SOURCE: Workday, Inc.

Workday, Inc.

August 24, 2016 16:02 ET

Workday Announces Fiscal 2017 Second Quarter Financial Results

Total Revenues of $377.7 Million, Up 34% Year Over Year; Subscription Revenues of $306.2 Million, Up 37% Year Over Year

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

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

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

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

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

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

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

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

Recent Highlights

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

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

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

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

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

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

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

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

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

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

Forward-Looking Statements
This press release contains forward-looking statements including, among other things, statements regarding Workday's third quarter revenue projections. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. Risks include, but are not limited to: (i) breaches in our security measures, unauthorized access to our customers' data or disruptions in our data center operations; (ii) our ability to manage our growth effectively; (iii) competitive factors, including pricing pressures, industry consolidation, entry of new competitors and new applications and marketing initiatives by our competitors; (iv) the development of the market for enterprise cloud services; (v) acceptance of our applications and services by customers; (vi) adverse changes in general economic or market conditions; (vii) delays or reductions in information technology spending; (viii) our limited operating history, which makes it difficult to predict future results; and (ix) changes in sales may not be immediately reflected in our results due to our subscription model. Further information on risks that could affect Workday's results is included in our filings with the Securities and Exchange Commission (SEC), including our Form 10-Q for the quarter ended April 30, 2016 and our future reports that we may file with the SEC from time to time, which could cause actual results to vary from expectations. Workday assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

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

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

   
   
Workday, Inc.  
Condensed Consolidated Balance Sheets  
(in thousands)  
(unaudited)  
   
    July 31,
 2016
    January 31,
 2016
 
Assets                
Current assets:                
  Cash and cash equivalents   $ 405,529     $ 300,087  
  Marketable securities     1,662,381       1,669,372  
  Accounts receivable, net     248,658       293,407  
  Deferred costs     22,664       21,817  
  Prepaid expenses and other current assets     90,858       77,625  
Total current assets     2,430,090       2,362,308  
Property and equipment, net     255,118       214,158  
Deferred costs, noncurrent     32,488       30,074  
Goodwill and acquisition-related intangible assets, net     68,623       65,816  
Other assets     43,485       57,738  
Total assets   $ 2,829,804     $ 2,730,094  
Liabilities and stockholders' equity                
Current liabilities:                
  Accounts payable   $ 17,135     $ 19,605  
  Accrued expenses and other current liabilities     58,880       43,122  
  Accrued compensation     76,693       91,211  
  Unearned revenue     854,845       768,741  
Total current liabilities     1,007,553       922,679  
Convertible senior notes, net     520,765       507,476  
Unearned revenue, noncurrent     124,269       130,988  
Other liabilities     36,371       32,794  
Total liabilities     1,688,958       1,593,937  
Stockholders' equity:                
  Common stock     198       193  
  Additional paid-in capital     2,444,172       2,247,454  
  Accumulated other comprehensive income (loss)     (2,588 )     799  
  Accumulated deficit     (1,300,936 )     (1,112,289 )
Total stockholders' equity     1,140,846       1,136,157  
Total liabilities and stockholders' equity   $ 2,829,804     $ 2,730,094  
                 
                 
                 
Workday, Inc.  
Condensed Consolidated Statements of Operations  
(in thousands, except per share data)  
(unaudited)  
   
    Three Months Ended
 July 31,
    Six Months Ended
 July 31,
 
    2016     2015     2016     2015  
Revenues:                                
  Subscription services   $ 306,228     $ 223,742     $ 586,231     $ 424,735  
  Professional services     71,495       58,954       136,922       108,918  
Total revenues     377,723       282,696       723,153       533,653  
Costs and expenses(1):                                
  Costs of subscription services     51,379       35,287       100,579       67,069  
  Costs of professional services     66,473       56,792       125,900       102,924  
  Product development     161,886       115,345       303,664       214,680  
  Sales and marketing     139,177       106,430       266,668       201,325  
  General and administrative     45,705       36,482       86,888       68,699  
Total costs and expenses     464,620       350,336       883,699       654,697  
Operating loss     (86,897 )     (67,640 )     (160,546 )     (121,044 )
Other expense, net     (21,193 )     (3,779 )     (27,031 )     (11,015 )
Loss before provision for (benefit from) income taxes     (108,090 )     (71,419 )     (187,577 )     (132,059 )
Provision for (benefit from) income taxes     (65 )     (1,998 )     1,070       (1,080 )
Net loss   $ (108,025 )   $ (69,421 )   $ (188,647 )   $ (130,979 )
Net loss per share, basic and diluted   $ (0.55 )   $ (0.37 )   $ (0.96 )   $ (0.70 )
Weighted-average shares used to compute net loss per share, basic and diluted     197,223       189,360       195,887       188,382  
(1) Costs and expenses include share-based compensation expenses as follows:        
    Costs of subscription services   $ 4,968   $ 3,173   $ 9,365   $ 5,221
    Costs of professional services     5,969     5,144     11,262     8,598
    Product development     38,314     28,632     71,282     49,443
    Sales and marketing     20,844     13,222     39,846     21,587
    General and administrative     18,127     14,593     34,702     27,189
                             
                         
                         
Workday, Inc.  
Condensed Consolidated Statements of Cash Flows  
(in thousands)  
(unaudited)  
   
    Three Months Ended
 July 31,
    Six Months Ended
 July 31,
 
    2016     2015     2016     2015  
Cash flows from operating activities                                
Net loss   $ (108,025 )   $ (69,421 )   $ (188,647 )   $ (130,979 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                
  Depreciation and amortization     26,662       19,888       52,786       38,457  
  Share-based compensation expenses     88,222       64,764       166,457       112,038  
  Amortization of deferred costs     6,140       7,735       12,013       12,360  
  Amortization of debt discount and issuance costs     6,690       6,336       13,289       12,586  
  Gain on sale of cost method investment     (65 )     (3,220 )     (65 )     (3,220 )
  Impairment of cost method investment     15,000       --       15,000       --  
  Other     1,918       (2,119 )     1,600       (1,382 )
  Changes in operating assets and liabilities, net of business combinations:                                
    Accounts receivable     (55,992 )     (27,570 )     45,055       32,147  
    Deferred costs     (10,486 )     (7,082 )     (15,274 )     (10,583 )
    Prepaid expenses and other assets     (11,902 )     (7,806 )     (12,678 )     (15,476 )
    Accounts payable     1,542       1,428       (180 )     4,180  
    Accrued expense and other liabilities     (6,517 )     2,590       (972 )     6,915  
    Unearned revenue     53,071       29,665       79,340       50,344  
Net cash provided by (used in) operating activities     6,258       15,188       167,724       107,387  
Cash flows from investing activities                                
Purchases of marketable securities     (557,180 )     (476,470 )     (1,191,136 )     (862,045 )
Maturities of marketable securities     539,315       429,186       1,164,903       710,593  
Sales of available-for-sale securities     28,652       19,524       28,852       29,524  
Business combinations, net of cash acquired     (3,670 )     (7,961 )     (3,670 )     (7,961 )
Owned real estate projects     (6,788 )     --       (25,774 )     --  
Capital expenditures, excluding owned real estate projects     (26,539 )     (25,469 )     (61,017 )     (53,789 )
Purchases of cost method investments     (200 )     (15,750 )     (300 )     (15,750 )
Sale of cost method investment     315       3,538       315       3,538  
Change in restricted cash     (4,000 )     --       (4,000 )     --  
Other     (684 )     --       (296 )     --  
Net cash provided by (used in) investing activities     (30,779 )     (73,402 )     (92,123 )     (195,890 )
Cash flows from financing activities                                
Proceeds from issuance of common stock from employee equity plans     25,395       19,172       28,776       22,736  
Principal payments on capital lease obligations     --       (1,016 )     --       (2,464 )
Other     195       362       571       779  
Net cash provided by (used in) financing activities     25,590       18,518       29,347       21,051  
Effect of exchange rate changes     (144 )     (210 )     494       (162 )
Net increase (decrease) in cash and cash equivalents     925       (39,906 )     105,442       (67,614 )
Cash and cash equivalents at the beginning of period     404,604       270,484       300,087       298,192  
Cash and cash equivalents at the end of period   $ 405,529     $ 230,578     $ 405,529     $ 230,578  
Supplemental cash flow data                                
Cash paid for interest   $ 3,241     $ 3,211     $ 3,245     $ 3,244  
Cash paid for taxes     3,566       418       4,147       1,034  
Non-cash investing and financing activities:                                
  Vesting of early exercise stock options   $ 460     $ 472     $ 920     $ 944  
  Property and equipment, accrued but not paid     11,426       18,642       11,426       18,642  
  Non-cash additions to property and equipment     394       323       915       2,183  
                                 
                                 
                                 
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Three Months Ended July 31, 2016  
(in thousands, except percentages and per share data)  
(unaudited)  
   
  GAAP     Share-Based Compensation Expenses     Other Operating Expenses (2)     Amortization of Debt Discount and Issuance Costs   Non-GAAP  
Costs and expenses:                                    
Costs of subscription services $ 51,379     $ (4,968 )   $ (133 )   $ --   $ 46,278  
Costs of professional services   66,473       (5,969 )     (226 )     --     60,278  
Product development   161,886       (38,314 )     (2,566 )     --     121,006  
Sales and marketing   139,177       (20,844 )     (707 )     --     117,626  
General and administrative   45,705       (18,127 )     (924 )     --     26,654  
Operating income (loss)   (86,897 )     88,222       4,556       --     5,881  
Operating margin   (23.0) %     23.4 %     1.2 %     -- %   1.6 %
Other income (expense), net   (21,193 )     --       --       6,690     (14,503 )
Income (loss) before provision for (benefit from) income taxes   (108,090 )     88,222       4,556       6,690     (8,622 )
Provision for (benefit from) income taxes   (65 )     --       --       --     (65 )
Net income (loss) $ (108,025 )   $ 88,222     $ 4,556     $ 6,690   $ (8,557 )
Net income (loss) per share (1) $ (0.55 )   $ 0.45     $ 0.02     $ 0.04   $ (0.04 )
(1) Calculated based upon 197,223 basic and diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $3.2 million, and amortization of acquisition-related intangible assets of $1.4 million recorded as part of product development expenses.
   
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Three Months Ended July 31, 2015  
(in thousands, except percentages and per share data)  
(unaudited)  
   
  GAAP     Share-Based Compensation Expenses     Other Operating Expenses(2)     Amortization of Debt Discount and Issuance Costs   Non-GAAP  
Costs and expenses:                                    
Costs of subscription services $ 35,287     $ (3,173 )   $ (76 )   $ --   $ 32,038  
Costs of professional services   56,792       (5,144 )     (170 )     --     51,478  
Product development   115,345       (28,632 )     (1,068 )     --     85,645  
Sales and marketing   106,430       (13,222 )     (327 )     --     92,881  
General and administrative   36,482       (14,593 )     (516 )     --     21,373  
Operating income (loss)   (67,640 )     64,764       2,157       --     (719 )
Operating margin   (23.9) %     22.9 %     0.7 %     -- %   (0.3 )%
Other income (expense), net   (3,779 )     --       --       6,336     2,557  
Income (loss) before provision for (benefit from) income taxes   (71,419 )     64,764       2,157       6,336     1,838  
Provision for (benefit from) income taxes   (1,998 )     --       --       --     (1,998 )
Net income (loss) $ (69,421 )   $ 64,764     $ 2,157     $ 6,336   $ 3,836  
Net income (loss) per share (1) $ (0.37 )   $ 0.34     $ 0.01     $ 0.04   $ 0.02  
(1) GAAP net loss per share calculated based upon 189,360 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 202,450 diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $1.8 million, and amortization of acquisition-related intangible assets of $0.4 million recorded as part of product development expenses.
   
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Six Months Ended July 31, 2016  
(in thousands, except percentages and per share data)  
(unaudited)  
   
  GAAP     Share-Based Compensation Expenses     Other Operating Expenses (2)     Amortization of Debt Discount and Issuance Costs   Non-GAAP  
Costs and expenses:                                    
Costs of subscription services $ 100,579     $ (9,365 )   $ (452 )   $ --   $ 90,762  
Costs of professional services   125,900       (11,262 )     (716 )     --     113,922  
Product development   303,664       (71,282 )     (6,360 )     --     226,022  
Sales and marketing   266,668       (39,846 )     (1,797 )     --     225,025  
General and administrative   86,888       (34,702 )     (1,736 )     --     50,450  
Operating income (loss)   (160,546 )     166,457       11,061       --     16,972  
Operating margin   (22.2) %     23.0 %     1.5 %     -- %   2.3 %
Other income (expense), net   (27,031 )     --       --       13,289     (13,742 )
Income (loss) before provision for (benefit from) income taxes   (187,577 )     166,457       11,061       13,289     3,230  
Provision for (benefit from) income taxes   1,070       --       --       --     1,070  
Net income (loss) $ (188,647 )   $ 166,457     $ 11,061     $ 13,289   $ 2,160  
Net income (loss) per share (1) $ (0.96 )   $ 0.85     $ 0.06     $ 0.06   $ 0.01  
(1) GAAP net loss per share calculated based upon 195,887 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 206,531 diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $8.3 million, and amortization of acquisition-related intangible assets of $2.7 million recorded as part of product development expenses.
   
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Six Months Ended July 31, 2015  
(in thousands, except percentages and per share data)  
(unaudited)  
   
  GAAP     Share-Based Compensation Expenses     Other Operating Expenses(2)     Amortization of Debt Discount and Issuance Costs   Non-GAAP  
Costs and expenses:                          
Costs of subscription services $ 67,069     $ (5,221 )   $ (262 )   $ --   $ 61,586  
Costs of professional services   102,924       (8,598 )     (524 )     --     93,802  
Product development   214,680       (49,443 )     (3,381 )     --     161,856  
Sales and marketing   201,325       (21,587 )     (958 )     --     178,780  
General and administrative   68,699       (27,189 )     (1,103 )     --     40,407  
Operating income (loss)   (121,044 )     112,038       6,228       --     (2,778 )
Operating margin   (22.7) %     21.0 %     1.2 %     -- %   (0.5) %
Other income (expense), net   (11,015 )     --       --       12,586     1,571  
Income (loss) before provision for (benefit from) income taxes   (132,059 )     112,038       6,228       12,586     (1,207 )
Provision for (benefit from) income taxes   (1,080 )     --       --       --     (1,080 )
Net income (loss) $ (130,979 )   $ 112,038     $ 6,228     $ 12,586   $ (127 )
Net income (loss) per share (1) $ (0.70 )   $ 0.59     $ 0.03     $ 0.08   $ --  
(1) Calculated based upon 188,382 basic and diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $5.5 million, and amortization of acquisition-related intangible assets of $0.7 million recorded as part of product development expenses.
   
   
   
Workday, Inc.  
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows  
(A Non-GAAP Financial Measure)  
(in thousands)  
(unaudited)  
   
    Three Months Ended July 31,     Six Months Ended July 31,  
    2016     2015     2016     2015  
Net cash provided by (used in) operating activities   $ 6,258     $ 15,188     $ 167,724     $ 107,387  
Capital expenditures, excluding owned real estate projects     (26,539 )     (25,469 )     (61,017 )     (53,789 )
  Free cash flows   $ (20,281 )   $ (10,281 )   $ 106,707     $ 53,598  
                                 
    Trailing Twelve Months Ended
July 31,
             
    2016     2015              
Net cash provided by (used in) operating activities   $ 318,974     $ 196,704                  
Capital expenditures, excluding owned real estate projects     (140,895 )     (119,153 )                
  Free cash flows   $ 178,079     $ 77,551                  
                                   

About Non-GAAP Financial Measures

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

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

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

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

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

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

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

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

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