
Adjusted to reflect the adoption of ASU No. 2016-18, Statement of Cash Flows, Restricted Cash.
Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition, trade and other receivables, and deferred commissions that were updated as a result of adopting ASU No. 2014-09, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 31, 2017, filed with the SEC on March 20, 2017, that have had a material impact on our condensed consolidated financial statements and related notes.

11


Revenue Recognition
We derive our revenues primarily from subscription services and professional services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Subscription Services Revenues
Subscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, and analytics, with routine customer support. Revenue is generally recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts are generally three years or longer in length, billed annually in advance, and non-cancelable.
Professional Services Revenues
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majority of our consulting contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.
Contracts with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within our contracts.
Trade and Other Receivables
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, which is not material. Other receivables represent unbilled receivables related to subscription and professional services contracts.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in Sales and marketing expenses in the accompanying condensed consolidated statements of operations.
Recently Issued Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which requires entities to carry all investments in equity securities at fair value and recognize any changes in fair value in net income. We expect to elect the measurement alternative, defined as cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance is effective for our fiscal year beginning February 1, 2018. Early adoption is permitted. We plan to adopt the new standard in the first quarter of fiscal 2019. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

12


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC Topic 840 Leases. The guidance is effective for our fiscal year beginning February 1, 2019. Early adoption is permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior to the issuance of this ASU, existing guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. The guidance is effective for our fiscal year beginning February 1, 2018. Early adoption is permitted. We plan to adopt the new standard in the first quarter of fiscal 2019 and do not expect it to have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance is effective for our fiscal year beginning February 1, 2019. Early adoption is permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
Note 3. Marketable Securities
At October 31, 2017, marketable securities consisted of the following (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
U.S. agency obligations
$
837,650

 
$
1

 
$
(813
)
 
$
836,838

U.S. treasury securities
698,398

 

 
(447
)
 
697,951

Corporate bonds
428,145

 
14

 
(406
)
 
427,753

Commercial paper
500,114

 

 

 
500,114

Money market funds
559,076

 

 

 
559,076

Certificates of deposit
5,000

 

 

 
5,000

 
$
3,028,383

 
$
15

 
$
(1,666
)
 
$
3,026,732

Included in cash and cash equivalents
$
1,152,599

 
$

 
$
(6
)
 
$
1,152,593

Included in marketable securities
$
1,875,784

 
$
15

 
$
(1,660
)
 
$
1,874,139

At January 31, 2017, marketable securities consisted of the following (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
U.S. agency obligations
$
908,874

 
$
179

 
$
(535
)
 
$
908,518

U.S. treasury securities
192,028

 
48

 
(25
)
 
192,051

Corporate bonds
290,272

 
42

 
(429
)
 
289,885

Commercial paper
323,106

 

 

 
323,106

Money market funds
24,425

 

 

 
24,425

 
$
1,738,705

 
$
269

 
$
(989
)
 
$
1,737,985

Included in cash and cash equivalents
$
281,163

 
$

 
$

 
$
281,163

Included in marketable securities
$
1,457,542

 
$
269

 
$
(989
)
 
$
1,456,822


13


We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence, which includes our intent to hold these investments to maturity as of October 31, 2017. The unrealized losses on marketable securities which have been in a net loss position for 12 months or greater were not material as of October 31, 2017. We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We consider all marketable securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets in the accompanying condensed consolidated balance sheets. Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase greater than three months and the remainder of the securities are reflected in cash and cash equivalents. We sold $33 million and $63 million of our marketable securities during the three months ended October 31, 2017 and 2016, respectively, and $223 million and $92 million of our marketable securities during the nine months ended October 31, 2017 and 2016, respectively. The realized gains from the sales are immaterial.
Note 4.    Fair Value Measurements
We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs that are supported by little or no market activity.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of October 31, 2017 (in thousands):
Description
Level 1
 
Level 2
 
Level 3
 
Total
U.S. agency obligations
$

 
$
836,838

 
$

 
$
836,838

U.S. treasury securities
697,951

 

 

 
697,951

Corporate bonds

 
427,753

 

 
427,753

Commercial paper

 
500,114

 

 
500,114

Money market funds
559,076

 

 

 
559,076

Certificates of deposit

 
5,000

 

 
5,000

Foreign currency derivative assets

 
2,880

 

 
2,880

Total assets
$
1,257,027

 
$
1,772,585

 
$

 
$
3,029,612

Foreign currency derivative liabilities
$

 
$
15,172

 
$

 
$
15,172

Total liabilities
$

 
$
15,172

 
$

 
$
15,172

The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of January 31, 2017 (in thousands):
Description
Level 1
 
Level 2
 
Level 3
 
Total
U.S. agency obligations
$

 
$
908,518

 
$

 
$
908,518

U.S. treasury securities
192,051

 

 

 
192,051

Corporate bonds

 
289,885

 

 
289,885

Commercial paper

 
323,106

 

 
323,106

Money market funds
24,425

 

 

 
24,425

Foreign currency derivative assets

 
7,909

 

 
7,909

Total assets
$
216,476

 
$
1,529,418

 
$

 
$
1,745,894

Foreign currency derivative liabilities
$

 
$
2,127

 
$

 
$
2,127

Total liabilities
$

 
$
2,127

 
$

 
$
2,127


14


Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value in the condensed consolidated balance sheets (in thousands): 
 
October 31, 2017
 
January 31, 2017
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value
0.75% Convertible senior notes
$
337,930

 
$
475,230

 
$
325,620

 
$
402,259

1.50% Convertible senior notes
220,512

 
367,425

 
213,180

 
310,470

0.25% Convertible senior notes
931,866

 
1,166,100

 

 

The difference between the principal amount of the notes, $350 million for the 0.75% convertible senior notes, $250 million for the 1.50% convertible senior notes, and $1.15 billion for the 0.25% convertible senior notes, and the net carrying amount before unamortized debt issuance costs represents the unamortized debt discount (see Note 10). The estimated fair value of the convertible senior notes, which we have classified as Level 2 financial instruments, was determined based on the quoted bid price of the convertible senior notes in an over-the-counter market on the last trading day of each reporting period.
Based on the closing price of our common stock of $110.99 on October 31, 2017, the if-converted values of the 0.75% convertible senior notes and the 1.50% convertible senior notes were greater than their respective principal amounts, and the if-converted value of the 0.25% convertible senior notes was less than the respective principal amount.
Note 5. Deferred Costs
Deferred costs, which primarily consist of deferred sales commissions, were $176 million and $169 million as of October 31, 2017 and January 31, 2017, respectively. Amortization expense for the deferred costs was $14 million and $12 million for the three months ended October 31, 2017 and 2016, respectively, and $42 million and $33 million for the nine months ended October 31, 2017 and 2016, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.
Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
October 31, 2017
 
January 31, 2017
Land
$
7,353

 
$
6,592

Buildings
216,562

 
115,302

Computers, equipment and software
373,995

 
323,311

Computers, equipment and software acquired under capital leases
14,358

 
18,298

Furniture and fixtures
32,729

 
24,462

Leasehold improvements
122,881

 
108,673

Property and equipment, gross (1)
767,878

 
596,638

Less accumulated depreciation and amortization
(280,644
)
 
(230,761
)
Property and equipment, net
$
487,234

 
$
365,877

(1)  
Property and equipment, gross includes construction-in-progress for owned real estate projects of $137 million and $115 million that have not yet been placed in service as of October 31, 2017 and January 31, 2017, respectively.
Depreciation expense totaled $30 million and $23 million for the three months ended October 31, 2017 and 2016, respectively, and $85 million and $67 million for the nine months ended October 31, 2017 and 2016, respectively. Interest costs capitalized to property and equipment totaled $3 million and $1 million for the three months ended October 31, 2017 and 2016, respectively, and $6 million and $2 million for the nine months ended October 31, 2017 and 2016, respectively.

15


Note 7. Acquisition-related Intangible Assets, Net
Acquisition-related intangible assets, net consisted of the following (in thousands):
 
October 31, 2017
 
January 31, 2017
Acquired developed technology
$
64,900

 
$
64,900

Customer relationship assets
1,000

 
1,000

 
65,900

 
65,900

Less accumulated amortization
(31,595
)
 
(17,113
)
Acquisition-related intangible assets, net
$
34,305

 
$
48,787

Amortization expense related to acquired developed technology and customer relationship assets was $4 million and $5 million for the three months ended October 31, 2017 and 2016, respectively, and $14 million and $8 million for the nine months ended October 31, 2017 and 2016, respectively.
As of October 31, 2017, our future estimated amortization expense related to acquired developed technology and customer relationship assets is as follows (in thousands):
Fiscal Period:
 
2018
$
4,804

2019
18,904

2020
10,281

2021
316

Total
$
34,305

Note 8. Other Assets
Other assets consisted of the following (in thousands):
 
October 31, 2017
 
January 31, 2017
Cost method investments
$
24,320

 
$
14,004

Acquired land leasehold interest, net
9,596

 
9,676

Deposits
4,101

 
3,488

Net deferred tax assets
1,820

 
4,336

Other
30,977

 
22,066

Total
$
70,814

 
$
53,570

Our cost method investments include investments in private companies in which we do not have the ability to exert significant influence. The investments are tested for impairment at least annually, and more frequently upon the occurrence of certain events.
Note 9. Derivative Instruments
We conduct business on a global basis in multiple foreign currencies, subjecting Workday to foreign currency risk. To mitigate this risk, we utilize hedging contracts as described below. We do not enter into any derivatives for trading or speculative purposes.
Our foreign currency contracts are classified within Level 2 of the fair value hierarchy because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.

16


Cash Flow Hedges
We are exposed to foreign currency fluctuations resulting from customer contracts denominated in foreign currencies. We have a hedging program in which we enter into foreign currency forward contracts related to certain customer contracts. We designate these forward contracts as cash flow hedging instruments as the accounting criteria for such designation have been met. The effective portion of the gains or losses resulting from changes in the fair value of these hedges is recorded in Accumulated other comprehensive income (loss) ("OCI") on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the condensed consolidated statements of operations in the same period that the underlying revenues are earned. The changes in value of these contracts resulting from changes in forward points are excluded from the assessment of hedge effectiveness and are recorded as incurred in Other income (expense), net on the condensed consolidated statements of operations. Cash flows from such forward contracts are classified as operating activities.
As of October 31, 2017 and January 31, 2017, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $470 million and $252 million, respectively. All contracts have maturities not greater than 35 months. The notional value represents the amount that will be bought or sold upon maturity of the forward contract.
Foreign Currency Forward Contracts not Designated as Hedges
We also enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets and liabilities. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are recorded in Other income (expense), net on the condensed consolidated statements of operations. These forward contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities. Cash flows from such forward contracts are classified as operating activities.
As of October 31, 2017 and January 31, 2017, we had outstanding forward contracts with total notional values of $51 million.

17


The fair values of outstanding derivative instruments were as follows (in thousands):
 
 
Condensed Consolidated Balance Sheets Location
 
October 31, 2017
 
January 31, 2017
Derivative Assets:
 
 
 
 
 
 
Foreign currency forward contracts designated as cash flow hedges
 
Prepaid expenses and other current assets and Other assets
 
$
2,535

 
$
7,149

Foreign currency forward contracts not designated as hedges
 
Prepaid expenses and other current assets
 
345

 
760

Derivative Liabilities:
 
 
 
 
 
 
Foreign currency forward contracts designated as cash flow hedges
 
Accrued expenses and other current liabilities and Other liabilities
 
$
13,424

 
$
1,605

Foreign currency forward contracts not designated as hedges
 
Accrued expenses and other current liabilities
 
1,748

 
522

Gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):
 
 
Condensed Consolidated Statement of Operations and Statement of Comprehensive Loss Locations
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
 
 
2017
 
2016
 
2017
 
2016
Gains (losses) recognized in OCI (effective portion) (1)
 
Net change in market value of effective foreign currency forward exchange contracts
 
$
7,372

 
$
6,107

 
$
(16,526
)
 
$
1,606

Gains (losses) reclassified from OCI into income (effective portion)
 
Revenues
 
679

 
183

 
1,386

 
436

Gains (losses) recognized in income (amount excluded from effectiveness testing and ineffective portion)
 
Other income (expense), net
 
350

 
517

 
1,740

 
833

(1) 
Of the total effective portion of foreign currency forward contracts designated as cash flow hedges as of October 31, 2017, net losses of $3 million are expected to be reclassified out of OCI within the next 12 months.
Gains (losses) associated with foreign currency forward contracts not designated as cash flow hedges were as follows (in thousands):
 
 
Condensed Consolidated Statement of Operations Location
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
Derivative Type
 
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts not designated as hedges
 
Other income (expense), net
 
$
829

 
$
1,195

 
$
(1,796
)
 
$
654

We are subject to master netting agreements with certain counterparties of the foreign exchange contracts, under which we are permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is our policy to present the derivatives gross in the condensed consolidated balance sheets. Our foreign currency forward contracts are not subject to any credit contingent features or collateral requirements and we do not believe we are subject to significant counterparty concentration risk given the short-term nature, volume, and size of the derivative contracts outstanding.

18


As of October 31, 2017, information related to these offsetting arrangements was as follows (in thousands):
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
Net Assets Exposed
 
 
 
 
 
Financial Instruments
 
Cash Collateral Received
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty A
 
$
1,781

 
$

 
$
1,781

 
$
(1,781
)
 
$

 
$

Counterparty B
 
236

 

 
236

 
(236
)
 

 

Counterparty C
 
863

 

 
863

 
(863
)
 

 

Total
 
$
2,880

 
$

 
$
2,880

 
$
(2,880
)
 
$

 
$

 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
Net Liabilities Exposed
 
 
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty A
 
$
2,916

 
$

 
$
2,916

 
$
(1,781
)
 
$

 
$
1,135

Counterparty B
 
11,088

 

 
11,088

 
(236
)
 

 
10,852

Counterparty C
 
1,154

 

 
1,154

 
(863
)
 

 
291

Counterparty D
 
14

 

 
14

 

 

 
14

Total
 
$
15,172

 
$

 
$
15,172

 
$
(2,880
)
 
$

 
$
12,292

Note 10. Convertible Senior Notes, Net
Convertible Senior Notes
In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 ("2018 Notes") with a principal amount of $350 million. The 2018 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.75% on January 15 and July 15 of each year. The 2018 Notes mature on July 15, 2018 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2018 Notes prior to maturity.
Concurrently, we issued 1.50% convertible senior notes due July 15, 2020 ("2020 Notes") with a principal amount of $250 million. The 2020 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 1.50% on January 15 and July 15 of each year. The 2020 Notes mature on July 15, 2020 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2020 Notes prior to maturity.
In September 2017, we issued 0.25% convertible senior notes due October 1, 2022 ("2022 Notes") with a principal amount of $1.15 billion (together with the 2018 Notes and 2020 Notes, referred to as "the Notes"). The 2022 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.25% on April 1 and October 1 of each year. The 2022 Notes mature on October 1, 2022 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2022 Notes prior to maturity.
The terms of the Notes are governed by Indentures by and between us and Wells Fargo Bank, National Association, as Trustee ("the Indentures"). Upon conversion, holders of the Notes will receive cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election.
For the 2018 Notes, the initial conversion rate is 12.0075 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $83.28 per share of Class A common stock, subject to adjustment. Prior to the close of business on March 14, 2018, the conversion is subject to the satisfaction of certain conditions as described below. For the 2020 Notes, the initial conversion rate is 12.2340 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $81.74 per share of Class A common stock, subject to adjustment. Prior to the close of business on March 13, 2020, the conversion is subject to the satisfaction of certain conditions, as described below. For the 2022 Notes, the initial conversion rate is 6.7982 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $147.10 per share of Class A common stock, subject to adjustment. Prior to the close of business on May 31, 2022, the conversion is subject to the satisfaction of certain conditions, as described below.

19


Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indentures) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indentures), holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest.
Holders of the Notes may convert all or a portion of their Notes prior to the close of business on March 14, 2018 for the 2018 Notes, March 13, 2020 for the 2020 Notes, and May 31, 2022 for the 2022 Notes in multiples of $1,000 principal amount, only under the following circumstances:
if the last reported sale price of Class A common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the respective Notes on each applicable trading day. This circumstance is effective for the 2022 Notes during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2018;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the respective Notes for each day of that five day consecutive trading day period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate of the respective Notes on such trading day; or
upon the occurrence of specified corporate events, as noted in the Indentures.
In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components. The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity components representing the conversion option were determined by deducting the fair value of the liability components from the par value of the respective Notes. These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification.
In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes. The issuance costs attributable to the equity components were netted against the respective equity components in Additional paid-in capital. For the 2018 Notes, we recorded liability issuance costs of $7 million and equity issuance costs of $2 million. Amortization expense for the liability issuance costs was $0.4 million and $1 million for each of the three and nine month periods ended October 31, 2017 and 2016, respectively. For the 2020 Notes, we recorded liability issuance costs of $5 million and equity issuance costs of $2 million. Amortization expense for the liability issuance costs was $0.2 million and $0.5 million for each of the three and nine month periods ended October 31, 2017 and 2016, respectively. For the 2022 Notes, we recorded liability issuance costs of $14 million and equity issuance costs of $4 million. Amortization expense for the liability issuance costs was $0.4 million for each of the three and nine month periods ended October 31, 2017.
The Notes, net consisted of the following (in thousands):
 
October 31, 2017
 
January 31, 2017
 
2018 Notes
 
2020 Notes
 
2022 Notes
 
2018 Notes
 
2020 Notes
 
2022 Notes
Principal amounts:
 
 
 
 
 
 
 
 
 
 
 
    Principal
$
350,000

 
$
250,000

 
$
1,150,000

 
$
350,000

 
$
250,000

 
$

    Unamortized debt discount
(12,070
)
 
(29,488
)
 
(218,134
)
 
(24,380
)
 
(36,820
)
 

Net carrying amount before unamortized debt issuance costs
337,930

 
220,512

 
931,866

 
325,620

 
213,180

 

    Unamortized debt issuance costs
(994
)
 
(1,824
)
 
(14,060
)
 
(2,050
)
 
(2,327
)
 

Net carrying amount
$
336,936

 
$
218,688

 
$
917,806

 
$
323,570

 
$
210,853

 
$

Carrying amount of the equity component (1)
$
74,892

 
$
66,007

 
$
219,702

 
$
74,892

 
$
66,007

 
$

(1) 
Included in the condensed consolidated balance sheets within Additional paid-in capital, net of $2 million, $2 million, and $4 million for the 2018 Notes, 2020 Notes, and 2022 Notes, respectively, in equity issuance costs.
As of October 31, 2017, the 2018 Notes have a remaining life of approximately 8 months and are classified as current on the condensed consolidated balance sheet. The 2020 Notes and the 2022 Notes have a remaining life of 32 months and 59 months, respectively, and are classified as non-current on the condensed consolidated balance sheet.

20


The effective interest rates of the liability components of the 2018 Notes, 2020 Notes, and 2022 Notes are 5.75%, 6.25%, and 4.60% respectively. These interest rates were based on the interest rates of similar liabilities at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
 
2018 Notes
 
2020 Notes
 
2022 Notes
 
2018 Notes
 
2020 Notes
 
2022 Notes
 
2018 Notes
 
2020 Notes
 
2022 Notes
 
2018 Notes
 
2020 Notes
 
2022 Notes
Contractual interest expense
$
656

 
$
938

 
$
367

 
$
656

 
$
938

 
$

 
$
1,969

 
$
2,813

 
$
367

 
$
1,969

 
$
2,813

 
$

Interest cost related to amortization of debt issuance costs
352

 
168

 
365

 
352

 
167

 

 
1,056

 
503

 
365

 
1,056

 
504

 

Interest cost related to amortization of the debt discount
4,162

 
2,482

 
5,042

 
3,930

 
2,333

 

 
12,310

 
7,332

 
5,042

 
11,622

 
6,889

 

We capitalized interest costs related to the Notes of $3 million and $1 million for the three months ended October 31, 2017 and 2016, respectively, and $6 million and $2 million for the nine months ended October 31, 2017 and 2016, respectively.
Notes Hedges
In connection with the issuance of the Notes, we entered into convertible note hedge transactions with respect to our Class A common stock ("Purchased Options"). The Purchased Options relating to the 2018 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the Notes, approximately 4.2 million shares of our Class A common stock for $83.28 per share, exercisable upon conversion of the Notes. The Purchased Options relating to the 2020 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the Notes, approximately 3.1 million shares of our Class A common stock for $81.74 per share, exercisable upon conversion of the Notes. The Purchased Options relating to the 2022 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the Notes, approximately 7.8 million shares of our Class A common stock for $147.10 per share, exercisable upon conversion of the Notes. The Purchased Options will expire in 2018 for the 2018 Notes, in 2020 for the 2020 Notes, and in 2022 for the 2022 Notes, if not exercised earlier. The Purchased Options are intended to offset potential economic dilution to our Class A common stock upon any conversion of the Notes. The Purchased Options are separate transactions and are not part of the terms of the Notes.
We paid an aggregate amount of $144 million for the Purchased Options relating to the 2018 Notes and 2020 Notes, and $176 million for the Purchased Options relating to the 2022 Notes. The amount paid for the Purchased Options is included in Additional paid-in capital in the condensed consolidated balance sheets.
Warrants
In connection with the issuance of the Notes, we also entered into warrant transactions to sell warrants ("the Warrants") to acquire, subject to anti-dilution adjustments, up to approximately 4.2 million shares over 60 scheduled trading days beginning in October 2018, 3.1 million shares over 60 scheduled trading days beginning in October 2020, and 7.8 million shares over 60 scheduled trading days beginning in January 2023 of our Class A common stock at an exercise price of $107.96, $107.96, and $213.96 per share, respectively. If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of our Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants will have a dilutive effect on our earnings per share assuming that we are profitable. The Warrants are separate transactions, and are not part of the terms of the Notes or the Purchased Options.
We received aggregate proceeds of $93 million from the sale of the Warrants related to the 2018 Notes and the 2020 Notes, and $81 million from the sale of the Warrants related to the 2022 Notes. The proceeds from the sale of the Warrants are recorded in Additional paid-in capital in the condensed consolidated balance sheets.

21


Note 11. Commitments and Contingencies
Facility and Computing Infrastructure-related Commitments
We have entered into non-cancelable agreements for certain of our offices and data centers with various expiration dates. Certain of our office leases are with an affiliate of our Chairman, David Duffield, who is also a significant stockholder (see Note 17). Our operating lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. This includes payments for office and data center square footage, as well as data center power capacity for certain data centers. We generally recognize these expenses on a straight-line basis over the period in which we benefit from the lease and we have accrued for rent expense incurred but not paid. Total rent expense was $21 million and $19 million for the three months ended October 31, 2017 and 2016, respectively, and $60 million and $53 million for the nine months ended October 31, 2017 and 2016, respectively.
In January 2014, we entered into a 95-year lease for a 6.9-acre parcel of vacant land in Pleasanton, California, under which we paid $2 million for base rent from commencement through December 31, 2020. Annual rent payments of $0.2 million plus increases based on increases in the consumer price index begin on January 1, 2021 and continue through the end of the lease.
Additionally, we have entered into a non-cancelable agreement with a computing infrastructure vendor that expires on October 31, 2024.
Legal Matters
We are a party to various legal proceedings and claims which arise in the ordinary course of business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, as of October 31, 2017, there was not at least a reasonable possibility that we had incurred or will incur a material loss, or a material loss in excess of a recorded accrual, with respect to such loss contingencies.
Note 12. Common Stock and Stockholders’ Equity
Common Stock
As of October 31, 2017, there were 137 million shares of Class A common stock and 73 million shares of Class B common stock outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Each share of Class B common stock can be converted into a share of Class A common stock at any time at the option of the holder.
Employee Equity Plans
Our 2012 Equity Incentive Plan ("EIP") serves as the successor to our 2005 Stock Plan (together with the EIP, the "Stock Plans"). Pursuant to the terms of the EIP, the share reserve increased by 10 million shares in March 2017, and as of October 31, 2017, we had approximately 61 million shares of Class A common stock available for future grants.
We also have a 2012 Employee Stock Purchase Plan ("ESPP"). Under the ESPP, eligible employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about June 1 and December 1 and exercisable on or about the succeeding November 30 and May 31, respectively, of each year. Pursuant to the terms of the ESPP, the share reserve increased by 2 million shares in March 2017. As of October 31, 2017, 7 million shares of Class A common stock were available for issuance under the ESPP.

22


Stock Options
The Stock Plans provide for the issuance of incentive and nonstatutory options to employees and non-employees. Options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over five years. A summary of information related to stock option activity during the nine months ended October 31, 2017 is as follows:
 
Outstanding
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (in millions)
Balance as of January 31, 2017
9,096,592

 
$
4.34

 
$
716

Stock options granted

 

 
 
Stock options exercised
(2,016,123
)
 
4.60

 
 
Stock options canceled
(9,975
)
 
7.77

 
 
Balance as of October 31, 2017
7,070,494

 
$
4.26

 
$
755

Vested and expected to vest as of October 31, 2017
7,070,356

 
$
4.26

 
$
755

Exercisable as of October 31, 2017
7,068,894

 
$
4.26

 
$
754

As of October 31, 2017, there was a total of $0.3 million in unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately three months.
Restricted Stock Units
The Stock Plans provide for the issuance of restricted stock units ("RSUs") to employees. RSUs generally vest over four years. A summary of information related to RSU activity during the nine months ended October 31, 2017 is as follows: 
 
Number of  Shares
 
Weighted-Average
Grant Date Fair Value
Balance as of January 31, 2017
11,502,721

 
$
78.45

RSUs granted
7,011,426

 
87.22

RSUs vested
(4,445,556
)
 
78.02

RSUs forfeited
(807,255
)
 
78.46

Balance as of October 31, 2017
13,261,336

 
$
83.23

As of October 31, 2017, there was a total of $1.0 billion in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately three years.
Performance-based Restricted Stock Units
During fiscal 2017, 0.3 million shares of performance-based restricted stock units ("PRSUs") were granted to all employees other than executive management and included both service conditions and performance conditions related to company-wide goals . These performance conditions were met and the PRSUs vested on March 15, 2017. During the nine months ended October 31, 2017, we recognized $6 million in compensation cost related to these PRSUs.
Additionally, during fiscal 2018, 0.4 million shares of PRSUs were granted to all employees other than executive management and included both service conditions and performance conditions related to company-wide goals. We expect to grant additional shares related to this program for employees hired in fiscal 2018. These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2018 and if the individual employee continues to provide service through the vesting date of March 15, 2018. During the three and nine months ended October 31, 2017, we recognized $12 million and $18 million, respectively, in compensation cost related to these PRSUs, and there is a total of $19 million in unrecognized compensation cost which is expected to be recognized over a weighted-average period of approximately five months.
Note 13. Unearned Revenue and Performance Obligations
$421 million and $308 million of subscription services revenue was recognized during the three months ended October 31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. $1.2 billion and $841 million of subscription services revenue was recognized during the nine months ended October 31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. Professional services revenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods was not material.

23


Transaction Price Allocated to the Remaining Performance Obligations
As of October 31, 2017, approximately $4.5 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately two thirds of these remaining performance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of October 31, 2017 was not material.
Note 14. Other Income (Expense), Net
Other income (expense), net consisted of the following (in thousands):
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017
 
2016
 
2017
 
2016
Interest income
$
6,394

 
$
2,805