SOURCE: Workday, Inc.

Workday, Inc.

November 29, 2017 16:02 ET

Workday Announces Fiscal 2018 Third Quarter Financial Results

Subscription Revenues of $463.6 Million, Up 37% Year Over Year; Total Revenues of $555.4 Million, Up 34% Year Over Year

PLEASANTON, CA--(Marketwired - Nov 29, 2017) - Workday, Inc. (NASDAQ: WDAY), a leader in enterprise cloud applications for finance and human resources, today announced results for the fiscal third quarter ended October 31, 2017.

  • Total revenues were $555.4 million, an increase of 34.3% from the third quarter of fiscal 2017. Subscription revenues were $463.6 million, an increase of 37.2% from the same period last year.

  • Operating loss was $80.1 million, or negative 14.4% of revenues, compared to an operating loss of $105.9 million, or negative 25.6% of revenues, in the same period last year. Non-GAAP operating profit for the third quarter was $50.1 million, or 9.0% of revenues, compared to a non-GAAP operating profit of $8.0 million, or 1.9% of revenues, in the same period last year.1

  • Net loss per basic and diluted share was $0.41, compared to a net loss per basic and diluted share of $0.55 in the third quarter of fiscal 2017. Non-GAAP net income per diluted share was $0.24, compared to a non-GAAP net income per diluted share of $0.05 in the same period last year.1

  • Operating cash flows for the third quarter were $144.0 million and free cash flows were $107.7 million. For the trailing twelve months, operating cash flows were $448.9 million and free cash flows were $311.2 million.2

  • Cash, cash equivalents and marketable securities were $3.2 billion as of October 31, 2017. Unearned revenues were over $1.2 billion, a 21.5% increase from the same period last year.

Comments on the News
"Workday had a great third quarter, driving demand across all product areas and geographies, expanding our value proposition with the delivery of new products, and once again demonstrating our commitment to keeping customer satisfaction among the highest in the industry," said Aneel Bhusri, co-founder and CEO, Workday. "The outlook for the remainder of fiscal 2018 and beyond is bright as we continue to add new customers for HCM and Financial Management, and unlock new growth drivers such as Workday Prism Analytics and the Workday Cloud Platform."

"We delivered another strong quarter with subscription revenue up 37%, driven by strong net new customer growth, continued add on sales with existing customers, and high renewal rates," said Robynne Sisco, chief financial officer, Workday. "As we head into our seasonally strongest quarter, we are raising our fiscal 2018 outlook and are now expecting subscription revenue of $1.780 to $1.782 billion, or growth of 38%. We continue to invest for long-term growth, while delivering consistently solid operating and cash flow margins."

Recent Highlights

  • Workday held its 11th annual customer conference, Workday Rising, bringing together more than 8,500 members of the Workday community for education and collaboration in Chicago.

  • Workday once again achieved its goal to maintain a customer satisfaction rating over 95%, announcing that the company earned a 98% customer satisfaction rating for this year.

  • Workday announced the availability of Workday Prism Analytics, which enables customers to bring together any data -- including Workday data and data from any outside source -- with leading edge analytics tools to make better business decisions.

  • Workday also announced the availability of Workday Benchmarking, the first offering delivered on Workday Data-as-a-Service. Workday Benchmarking provides key metrics to customers seeking a better understanding of their company's relative performance in comparison to peers to help achieve optimal performance in their respective markets.

  • Workday was positioned by Gartner, Inc. in the Leaders quadrant of "Magic Quadrant for Cloud Human Capital Management Suites for Midmarket and Large Enterprises." Workday was acknowledged as a leader for the second year in a row and achieved the highest overall position for its ability to execute.3

  • Workday was also positioned as a leader in "The Forrester Wave™: SaaS Human Resource Management Systems, Q3 2017," a new report published by Forrester Research, Inc. Workday received the highest score in the strategy category and earned the highest possible scores in 16 criteria, including business vision, usability, and mobile.

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 Workday's Investor Relations website. The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 90 days.

Workday intends to use the Workday Blog as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

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.

3 Magic Quadrant for Cloud Human Capital Management Suites for Midmarket and Large Enterprises, 15 August 2017.

Disclaimer - Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

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. 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." A reconciliation of our forward outlook for non-GAAP operating margin with our forward-looking GAAP operating margin is not available without unreasonable efforts as the quantification of stock-based compensation expense, which is excluded from our non-GAAP operating margin, requires additional inputs such as number of shares granted and market price that are not ascertainable.

Forward-Looking Statements
This press release contains forward-looking statements including, among other things, statements regarding Workday's fourth quarter and fiscal year subscription revenue projections, investments, operating margins and cash flow growth. 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; and (viii) changes in sales, which 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, 2017 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.

© 2017. 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, 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  
* Prior-period information has been restated for the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on February 1, 2017.
 
 
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
*As Adjusted
    2017     2016
*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  
*Prior-period information has been restated for the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on February 1, 2017.
 
 
Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
 
 
Three Months Ended October 31,     Nine Months Ended October 31,  
2017     2016
*As Adjusted
 
 
 
 
2017     2016
*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  
         
    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
*Prior-period information has been restated for the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230), both of which we adopted on February 1, 2017.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended October 31, 2017
(in thousands, except per share data)
(unaudited)
 
  GAAP   Share-Based Compensation
Expenses
  Other
Operating Expenses
(3)
  Amortization
of Debt
Discount and
 Issuance
Costs
  Non-GAAP  
Costs and expenses:                              
Costs of subscription services $ 71,898   $ (6,899 ) $ (2,468 ) $ --   $ 62,531  
Costs of professional services   91,657     (9,956 )   (200 )   --     81,501  
Product development   239,588     (59,116 )   (3,780 )   --     176,692  
Sales and marketing   176,121     (25,517 )   (598 )   --     150,006  
General and administrative   56,184     (20,991 )   (683 )   --     34,510  
Operating income (loss)   (80,059 )   122,479     7,729     --     50,149  
Operating margin   (14.4 )%   22.1 %   1.3 %   -- %   9.0 %
Other income (expense), net   (3,742 )   --     --     12,257     8,515  
Income (loss) before provision for (benefit from) income taxes   (83,801 )   122,479     7,729     12,257     58,664  
Provision for (benefit from) income taxes (1)   1,745     --     --     --     1,745  
Net income (loss) $ (85,546 ) $ 122,479   $ 7,729   $ 12,257   $ 56,919  
Net income (loss) per share (2) $ (0.41 ) $ 0.59   $ 0.04   $ 0.02   $ 0.24  
(1) The Company's GAAP tax provision is primarily related to state taxes and income tax in profitable foreign jurisdictions. We maintain a full valuation allowance against our deferred tax assets in the US. Accordingly, there is no tax impact associated with the non-GAAP adjustments.
(2) GAAP net loss per share calculated based upon 209,188 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 235,341 diluted weighted-average shares of common stock.
(3) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $2.9 million, and amortization of acquisition-related intangible assets of $4.8 million.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended October 31, 2016
(in thousands, except per share data)
(unaudited)
    GAAP
*As Adjusted
  Share-Based
 Compensation
 Expenses
  Other
 Operating
 Expenses
(3)
  Amortization
 of Debt
 Discount and
 Issuance
 Costs
  Non-GAAP
*As Adjusted
 
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     149,537     (22,597 )   (661 )   --     126,279  
General and administrative     57,721     (24,982 )   (713 )   --     32,026  
Operating income (loss)     (105,932 )   106,455     7,455     --     7,978  
Operating margin     (25.6 )%   25.7 %   1.8 %   -- %   1.9 %
Other income (expense), net     (3,105 )   --     --     6,782     3,677  
Income (loss) before provision for (benefit from) income taxes     (109,037 )   106,455     7,455     6,782     11,655  
Provision for (benefit from) income taxes (1)     1,077     --     --     --     1,077  
Net income (loss)   $ (110,114 ) $ 106,455   $ 7,455   $ 6,782   $ 10,578  
Net income (loss) per share (2)   $ (0.55 ) $ 0.53   $ 0.04   $ 0.03   $ 0.05  
(1) The Company's GAAP tax provision is primarily related to state taxes and income tax in profitable foreign jurisdictions. We maintain a full valuation allowance against our deferred tax assets in the US. Accordingly, there is no tax impact associated with the non-GAAP adjustments.
(2) 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.
(3) 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.
*Prior-period information has been restated for the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on February 1, 2017.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Nine Months Ended October 31, 2017
(in thousands, except per share data)
(unaudited)
 
    GAAP   Share-Based
 Compensation
 Expenses
  Other
 Operating
 Expenses
(3)
  Amortization
 of Debt
 Discount and
 Issuance
 Costs
  Non-GAAP  
Costs and expenses:                                
Costs of subscription services   $ 197,627   $ (19,170 ) $ (3,222 ) $ --   $ 175,235  
Costs of professional services     260,834     (27,278 )   (1,485 )   --     232,071  
Product development     657,130     (167,068 )   (19,344 )   --     470,718  
Sales and marketing     503,782     (74,618 )   (3,398 )   --     425,766  
General and administrative     163,085     (63,656 )   (2,755 )   --     96,674  
Operating income (loss)     (221,888 )   351,790     30,204     --     160,106  
Operating margin     (14.2 )%   22.5 %   2.0 %   -- %   10.3 %
Other income (expense), net     (4,467 )   --     --     25,992     21,525  
Income (loss) before provision for (benefit from) income taxes     (226,355 )   351,790     30,204     25,992     181,631  
Provision for (benefit from) income taxes (1)     5,767     --     --     --     5,767  
Net income (loss)   $ (232,122 ) $ 351,790   $ 30,204   $ 25,992   $ 175,864  
Net income (loss) per share (2)   $ (1.12 ) $ 1.70   $ 0.15   $ 0.03   $ 0.76  
(1) The Company's GAAP tax provision is primarily related to state taxes and income tax in profitable foreign jurisdictions. We maintain a full valuation allowance against our deferred tax assets in the US. Accordingly, there is no tax impact associated with the non-GAAP adjustments.
(2) GAAP net loss per share calculated based upon 206,715 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 232,918 diluted weighted-average shares of common stock.
(3) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $15.7 million, and amortization of acquisition-related intangible assets of $14.5 million.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Nine Months Ended October 31, 2016
(in thousands, except per share data)
(unaudited)
 
  GAAP
*As Adjusted
  Share-Based
 Compensation
 Expenses
  Other
 Operating
 Expenses
(3)
    Amortization
 of Debt
 Discount and
 Issuance
 Costs
  Non-GAAP
*As Adjusted
 
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   412,055     (62,443 )   (2,458 )     --     347,154  
General and administrative   144,609     (59,684 )   (2,449 )     --     82,476  
Operating income (loss)   (264,147 )   272,912     18,516       --     27,281  
Operating margin   (23.3 )%   24.0 %   1.7 %     -- %   2.4 %
Other income (expense), net   (30,136 )   --     --       20,071     (10,065 )
Income (loss) before provision for (benefit from) income taxes   (294,283 )   272,912     18,516       20,071     17,216  
Provision for (benefit from) income taxes (1)   2,147     --     --       --     2,147  
Net income (loss) $ (296,430 ) $ 272,912   $ 18,516     $ 20,071   $ 15,069  
Net income (loss) per share (2) $ (1.50 ) $ 1.38   $ 0.09     $ 0.10   $ 0.07  
(1) The Company's GAAP tax provision is primarily related to state taxes and income tax in profitable foreign jurisdictions. We maintain a full valuation allowance against our deferred tax assets in the US. Accordingly, there is no tax impact associated with the non-GAAP adjustments.
(2) 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.
(3) 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.
*Prior-period information has been restated for the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on February 1, 2017.
 
 
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,  
2017     2016
*As Adjusted
    2017     2016
*As Adjusted
 
Net cash provided by (used in) operating activities $ 144,031     $ 71,556     $ 339,179     $ 240,895  
Capital expenditures, excluding owned real estate projects   (36,356 )     (27,518 )     (105,477 )     (88,535 )
  Free cash flows $ 107,675     $ 44,038     $ 233,702     $ 152,360  
                               
 
 
 
Trailing Twelve Months Ended
October 31,
 
 
   
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
2017     2016
*As Adjusted
Net cash provided by (used in) operating activities $ 448,910     $ 339,386                  
Capital expenditures, excluding owned real estate projects   (137,755 )     (130,520 )                
  Free cash flows $ 311,155     $ 208,866                  
*Prior-period information has been restated for the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230), both of which we adopted on February 1, 2017.

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 and September 2017. 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 or construction costs of our new development center and of other owned buildings. We exclude these owned real estate projects as they are infrequent in nature. For the current fiscal year, these costs primarily represent the construction of our new development center, which is anticipated to be completed in fiscal 2020. 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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