SOURCE: Workday, Inc.

Workday, Inc.

February 29, 2016 16:02 ET

Workday Announces Fourth Quarter and Full Year Fiscal 2016 Financial Results

Fiscal Year 2016 Total Revenues of $1.16 Billion, Up 48% Year Over Year; Subscription Revenue of $929.2 Million, Up 52% Year Over Year; Operating Cash Flows of $258.6 Million for the Year; Q4 Total Revenues of $323.4 Million, Up 43% Year Over Year; Subscription Revenue of $261.8 Million, Up 44% Year Over Year

PLEASANTON, CA--(Marketwired - Feb 29, 2016) -  Workday, Inc. (NYSE: WDAY), a leader in enterprise cloud applications for finance and human resources, today announced results for the fourth quarter and fiscal year ended January 31, 2016.

Fiscal Fourth Quarter Results:

  • Total revenues were $323.4 million, an increase of 43% from the fourth quarter of fiscal 2015. Subscription revenue was $261.8 million, an increase of 44% from the same period last year.

  • Operating loss was $73.4 million, or negative 22.7% of revenues, compared to an operating loss of $50.4 million, or negative 22.3% of revenues, in the same period last year. Non-GAAP operating loss for the fourth quarter was $0.8 million, or negative 0.2% of revenues, compared to a non-GAAP operating loss of $8.6 million last year, or negative 3.8% of revenues.1

  • Net loss per basic and diluted share was $0.42, compared to a net loss per basic and diluted share of $0.32 in the fourth quarter of fiscal 2015. Non-GAAP net loss per basic and diluted share was $0.01, compared to a non-GAAP net loss per basic and diluted share of $0.06 for the same period last year.1

Fiscal Year 2016 Results:

  • Total revenues were $1.16 billion, an increase of 48% from fiscal 2015. Subscription revenue was $929.2 million, an increase of 52% from the prior year.

  • Operating loss was $264.7 million, or negative 22.8% of revenues, compared to an operating loss of $215.7 million, or negative 27.4% of revenues, in fiscal 2015. Non-GAAP operating loss was $2.7 million, or negative 0.2% of revenues, compared to a non-GAAP operating loss of $53.2 million, or negative 6.7% of revenues, last year.1

  • Net loss per basic and diluted share was $1.53, compared to a net loss per basic and diluted share of $1.35 in fiscal 2015. Non-GAAP net loss per basic and diluted share was $0.01, compared to a non-GAAP net loss per basic and diluted share of $0.33 last year.1 

  • Operating cash flows were $258.6 million and free cash flows were $125.0 million.2

  • Cash, cash equivalents and marketable securities were approximately $1.97 billion as of January 31, 2016. Unearned revenues were $899.7 million, a 42% increase from last year.

"We ended FY16 on a high note with a very strong fourth quarter across product lines and around the world. Demand for our Financial Management and HCM products continues to rise, as do our competitive win rates," said Aneel Bhusri, co-founder and CEO, Workday. "The year ahead brings us an expanded addressable market with the delivery of Planning, Learning Management and Student applications that allow customers to drive employee engagement and productivity in new and transformative ways."

"Workday finished a very strong fiscal 2016 with a great fourth quarter. Total revenue for the year increased 48% to $1.16 billion, and we generated nearly $260 million in operating cash flows," said Mark Peek, co-president and chief financial officer, Workday. "Looking ahead to our fiscal 2017, we are increasing our billings guidance for the first quarter from $350 million to $360 to $365 million. Billings for fiscal 2017 are expected to be between $1.855 and $1.875 billion. For the first quarter, we expect subscription revenue of $277 to $278 million and total revenue of $337 to $339 million. Subscription revenue for the year is expected to be between $1.275 and $1.285 billion, and total revenue between $1.540 and $1.550 billion."

Recent Highlights

  • Workday accelerated momentum for Workday Financial Management with 45 customers joining in the fourth quarter of fiscal 2016, bringing the total customer count for this application to more than 200. Workday has over 100 financial management customers in production and live customers in 35 countries.

  • Workday ranked #2 on Fortune magazine's list of the 10 Best Large Workplaces in Tech and #6 on its list of the 50 Best Workplaces for Diversity.

  • Workday announced plans to expand its partnership with ADP to provide multinational organizations with a seamless and unified global payroll experience, uniting Workday Human Capital Management (HCM) and ADP Global Payroll in a single user experience within Workday.

Workday plans to host a conference call today to review its fourth quarter and full year fiscal 2016 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 loss and non-GAAP net loss per share for the 2016 and 2015 fiscal fourth quarters and fiscal years 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 purchased property and equipment, property and equipment acquired under capital leases and purchased other intangible assets. 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 first quarter and fiscal year revenue and billings 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 but not limited to 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 October 31, 2015 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)  
    January 31,  
    2016     2015 (1)  
Assets            
Current assets:                
  Cash and cash equivalents   $ 300,087     $ 298,192  
  Marketable securities     1,669,372       1,559,517  
  Accounts receivable, net     293,407       188,357  
  Deferred costs     21,817       20,471  
  Prepaid expenses and other current assets     77,625       41,850  
Total current assets     2,362,308       2,108,387  
Property and equipment, net     214,158       140,136  
Deferred costs, noncurrent     30,074       20,998  
Goodwill and acquisition-related intangible assets, net     65,816       34,779  
Other assets     57,738       45,790  
Total assets   $ 2,730,094     $ 2,350,090  
Liabilities and stockholders' equity                
Current liabilities:                
  Accounts payable   $ 19,605     $ 10,623  
  Accrued expenses and other current liabilities     43,122       24,132  
  Accrued compensation     91,211       56,152  
  Capital leases     --       3,207  
  Unearned revenue     768,741       547,151  
Total current liabilities     922,679       641,265  
Convertible senior notes, net     507,476       481,958  
Unearned revenue, noncurrent     130,988       85,593  
Other liabilities     32,794       15,299  
Total liabilities     1,593,937       1,224,115  
Stockholders' equity:                
  Common stock     193       186  
  Additional paid-in capital     2,247,454       1,948,300  
  Accumulated other comprehensive income (loss)     799       (140 )
  Accumulated deficit     (1,112,289 )     (822,371 )
Total stockholders' equity     1,136,157       1,125,975  
Total liabilities and stockholders' equity   $ 2,730,094     $ 2,350,090  
                 
(1) Amounts as of January 31, 2015 were derived from the January 31, 2015 audited financial statements.
   
   
   
Workday, Inc.  
Condensed Consolidated Statements of Operations  
(in thousands, except per share data)  
(unaudited)  
   
    Three Months Ended
January 31,
    Year Ended
January 31,
 
    2016     2015     2016     2015  
Revenues:                        
  Subscription services   $ 261,799     $ 181,866     $ 929,234     $ 613,328  
  Professional services     61,628       44,407       233,112       174,532  
Total revenues     323,427       226,273       1,162,346       787,860  
Costs and expenses(1):                                
  Costs of subscription services     43,009       29,218       149,869       102,476  
  Costs of professional services     59,671       40,737       224,558       162,327  
  Product development     131,244       88,963       469,944       316,868  
  Sales and marketing     121,073       88,469       434,056       315,840  
  General and administrative     41,871       29,270       148,578       106,051  
Total costs and expenses     396,868       276,657       1,427,005       1,003,562  
Operating loss     (73,441 )     (50,384 )     (264,659 )     (215,702 )
Other expense, net     (6,505 )     (8,271 )     (24,242 )     (30,270 )
Loss before provision for income taxes     (79,946 )     (58,655 )     (288,901 )     (245,972 )
Provision for income taxes     1,182       811       1,017       2,010  
Net loss   $ (81,128 )   $ (59,466 )   $ (289,918 )   $ (247,982 )
Net loss per share, basic and diluted   $ (0.42 )   $ (0.32 )   $ (1.53 )   $ (1.35 )
Weighted-average shares used to compute net loss per share, basic and diluted     192,485       185,696       190,016       183,702  
                                 
(1) Costs and expenses include share-based compensation as follows:  
   
      Costs of subscription services   $ 3,636     $ 1,431     $ 12,060     $ 6,053  
      Costs of professional services     5,504       2,959       19,526       12,890  
      Product development     30,372       17,142       109,362       63,938  
      Sales and marketing     14,709       7,068       51,617       29,875  
      General and administrative     15,052       10,784       57,405       43,292  
                                       
                                       
                                       
Workday, Inc.  
Condensed Consolidated Statements of Cash Flows  
(in thousands)  
(unaudited)  
   
    Three Months Ended
January 31,
    Year Ended
January 31,
 
    2016     2015     2016     2015  
Cash flows from operating activities                                
Net loss   $ (81,128 )   $ (59,466 )   $ (289,918 )   $ (247,982 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                
Depreciation and amortization     25,222       16,526       85,939       59,205  
Share-based compensation expenses     69,273       39,384       249,970       156,048  
Amortization of deferred costs     5,728       5,175       23,477       19,288  
Amortization of debt discount and issuance costs     6,510       6,166       25,518       24,171  
Gain on sale of cost method investment     --       --       (3,220 )     --  
Other     2,381       269       1,047       2,924  
Changes in operating assets and liabilities, net of business combinations:                                
    Accounts receivable     (122,684 )     (69,824 )     (105,264 )     (96,876 )
    Deferred costs     (14,572 )     (9,278 )     (33,899 )     (23,514 )
    Prepaid expenses and other assets     (3,368 )     (7,011 )     (28,366 )     (15,524 )
    Accounts payable     6,363       (483 )     6,824       1,120  
    Accrued expense and other liabilities     23,024       2,204       59,724       3,964  
    Unearned revenue     181,742       124,613       266,805       219,179  
Net cash provided by (used in) operating activities     98,491       48,275       258,637       102,003  
Cash flows from investing activities                                
Purchases of marketable securities     (640,419 )     (247,436 )     (2,125,841 )     (1,737,840 )
Maturities of marketable securities     639,995       282,998       1,901,858       1,419,454  
Sales of available-for-sale securities     4,000       45,044       102,711       53,182  
Business combinations, net of cash acquired     --       --       (31,436 )     (26,317 )
Purchases of property and equipment     (41,985 )     (37,665 )     (133,667 )     (103,646 )
Purchases of cost method investments     (100 )     --       (16,550 )     (10,000 )
Sale of cost method investment     --       --       3,538       --  
Other     (760 )     --       (760 )     1,000  
Net cash provided by (used in) investing activities     (39,269 )     42,941       (300,147 )     (404,167 )
Cash flows from financing activities                                
Proceeds from issuance of common stock from employee equity plans     20,560       15,459       45,656       36,239  
Principal payments on capital lease obligations     (66 )     (1,474 )     (3,193 )     (9,759 )
Shares repurchased for tax withholdings on vesting of restricted stock     --       --       --       (8,291 )
Other     621       1,115       1,646       1,266  
Net cash provided by (used in) financing activities     21,115       15,100       44,109       19,455  
Effect of exchange rate changes     (143 )     (266 )     (704 )     (425 )
Net increase (decrease) in cash and cash equivalents     80,194       106,050       1,895       (283,134 )
Cash and cash equivalents at the beginning of period     219,893       192,142       298,192       581,326  
Cash and cash equivalents at the end of period   $ 300,087     $ 298,192     $ 300,087     $ 298,192  
Supplemental cash flow data                                
  Cash paid for interest   $ 3,204     $ 3,255     $ 6,456     $ 6,869  
  Cash paid for taxes     472       777       2,124       943  
  Non-cash investing and financing activities:                                
    Vesting of early exercise stock options   $ 472     $ 471     $ 1,888     $ 1,887  
    Purchases of property and equipment, accrued but not paid     14,052       8,776       14,052       8,776  
    Non-cash additions to property and equipment     764       --       7,256       --  
                                 
                                 
                                 
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Three Months Ended January 31, 2016  
(in thousands, except per share data)  
(unaudited)  
   
  GAAP   Share-Based
Compensation
    Other
Operating
Expenses
(1)
    Amortization
of Debt
Discount and
Issuance Costs
  Non-GAAP  
Costs and expenses:                                  
Costs of subscription services $ 43,009   $ (3,636 )   $ (88 )   $ --   $ 39,285  
Costs of professional services   59,671     (5,504 )     (137 )     --     54,030  
Product development   131,244     (30,372 )     (2,226 )     --     98,646  
Sales and marketing   121,073     (14,709 )     (328 )     --     106,036  
General and administrative   41,871     (15,052 )     (596 )     --     26,223  
Operating loss   (73,441 )   69,273       3,375       --     (793 )
Operating margin   (22.7 )%   21.5 %     1.0 %     --     (0.2 )%
Other income (expense), net   (6,505 )   --       --       6,510     5  
Loss before provision for income taxes   (79,946 )   69,273       3,375       6,510     (788 )
Provision for income taxes   1,182     --       --       --     1,182  
Net loss $ (81,128 ) $ 69,273     $ 3,375     $ 6,510   $ (1,970 )
Net loss per share, basic and diluted (2) $ (0.42 ) $ 0.36     $ 0.02     $ 0.03   $ (0.01 )
                                   
(1) Other operating expenses include employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.
(2) Calculated based upon 192,485 basic and diluted weighted-average shares of common stock.
   
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Three Months Ended January 31, 2015  
(in thousands, except per share data)  
(unaudited)  
   
  GAAP   Share-Based
Compensation
    Other
Operating
Expenses
(1)
    Amortization
of Debt
Discount and
Issuance Costs
  Non-GAAP  
Costs and expenses:                                  
Costs of subscription services $ 29,218   $ (1,431 )   $ (103 )   $ --   $ 27,684  
Costs of professional services   40,737     (2,959 )     (247 )     --     37,531  
Product development   88,963     (17,142 )     (1,123 )     --     70,698  
Sales and marketing   88,469     (7,068 )     (424 )     --     80,977  
General and administrative   29,270     (10,784 )     (514 )     --     17,972  
Operating loss   (50,384 )   39,384       2,411       --     (8,589 )
Operating margin   (22.3 )%   17.4 %     1.1 %     --     (3.8 )%
Other income (expense), net   (8,271 )   --       --       6,166     (2,105 )
Loss before provision for income taxes   (58,655 )   39,384       2,411       6,166     (10,694 )
Provision for income taxes   811     --       --       --     811  
Net loss $ (59,466 ) $ 39,384     $ 2,411     $ 6,166   $ (11,505 )
Net loss per share, basic and diluted (2) $ (0.32 ) $ 0.21     $ 0.01     $ 0.04   $ (0.06 )
                                   
(1) Other operating expenses include employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.
(2) Calculated based upon 185,696 basic and diluted weighted-average shares of common stock.
   
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Year Ended January 31, 2016  
(in thousands, except per share data)  
(unaudited)  
   
    GAAP   Share-Based
Compensation
    Other
Operating
Expenses
(1)
    Amortization
of Debt
Discount and
Issuance Costs
  Non-GAAP  
Costs and expenses:                                    
Costs of subscription services   $ 149,869   $ (12,060 )   $ (414 )   $ --   $ 137,395  
Costs of professional services     224,558     (19,526 )     (768 )     --     204,264  
Product development     469,944     (109,362 )     (7,201 )     --     353,381  
Sales and marketing     434,056     (51,617 )     (1,482 )     --     380,957  
General and administrative     148,578     (57,405 )     (2,095 )     --     89,078  
Operating loss     (264,659 )   249,970       11,960       --     (2,729 )
Operating margin     (22.8 )%   21.6 %     1.0 %     --     (0.2 )%
Other income (expense), net     (24,242 )   --       --       25,518     1,276  
Loss before provision for income taxes     (288,901 )   249,970       11,960       25,518     (1,453 )
Provision for income taxes     1,017     --       --       --     1,017  
Net loss   $ (289,918 ) $ 249,970     $ 11,960     $ 25,518   $ (2,470 )
Net loss per share, basic and diluted (2)   $ (1.53 ) $ 1.32     $ 0.06     $ 0.14   $ (0.01 )
                                     
(1) Other operating expenses include employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.
(2) Calculated based upon 190,016 basic and diluted weighted-average shares of common stock.
   
   
   
Workday, Inc.  
Reconciliation of GAAP to Non-GAAP Data  
Year Ended January 31, 2015  
(in thousands, except per share data)  
(unaudited)  
    GAAP   Share-Based
Compensation
  Other
Operating
Expenses
(1)
    Amortization
of Debt
Discount and
Issuance Costs
  Non-GAAP  
Costs and expenses:                                  
Costs of subscription services   $ 102,476   $ (6,053 ) $ (204 )   $ --   $ 96,219  
Costs of professional services     162,327     (12,890 )   (451 )     --     148,986  
Product development     316,868     (63,938 )   (3,221 )     --     249,709  
Sales and marketing     315,840     (29,875 )   (1,420 )     --     284,545  
General and administrative     106,051     (43,292 )   (1,202 )     --     61,557  
Operating loss     (215,702 )   156,048     6,498       --     (53,156 )
Operating margin     (27.4 )%   19.8 %   0.9 %     --     (6.7 )%
Other income (expense), net     (30,270 )   --     --       24,171     (6,099 )
Loss before provision for income taxes     (245,972 )   156,048     6,498       24,171     (59,255 )
Provision for income taxes     2,010     --     --       --     2,010  
Net loss   $ (247,982 ) $ 156,048   $ 6,498     $ 24,171   $ (61,265 )
Net loss per share, basic and diluted (2)   $ (1.35 ) $ 0.85   $ 0.04     $ 0.13   $ (0.33 )
   
(1) Other operating expenses include employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.
(2) Calculated based upon 183,702 basic and diluted weighted-average shares of common stock.
   
   
   
Workday, Inc.  
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows  
(A Non-GAAP Financial Measure)  
(in thousands)  
(unaudited)  
   
    Three Months Ended
January 31,
    Year Ended
January 31,
 
    2016     2015     2016     2015  
Net cash provided by (used in) operating activities   $ 98,491     $ 48,275     $ 258,637     $ 102,003  
Purchases of property and equipment     (41,985 )     (37,665 )     (133,667 )     (103,646 )
    Free cash flows   $ 56,506     $ 10,610     $ 124,970     $ (1,643 )
                                 

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 loss, non-GAAP net 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 loss and non-GAAP net 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, as applicable. Free cash flows differ from GAAP cash flows from operating activities in that it treats purchases of property and equipment, property and equipment acquired under capital leases and purchased other (non-acquisition related) intangible assets 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 available to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures.

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 the 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 capital expenditures, whether purchased or leased, and purchased other intangible assets, due to the fact that these expenditures are considered to be an ongoing operational component of our business. This provides an enhanced view of cash available to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures.

The use of non-GAAP operating loss and non-GAAP net 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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