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Workday Announces Fiscal 2017 Third Quarter Financial Results

/EINPresswire.com/ -- Total Revenues of $409.6 Million, Up 34.2% Year Over Year; Subscription Revenues of $335.7 Million, Up 38.3% Year Over Year

PLEASANTON, CA--(Marketwired - Dec 1, 2016) - Workday, Inc. (NYSE: WDAY), a leader in enterprise cloud applications for finance and human resources, today announced results for the fiscal third quarter ended October 31, 2016.

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

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

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

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

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

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

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

Recent Highlights

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

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

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

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

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

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

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

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

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

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

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

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

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

   
   
Workday, Inc.  
Condensed Consolidated Balance Sheets  
(in thousands)  
(unaudited)  
   
    October 31,
 2016
    January 31,
 2016
 
Assets                
Current assets:                
  Cash and cash equivalents   $ 386,557     $ 300,087  
  Marketable securities     1,527,238       1,669,372  
  Accounts receivable, net     268,945       293,407  
  Deferred costs     23,067       21,817  
  Prepaid expenses and other current assets     88,788       77,625  
Total current assets     2,294,595       2,362,308  
Property and equipment, net     334,265       214,158  
Deferred costs, noncurrent     33,551       30,074  
Goodwill and acquisition-related intangible assets, net     212,087       65,816  
Other assets     48,071       57,738  
Total assets   $ 2,922,569     $ 2,730,094  
Liabilities and stockholders' equity                
Current liabilities:                
  Accounts payable   $ 28,374     $ 19,605  
  Accrued expenses and other current liabilities     66,075       43,122  
  Accrued compensation     103,206       91,211  
  Unearned revenue     900,441       768,741  
Total current liabilities     1,098,096       922,679  
Convertible senior notes, net     527,547       507,476  
Unearned revenue, noncurrent     123,179       130,988  
Other liabilities     36,288       32,794  
Total liabilities     1,785,110       1,593,937  
Stockholders' equity:                
  Common stock     200       193  
  Additional paid-in capital     2,549,639       2,247,454  
  Accumulated other comprehensive income     2,622       799  
  Accumulated deficit     (1,415,002 )     (1,112,289 )
Total stockholders' equity     1,137,459       1,136,157  
Total liabilities and stockholders' equity   $ 2,922,569     $ 2,730,094  
                 
   
   
Workday, Inc.  
Condensed Consolidated Statements of Operations  
(in thousands, except per share data)  
(unaudited)  
   
    Three Months Ended
 October 31,
    Nine Months Ended
 October 31,
 
    2016     2015     2016     2015  
Revenues:                                
  Subscription services   $ 335,722     $ 242,700     $ 921,953     $ 667,435  
  Professional services     73,860       62,566       210,782       171,484  
Total revenues     409,582       305,266       1,132,735       838,919  
Costs and expenses(1):                                
  Costs of subscription services     54,645       39,791       155,224       106,860  
  Costs of professional services     72,240       61,963       198,140       164,887  
  Product development     185,311       124,020       488,975       338,700  
  Sales and marketing     149,549       111,658       416,217       312,983  
  General and administrative     57,721       38,008       144,609       106,707  
Total costs and expenses     519,466       375,440       1,403,165       1,030,137  
Operating loss     (109,884 )     (70,174 )     (270,430 )     (191,218 )
Other expense, net     (3,105 )     (6,722 )     (30,136 )     (17,737 )
Loss before provision for (benefit from) income taxes     (112,989 )     (76,896 )     (300,566 )     (208,955 )
Provision for (benefit from) income taxes     1,077       915       2,147       (165 )
Net loss   $ (114,066 )   $ (77,811 )   $ (302,713 )   $ (208,790 )
Net loss per share, basic and diluted   $ (0.57 )   $ (0.41 )   $ (1.54 )   $ (1.10 )
Weighted-average shares used to compute net loss per share, basic and diluted     199,479       190,727       197,093       189,185  
   
(1) Costs and expenses include share-based compensation expenses as follows:  
    Costs of subscription services   $ 5,472     $ 3,203     $ 14,837     $ 8,424  
    Costs of professional services     7,436       5,424       18,698       14,022  
    Product development     45,968       29,547       117,250       78,990  
    Sales and marketing     22,597       15,321       62,443       36,908  
    General and administrative     24,982       15,164       59,684       42,353  
                                     
   
   
Workday, Inc.  
Condensed Consolidated Statements of Cash Flows  
(in thousands)  
(unaudited)  
   
    Three Months Ended
 October 31,
    Nine Months Ended
 October 31,
 
    2016     2015     2016     2015  
Cash flows from operating activities                                
Net loss   $ (114,066 )   $ (77,811 )   $ (302,713 )   $ (208,790 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                
  Depreciation and amortization     30,453       22,260       83,239       60,717  
  Share-based compensation expenses     100,098       68,659       266,555       180,697  
  Amortization of deferred costs     6,507       5,389       18,520       17,749  
  Amortization of debt discount and issuance costs     6,782       6,422       20,071       19,008  
  Gain on sale of cost method investment     --       --       (65 )     (3,220 )
  Impairment of cost method investment     --       --       15,000       --  
  Other     78       48       1,678       (1,334 )
  Changes in operating assets and liabilities, net of business combinations:                                
    Accounts receivable     (20,360 )     (14,727 )     24,695       17,420  
    Deferred costs     (7,973 )     (8,744 )     (23,247 )     (19,327 )
    Prepaid expenses and other assets     (1,425 )     (9,522 )     (14,103 )     (24,998 )
    Accounts payable     2,260       (3,719 )     2,080       461  
    Accrued expense and other liabilities     30,591       29,785       29,619       36,700  
    Unearned revenue     38,514       34,719       117,854       85,063  
Net cash provided by (used in) operating activities     71,459       52,759       239,183       160,146  
Cash flows from investing activities                                
Purchases of marketable securities     (380,620 )     (623,377 )     (1,571,756 )     (1,485,422 )
Maturities of marketable securities     449,592       551,270       1,614,495       1,261,863  
Sales of available-for-sale securities     63,340       69,187       92,192       98,711  
Business combinations, net of cash acquired     (144,209 )     (23,475 )     (147,879 )     (31,436 )
Owned real estate projects     (59,705 )     --       (85,479 )     --  
Capital expenditures, excluding owned real estate projects     (27,518 )     (37,893 )     (88,535 )     (91,682 )
Purchases of cost method investments     --       (700 )     (300 )     (16,450 )
Sale of cost method investment     --       --       315       3,538  
Change in restricted cash     3,900       --       (100 )     --  
Other     --       --       (296 )     --  
Net cash provided by (used in) investing activities     (95,220 )     (64,988 )     (187,343 )     (260,878 )
Cash flows from financing activities                                
Proceeds from issuance of common stock from employee equity plans     4,491       2,360       33,267       25,096  
Principal payments on capital lease obligations     --       (663 )     --       (3,127 )
Other     435       246       1,006       1,025  
Net cash provided by (used in) financing activities     4,926       1,943       34,273       22,994  
Effect of exchange rate changes     (137 )     (399 )     357       (561 )
Net increase (decrease) in cash and cash equivalents     (18,972 )     (10,685 )     86,470       (78,299 )
Cash and cash equivalents at the beginning of period     405,529       230,578       300,087       298,192  
Cash and cash equivalents at the end of period   $ 386,557     $ 219,893     $ 386,557     $ 219,893  
Supplemental cash flow data                                
Cash paid for interest   $ 48     $ 8     $ 3,293     $ 3,252  
Cash paid for income taxes     655       618       4,802       1,652  
Non-cash investing and financing activities:                                
  Vesting of early exercise stock options   $ 445     $ 472     $ 1,365     $ 1,416  
  Property and equipment, accrued but not paid     25,917       17,237       25,917       17,237  
  Non-cash additions to property and equipment     67       4,308       982       6,491  
                                 
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Three Months Ended October 31, 2016  
(in thousands, except percentages and per share data)  
(unaudited)  
   
    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   $ 54,645   $ (5,472 )   $ (118 ) $ --   $ 49,055  
Costs of professional services     72,240     (7,436 )     (171 )   --     64,633  
Product development     185,311     (45,968 )     (5,792 )   --     133,551  
Sales and marketing     149,549     (22,597 )     (661 )   --     126,291  
General and administrative     57,721     (24,982 )     (713 )   --     32,026  
Operating income (loss)     (109,884 )   106,455       7,455     --     4,026  
Operating margin     (26.8 )%   26.0 %     1.8 %   -- %   1.0 %
Other income (expense), net     (3,105 )   --       --     6,782     3,677  
Income (loss) before provision for (benefit from) income taxes     (112,989 )   106,455       7,455     6,782     7,703  
Provision for (benefit from) income taxes     1,077     --       --     --     1,077  
Net income (loss)   $ (114,066 ) $ 106,455     $ 7,455   $ 6,782   $ 6,626  
Net income (loss) per share (1)   $ (0.57 ) $ 0.53     $ 0.04   $ 0.03   $ 0.03  
(1)   GAAP net loss per share calculated based upon 199,479 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 209,924 diluted weighted-average shares of common stock.
(2)   Other operating expenses include total employer payroll tax-related items on employee stock transactions of $2.6 million, and amortization of acquisition-related intangible assets of $4.9 million recorded as part of product development expenses.
     
     
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Three Months Ended October 31, 2015  
(in thousands, except percentages and per share data)  
(unaudited)  
   
    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   $ 39,791   $ (3,203 )   $ (64 )   $ --   $ 36,524  
Costs of professional services     61,963     (5,424 )     (107 )     --     56,432  
Product development     124,020     (29,547 )     (1,594 )     --     92,879  
Sales and marketing     111,658     (15,321 )     (196 )     --     96,141  
General and administrative     38,008     (15,164 )     (396 )     --     22,448  
Operating income (loss)     (70,174 )   68,659       2,357       --     842  
Operating margin     (23.0 )%   22.5 %     0.8 %     -- %   0.3 %
Other income (expense), net     (6,722 )   --       --       6,422     (300 )
Income (loss) before provision for (benefit from) income taxes     (76,896 )   68,659       2,357       6,422     542  
Provision for (benefit from) income taxes     915     --       --       --     915  
Net income (loss)   $ (77,811 ) $ 68,659     $ 2,357     $ 6,422   $ (373 )
Net income (loss) per share (1)   $ (0.41 ) $ 0.36     $ 0.01     $ 0.04   $ --  
(1)   Calculated based upon 190,727 basic and diluted weighted-average shares of common stock.
(2)   Other operating expenses include total employer payroll tax-related items on employee stock transactions of $1.3 million, and amortization of acquisition-related intangible assets of $1.1 million recorded as part of product development expenses.
     
     
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Nine Months Ended October 31, 2016  
(in thousands, except percentages and per share data)  
(unaudited)  
   
    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   $ 155,224   $ (14,837 )   $ (570 )   $ --   $ 139,817  
Costs of professional services     198,140     (18,698 )     (887 )     --     178,555  
Product development     488,975     (117,250 )     (12,152 )     --     359,573  
Sales and marketing     416,217     (62,443 )     (2,458 )     --     351,316  
General and administrative     144,609     (59,684 )     (2,449 )     --     82,476  
Operating income (loss)     (270,430 )   272,912       18,516       --     20,998  
Operating margin     (23.9 )%   24.1 %     1.7 %     -- %   1.9 %
Other income (expense), net     (30,136 )   --       --       20,071     (10,065 )
Income (loss) before provision for (benefit from) income taxes     (300,566 )   272,912       18,516       20,071     10,933  
Provision for (benefit from) income taxes     2,147     --       --       --     2,147  
Net income (loss)   $ (302,713 ) $ 272,912     $ 18,516     $ 20,071   $ 8,786  
Net income (loss) per share (1)   $ (1.54 ) $ 1.38     $ 0.09     $ 0.11   $ 0.04  
(1)   GAAP net loss per share calculated based upon 197,093 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 207,685 diluted weighted-average shares of common stock.
(2)   Other operating expenses include total employer payroll tax-related items on employee stock transactions of $10.9 million, and amortization of acquisition-related intangible assets of $7.6 million recorded as part of product development expenses.
     
     
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Nine Months Ended October 31, 2015  
(in thousands, except percentages and per share data)  
(unaudited)  
   
    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   $ 106,860   $ (8,424 )   $ (326 )   $ --   $ 98,110  
Costs of professional services     164,887     (14,022 )     (631 )     --     150,234  
Product development     338,700     (78,990 )     (4,975 )     --     254,735  
Sales and marketing     312,983     (36,908 )     (1,154 )     --     274,921  
General and administrative     106,707     (42,353 )     (1,499 )     --     62,855  
Operating income (loss)     (191,218 )   180,697       8,585       --     (1,936 )
Operating margin     (22.8 )%   21.6 %     1.0 %     -- %   (0.2 )%
Other income (expense), net     (17,737 )   --       --       19,008     1,271  
Income (loss) before provision for (benefit from) income taxes     (208,955 )   180,697       8,585       19,008     (665 )
Provision for (benefit from) income taxes     (165 )   --       --       --     (165 )
Net income (loss)   $ (208,790 ) $ 180,697     $ 8,585     $ 19,008   $ (500 )
Net income (loss) per share (1)   $ (1.10 ) $ 0.95     $ 0.05     $ 0.10   $ --  
(1)   Calculated based upon 189,185 basic and diluted weighted-average shares of common stock.
(2)   Other operating expenses include total employer payroll tax-related items on employee stock transactions of $6.8 million, and amortization of acquisition-related intangible assets of $1.8 million recorded as part of product development expenses.
     
     
   
Workday, Inc.  
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows  
(A Non-GAAP Financial Measure)  
(in thousands)  
(unaudited)  
   
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2016     2015     2016     2015  
Net cash provided by (used in) operating activities   $ 71,459     $ 52,759     $ 239,183     $ 160,146  
Capital expenditures, excluding owned real estate projects     (27,518 )     (37,893 )     (88,535 )     (91,682 )
  Free cash flows   $ 43,941     $ 14,866     $ 150,648     $ 68,464  
                                 
    Trailing Twelve Months Ended
October 31,
             
    2016     2015              
Net cash provided by (used in) operating activities   $ 337,674     $ 208,421                  
Capital expenditures, excluding owned real estate projects     (130,520 )     (129,347 )                
  Free cash flows   $ 207,154     $ 79,074                  
                                 

About Non-GAAP Financial Measures

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

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

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

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

  • Other Operating Expenses. Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of ongoing operations.

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

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

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

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

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

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