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EXCEL - IDEA: XBRL DOCUMENT - Workday, Inc.Financial_Report.xls

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2014
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35680
 
 
 
Workday, Inc.
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
20-2480422
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
6230 Stoneridge Mall Road
Pleasanton, California 94588
(Address of principal executive offices)
Telephone Number (925) 951-9000
(Registrant’s telephone number, including area code) 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of November 30, 2014, there were approximately 187 million shares of the registrant’s common stock outstanding.
 
 
 



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


2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Workday, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
 
October 31,
2014
 
January 31,
2014 (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
192,142

 
$
581,326

Marketable securities
1,642,517

 
1,305,253

Accounts receivable, net
118,943

 
92,184

Deferred costs
19,024

 
16,446

Prepaid expenses and other current assets
37,120

 
28,449

Total current assets
2,009,746

 
2,023,658

Property and equipment, net
116,640

 
77,664

Deferred costs, noncurrent
18,342

 
20,797

Goodwill and acquisition-related intangible assets, net
35,079

 
8,488

Other assets
52,511

 
45,658

Total assets
$
2,232,318

 
$
2,176,265

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,610

 
$
6,212

Accrued expenses and other current liabilities
34,508

 
17,999

Accrued compensation
47,510

 
55,620

Capital leases
4,681

 
9,377

Unearned revenue
441,324

 
332,682

Total current liabilities
537,633

 
421,890

Convertible senior notes, net
484,855

 
468,412

Capital leases, noncurrent

 
3,589

Unearned revenue, noncurrent
66,807

 
80,883

Other liabilities
13,807

 
14,274

Total liabilities
1,103,102

 
989,048

Stockholders’ equity:
 
 
 
Common stock
185

 
181

Additional paid-in capital
1,891,872

 
1,761,156

Accumulated other comprehensive income (loss)
64

 
269

Accumulated deficit
(762,905
)
 
(574,389
)
Total stockholders’ equity
1,129,216

 
1,187,217

Total liabilities and stockholders’ equity
$
2,232,318

 
$
2,176,265

 
(1)Amounts as of January 31, 2014 were derived from the January 31, 2014 audited financial statements.
See Notes to Condensed Consolidated Financial Statements.


3


Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Subscription services
$
164,403

 
$
93,925

 
$
431,462

 
$
243,454

Professional services
50,667

 
33,947

 
130,125

 
83,618

Total revenues
215,070

 
127,872

 
561,587

 
327,072

Costs and expenses(1):
 
 
 
 
 
 
 
Costs of subscription services
27,426

 
18,076

 
73,258

 
49,333

Costs of professional services
44,363

 
30,515

 
121,590

 
76,711

Product development
85,270

 
49,349

 
227,905

 
126,799

Sales and marketing
80,681

 
54,051

 
227,371

 
136,565

General and administrative
28,796

 
16,280

 
76,781

 
42,970

Total costs and expenses
266,536

 
168,271

 
726,905

 
432,378

Operating loss
(51,466
)
 
(40,399
)
 
(165,318
)
 
(105,306
)
Other expense, net
(8,047
)
 
(6,893
)
 
(21,999
)
 
(10,628
)
Loss before provision for income taxes
(59,513
)
 
(47,292
)
 
(187,317
)
 
(115,934
)
Provision for income taxes
399

 
242

 
1,199

 
593

Net loss
$
(59,912
)
 
$
(47,534
)
 
$
(188,516
)
 
$
(116,527
)
Net loss per share, basic and diluted
$
(0.33
)
 
$
(0.27
)
 
$
(1.03
)
 
$
(0.68
)
Weighted-average shares used to compute net loss per share, basic and diluted
184,310

 
174,385

 
182,770

 
171,269

(1)      Costs and expenses include share-based compensation as follows:
 
 
 
 
 
 
 
Costs of subscription services
$
1,959


$
783


$
4,622


$
1,446

Costs of professional services
4,214


1,559


9,931


2,835

Product development
19,191


7,032


46,796


12,404

Sales and marketing
8,678


4,583


22,807


7,431

General and administrative
12,966


5,726


32,508


12,766


See Notes to Condensed Consolidated Financial Statements.


4


Workday, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(59,912
)
 
$
(47,534
)
 
$
(188,516
)
 
$
(116,527
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in foreign currency translation adjustment
(201
)
 
32

 
(177
)
 
(54
)
Net change in unrealized gains (losses) on available-for-sale investments
302

 
41

 
(28
)
 
170

Other comprehensive income (loss), net of tax
101

 
73

 
(205
)
 
116

Comprehensive loss
$
(59,811
)
 
$
(47,461
)
 
$
(188,721
)
 
$
(116,411
)

See Notes to Condensed Consolidated Financial Statements.


5


Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2014
 
2013
 
2014
 
2013
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(59,912
)
 
$
(47,534
)
 
$
(188,516
)
 
$
(116,527
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
15,682

 
9,361

 
42,679

 
23,981

Share-based compensation expenses
47,008

 
19,683

 
116,664

 
36,882

Amortization of deferred costs
5,740

 
3,211

 
14,113

 
8,449

Amortization of debt discount and issuance costs
6,083

 
5,764

 
18,005

 
8,554

Other
1,808

 
86

 
2,654

 
256

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Accounts receivable
(18,598
)
 
(19,997
)
 
(27,052
)
 
(19,674
)
Deferred costs
(4,340
)
 
(5,346
)
 
(14,236
)
 
(12,449
)
Prepaid expenses and other assets
1,586

 
(2,652
)
 
(8,512
)
 
(12,794
)
Accounts payable
4,056

 
1,891

 
1,603

 
5,563

Accrued expense and other liabilities
15,271

 
16,458

 
1,760

 
22,720

Unearned revenue
26,658

 
26,151

 
94,566

 
66,509

Net cash provided by operating activities
41,042

 
7,076

 
53,728

 
11,470

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of marketable securities
(454,219
)
 
(499,787
)
 
(1,490,404
)
 
(1,229,488
)
Maturities of marketable securities
368,984

 
256,240

 
1,136,456

 
833,107

Sales of available-for-sale securities

 

 
8,138

 

Business combinations, net of cash acquired

 

 
(26,317
)
 

Purchases of property and equipment
(27,699
)
 
(16,757
)
 
(65,981
)
 
(48,384
)
Purchase of cost method investment

 

 
(10,000
)
 

Other

 

 
1,000

 
90

Net cash (used in) investing activities
(112,934
)
 
(260,304
)
 
(447,108
)
 
(444,675
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from borrowings on convertible senior notes, net of issuance costs

 

 

 
584,291

Proceeds from issuance of warrants

 

 

 
92,708

Purchase of convertible senior notes hedges

 

 

 
(143,729
)
Proceeds from issuance of common stock from employee equity plans
2,615

 
2,637

 
20,780

 
9,312

Principal payments on capital lease obligations
(1,123
)
 
(2,817
)
 
(8,285
)
 
(9,505
)
Shares repurchased for tax withholdings on vesting of restricted stock

 
(637
)
 
(8,291
)
 
(637
)
Other
91

 
41

 
151

 
121

Net cash provided by (used in) financing activities
1,583

 
(776
)
 
4,355

 
532,561

Effect of exchange rate changes
(183
)
 
32

 
(159
)
 
(54
)
Net increase (decrease) in cash and cash equivalents
(70,492
)
 
(253,972
)
 
(389,184
)
 
99,302

Cash and cash equivalents at the beginning of period
262,634

 
437,432

 
581,326

 
84,158

Cash and cash equivalents at the end of period
$
192,142

 
$
183,460

 
$
192,142

 
$
183,460

Supplemental cash flow data
 
 
 
 
 
 
 
Cash paid for interest
$
56

 
$
264

 
$
3,614

 
$
991

Non-cash investing and financing activities:
 
 
 
 
 
 
 
Property and equipment acquired under capital leases

 

 

 
115

Vesting of early exercise stock options
472

 
398

 
1,416

 
1,974

Purchases of property and equipment, accrued but not paid
9,052

 
1,360

 
9,052

 
1,360

See Notes to Condensed Consolidated Financial Statements

6


Workday, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1. Overview and Basis of Presentation
Company and Background
Workday provides financial management, human capital management, and analytics applications designed for the world's largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer Internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources. We are incorporated in Delaware.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. The condensed consolidated financial statements include the results of Workday, Inc. and its wholly-owned subsidiaries. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the information contained herein reflects all adjustments necessary for a fair presentation of Workday’s results of operations, financial position and cash flows. All such adjustments are of a normal, recurring nature. The results of operations for the three and nine months ended October 31, 2014 shown in this report are not necessarily indicative of results to be expected for the full year ending January 31, 2015. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2014, filed on March 31, 2014. There have been no changes to our significant accounting policies described in the annual report that have had a material impact on our condensed consolidated financial statements and related notes.
Subsequent to the filing of our Annual Report on Form 10-K, we added a policy related to business combinations. For business combinations, we use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, the determination of the relative selling prices for our services, the recoverability of deferred costs, certain assumptions used in the valuation of equity awards and the fair value of assets acquired and liabilities assumed through business combinations. Actual results could differ from those estimates and such differences could be material to our consolidated financial position and results of operations.
Segment Information
We operate in one operating segment, cloud applications. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level. Since we operate in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.

7


Recent Accounting Pronouncements
On May 28, 2014, the FASB issued ASU 2014-9 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for our fiscal year beginning February 1, 2017. Early adoption is not permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

Note 2. Marketable Securities
At October 31, 2014, marketable securities consisted of the following (in thousands):
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Aggregate
Fair Value
U.S. agency obligations
$
1,352,592

 
$
317

 
$
(51
)
 
$
1,352,858

U.S. treasury securities
189,796

 
84

 
(4
)
 
189,876

U.S. corporate securities
99,826

 
3

 
(46
)
 
99,783

Commercial paper
80,991

 

 

 
80,991

Money market funds
42,106

 

 

 
42,106

 
$
1,765,311

 
$
404

 
$
(101
)
 
$
1,765,614

Included in cash and cash equivalents
$
123,097

 
$

 
$

 
$
123,097

Included in marketable securities
$
1,642,214

 
$
404

 
$
(101
)
 
$
1,642,517

At January 31, 2014, marketable securities consisted of the following (in thousands):
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Aggregate
Fair Value
U.S. agency obligations
$
1,125,170

 
$
334

 
$
(50
)
 
$
1,125,454

U.S. treasury securities
536,747

 
88

 
(47
)
 
536,788

Commercial paper
62,997

 

 

 
62,997

U.S. corporate securities
11,771

 
6

 

 
11,777

Money market funds
90,159

 

 

 
90,159

 
$
1,826,844

 
$
428

 
$
(97
)
 
$
1,827,175

Included in cash and cash equivalents
$
521,956

 
$
3

 
$
(37
)
 
$
521,922

Included in marketable securities
$
1,304,888

 
$
425

 
$
(60
)
 
$
1,305,253

We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence, which includes our intent to hold these investments to maturity as of October 31, 2014. No marketable securities held as of October 31, 2014 have been in a continuous unrealized loss position for more than 12 months. We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, we classify our investments, including securities with maturities beyond twelve months as Current assets in the accompanying condensed consolidated balance sheets. Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase of greater than three months and the remainder of the securities is reflected in cash and cash equivalents. During the three months ended October 31, 2014, we did not have any sales of available-for-sale securities. During the nine months ended October 31 2014, we sold $8.1 million of our available-for-sale securities and the realized gain from the sale is immaterial.


8


Note 3. Deferred Costs
Deferred costs consisted of the following (in thousands):
 
 
October 31,
2014
 
January 31,
2014
Current:
 
 
 
Deferred professional service costs
$
4,297

 
$
3,555

Deferred sales commissions
14,727

 
12,891

Total
$
19,024

 
$
16,446

Noncurrent:
 
 
 
Deferred professional service costs
$
1,485

 
$
4,357

Deferred sales commissions
16,857

 
16,440

Total
$
18,342

 
$
20,797


Note 4. Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
 
 
October 31,
2014
 
January 31,
2014
Computers, equipment and software
$
117,767

 
$
75,867

Computers, equipment and software acquired under capital leases
35,873

 
38,912

Furniture and fixtures
11,036

 
7,782

Leasehold improvements
38,614

 
15,885

 
203,290

 
138,446

Less accumulated depreciation and amortization
(86,650
)
 
(60,782
)
Property and equipment, net
$
116,640

 
$
77,664

Depreciation expense totaled $12.7 million and $7.9 million for the three months ended October 31, 2014 and 2013, respectively, and $32.9 million and $20.5 million for the nine months ended October 31, 2014 and 2013, respectively.
These amounts include depreciation of assets recorded under capital leases of $2.3 million and $3.0 million for the three months ended October 31, 2014 and 2013, respectively, and $7.1 million and $9.4 million for the nine months ended October 31, 2014 and 2013, respectively.

Note 5. Business Combinations
Identified, Inc.
On February 20, 2014, we acquired Identified, Inc., for the purpose of enhancing search capabilities and accelerating the delivery of predictive analytics and machine learning throughout our suite of applications. We have included the financial results of the acquired company in the consolidated financial statements from the date of acquisition. The consideration paid for this acquisition was $26.4 million, not including cash acquired.

9


The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Cash
$
74

Prepaid expenses and other current assets
150

Identified intangible assets acquired:
 
Developed technology
3,600

Goodwill
23,824

Total assets acquired
27,648

Accrued expenses and other current liabilities
(1,257
)
Deferred tax liabilities

Total liabilities assumed
(1,257
)
Net assets acquired
$
26,391

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes, and identifiable intangible assets may be subject to change as additional information is received and certain tax returns are finalized. We expect to finalize the allocation of purchase consideration as soon as practicable and no later than one year from the acquisition date.
Developed technology represents the estimated fair value of the acquired existing technology and is being amortized over its estimated remaining useful life of three years. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the last three months of the fiscal year. The goodwill balance is not deductible for U.S. income tax purposes.

Note 6. Goodwill and Acquisition-related Intangible Assets, net
Goodwill and acquisition-related intangible assets consisted of the following (in thousands):
 
 
October 31,
2014
 
January 31,
2014
Acquired purchased technology
$
4,200

 
$
600

Customer relationship assets
338

 
338

 
4,538

 
938

Less accumulated amortization
(1,771
)
 
(938
)
Intangible assets, net
2,767

 

Goodwill
32,312

 
8,488

Goodwill and acquisition-related intangible assets, net
$
35,079

 
$
8,488



10


Note 7. Other Assets
Other assets consisted of the following (in thousands):
 
 
October 31,
2014
 
January 31,
2014
Issuance costs of convertible senior notes
$
9,064

 
$
10,625

Acquired land leasehold interest, net
9,912

 
9,991

Technology patents, net
4,172

 
4,865

Cost method investment
10,000

 

Other
19,363

 
20,177

Total
$
52,511

 
$
45,658

Amortization expense on our land leasehold interest and technology patents, both of which were acquired in the three months ended January 31, 2014, was $0.3 million and $0.8 million, respectively, for the three months and nine months ended October 31, 2014. In July 2014, we purchased 1.4 million shares of series D preferred stock in a private company for $10.0 million. The investment is recorded at cost as we do not have significant influence over the company’s operational or financial policies.

Note 8. Fair Value Measurements
We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs that are supported by little or no market activity.
Financial assets
We value our marketable securities using quoted prices for identical instruments in active markets when available. If we are unable to value our marketable securities using quoted prices for identical instruments in active markets, we value our investments using broker reports that utilize quoted market prices for identical or comparable instruments. We validate, on a sample basis, the derived prices provided by the brokers by comparing their assessment of the fair values of our investments against the fair values of the portfolio balances of another third-party professional’s pricing service. To date, all of our marketable securities can be valued using one of these two methodologies.
Based on our valuation of our marketable securities, we concluded that they are classified in either Level 1 or Level 2 and we have no financial assets or liabilities measured using Level 3 inputs. The following tables present information about our assets that are measured at fair value on a recurring basis using the above input categories (in thousands):
 

11


 
Fair Value Measurements as of
October 31, 2014
Description
Level 1
 
Level 2
 
Total
U.S. agency obligations
$

 
$
1,352,858

 
$
1,352,858

U.S. treasury securities
189,876

 

 
189,876

U.S. corporate securities

 
99,783

 
99,783

Commercial paper

 
80,991

 
80,991

Money market funds
42,106

 

 
42,106

 
$
231,982

 
$
1,533,632

 
$
1,765,614

Included in cash and cash equivalents
 
 
 
 
$
123,097

Included in marketable securities
 
 
 
 
$
1,642,517

 
Fair Value Measurements as of
January 31, 2014
Description
Level 1
 
Level 2
 
Total
U.S. agency obligations
$

 
$
1,125,454

 
$
1,125,454

U.S. treasury securities
536,788

 

 
536,788

Commercial paper

 
62,997

 
62,997

U.S. corporate securities

 
11,777

 
11,777

Money market funds
90,159

 

 
90,159

 
$
626,947

 
$
1,200,228

 
$
1,827,175

Included in cash and cash equivalents
 
 
 
 
$
521,922

Included in marketable securities
 
 
 
 
$
1,305,253

Financial liabilities
The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows (in thousands):
 
 
October 31, 2014
 
January 31, 2014
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
0.75% Convertible senior notes
$
291,721

 
$
460,688

 
$
281,359

 
$
434,875

1.50% Convertible senior notes
193,134

 
341,719

 
187,053

 
319,219

The difference between the principal amount of the notes, $350.0 million for the 0.75% convertible senior notes and $250.0 million for the 1.50% convertible senior notes, and the carrying value represents the unamortized debt discount (see Note 9). The estimated fair value of the convertible senior notes, which we have classified as Level 2 financial instruments, was determined based on the quoted bid price of the convertible senior notes in an over-the-counter market on October 31, 2014 and January 31, 2014.
Based on the closing price of our common stock of $95.48 on October 31, 2014, the if-converted value of the 0.75% convertible senior notes and the if-converted value of the 1.50% convertible senior notes were more than their respective principal amounts.
Derivative Financial Instruments
In order to manage certain exposures to currency fluctuations, we initiated a limited hedging program in fiscal 2015 by entering into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets and liabilities. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in Other expense, net in our condensed consolidated statements of operations. These forward contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities. We do not enter into any derivatives for trading or speculative purposes.

12


As of October 31, 2014 we had no outstanding forward contracts.
During the nine months ended October 31, 2014, we recognized a gain of less than $0.1 million on non-designated derivative instruments within Other expense, net, in our condensed consolidated statements of operations.
Our foreign currency contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.

Note 9. Convertible Senior Notes
Convertible Senior Notes
In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 (2018 Notes) with a principal amount of $350.0 million. The 2018 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.75% on January 15 and July 15 of each year, beginning on January 15, 2014. The 2018 Notes mature on July 15, 2018 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2018 Notes prior to maturity.
Concurrently, we issued 1.50% convertible senior notes due July 15, 2020 (2020 Notes) with a principal amount of $250.0 million (together with the 2018 Notes, referred to as Notes). The 2020 Notes are unsecured, unsubordinated obligations of Workday, and interest is payable in cash in arrears at a fixed rate of 1.5% on January 15 and July 15 of each year, beginning on January 15, 2014. The 2020 Notes mature on July 15, 2020 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2020 Notes prior to maturity.
The terms of the Notes are governed by Indentures by and between us and Wells Fargo Bank, National Association, as Trustee (the Indentures). Upon conversion, holders of the Notes will receive cash, shares of Class A Common Stock or a combination of cash and shares of Class A Common Stock, at our election.
For the 2018 Notes, the initial conversion rate is 12.0075 shares of Class A Common Stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $83.28 per share of Class A Common Stock, subject to adjustment. Prior to the close of business on March 14, 2018, the conversion is subject to the satisfaction of certain conditions as described below. For the 2020 Notes, the initial conversion rate is 12.2340 shares of Class A Common Stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $81.74 per share of Class A Common Stock, subject to adjustment. Prior to the close of business on March 13, 2020, the conversion is subject to the satisfaction of certain conditions, as described below.
Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indentures) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indentures), holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest.
Holders of the 2018 Notes and 2020 Notes may convert all or a portion of their Notes prior to the close of business on March 14, 2018 for the 2018 Notes and March 13, 2020 for the 2020 Notes, in multiples of $1,000 principal amount, only under the following circumstances, none of which have occurred to date:
 
if the last reported sale price of Class A Common Stock for at least twenty trading days during a period of thirty consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the respective Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the respective Notes for each day of that five day consecutive trading day period was less than 98% of the product of the last reported sale price of Class A Common Stock and the conversion rate of the respective Notes on such trading day; or
upon the occurrence of specified corporate events, as noted in the Indentures.
In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components. The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity components representing the conversion option was

13


determined by deducting the fair value of the liability components from the par value of the respective Notes. These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes. The equity components are not remeasured as long as they continue to meet the conditions for equity classification.

We allocated the total issuance costs incurred to the 2018 Notes and 2020 Notes on a prorated basis using the aggregate principal balances. In accounting for the issuance costs related to the 2018 Notes and 2020 Notes, we allocated the total amount of issuance costs incurred to liability and equity components. Issuance costs attributable to the liability components are being amortized to interest expense over the respective terms of the Notes, and the issuance costs attributable to the equity components were netted against the respective equity components in additional paid-in capital. For the 2018 Notes, we recorded liability issuance costs of $7.2 million and equity issuance costs of $2.0 million. Amortization expense for the liability issuance costs was $0.4 million and $0.3 million, respectively, for the three months ended October 31, 2014 and 2013 and $1.1 million and $0.5 million, respectively, for the nine months ended October 31, 2014 and 2013. For the 2020 Notes, we recorded liability issuance costs of $4.7 million and equity issuance costs of $1.8 million. Amortization expense for the liability issuance costs was $0.2 million and $0.2 million, respectively, for the three months ended October 31, 2014 and 2013 and $0.5 million and $0.3 million, respectively, for the nine months ended October 31, 2014 and 2013.
The Notes consisted of the following (in thousands):
 
 
October 31, 2014
 
January 31, 2014
 
2018 Notes
 
2020 Notes
 
2018 Notes
 
2020 Notes
Principal amounts:
 
 
 
 
 
 
 
 Principal
$
350,000

 
$
250,000

 
$
350,000

 
$
250,000

Unamortized debt discount(1)
(58,279
)
 
(56,866
)
 
(68,641
)
 
(62,947
)
 Net carrying amount
$
291,721

 
$
193,134

 
$
281,359

 
$
187,053

Carrying amount of the equity component(2)
$
74,892

 
$
66,007

 
$
74,892

 
$
66,007

(1)
Included in the condensed consolidated balance sheets within Convertible senior notes, net and amortized over the remaining lives of the Notes on the straight-line basis as it approximates the effective interest rate method.
(2)
Included in the condensed consolidated balance sheets within Additional paid-in capital, net of $2.0 million and $1.8 million for the 2018 Notes and 2020 Notes, respectively, in equity issuance costs.
As of October 31, 2014, the remaining life of the 2018 Notes and 2020 Notes is approximately 44 months and 68 months, respectively.
The effective interest rates of the liability components of the 2018 Notes and 2020 Notes are 5.75% and 6.25%, respectively. These interest rates were based on the interest rates of similar liabilities at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the 2018 Notes and 2020 Notes (in thousands):
 
 
Three Months ended
October 31,
 
Nine Months ended
October 31,
 
2014
 
2013
 
2014
 
2013
 
2018
Notes
 
2020
Notes
 
2018
Notes
 
2020
Notes
 
2018
Notes
 
2020
Notes
 
2018
Notes
 
2020
Notes
Contractual interest expense
$
656

 
$
938

 
$
656

 
$
938

 
$
1,969

 
$
2,813

 
$
977

 
$
1,396

Interest cost related to amortization of debt issuance costs
353

 
168

 
352

 
169

 
1,057

 
505

 
524

 
251

Interest cost related to amortization of the debt discount
3,503

 
2,059

 
3,308

 
1,935

 
10,362

 
6,081

 
4,909

 
2,870

Notes Hedges
In connection with the issuance of the 2018 Notes and 2020 Notes, we entered into convertible note hedge transactions with respect to our Class A common stock (Purchased Options). The Purchased Options cover, subject to anti-dilution adjustments substantially identical to those in the Notes, approximately 7.3 million shares of our Class A common stock and are

14


exercisable upon conversion of the Notes. The Purchased Options have initial exercise prices that correspond to the initial conversion prices of the 2018 Notes and 2020 Notes, respectively, subject to anti-dilution adjustments substantially similar to those in the Notes. The Purchased Options will expire in 2018 for the 2018 Notes and in 2020 for the 2020 Notes, if not earlier exercised. The Purchased Options are intended to offset potential economic dilution to our Class A Common Stock upon any conversion of the Notes. The Purchased Options are separate transactions and are not part of the terms of the Notes.
We paid an aggregate amount of $143.7 million for the Purchased Options, which is included in additional paid-in capital in the consolidated balance sheets.
Warrants
In connection with the issuance of the Notes, we also entered into warrant transactions to sell warrants (the Warrants) to acquire, subject to anti-dilution adjustments, up to approximately 4.2 million shares in July 2018 and 3.1 million shares in July 2020 of our Class A common stock at an exercise price of $107.96 per share. If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of our Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants will have a dilutive effect on our earnings per share assuming that we are profitable. The Warrants are separate transactions, and are not part of the terms of the Notes or the Purchased Options.
We received aggregate proceeds of $92.7 million from the sale of the Warrants, which is recorded in additional paid-in capital in the consolidated balance sheets.

Note 10. Commitments and Contingencies
Leases
We lease office space under noncancelable operating leases in the U.S. and other countries with various expiration dates. In addition, we leased a 6-acre parcel of vacant land under a 95-year lease adjacent to our existing Pleasanton, California leased facility in January 2014. Certain of our office leases are with an affiliate of our Chairman, David Duffield, who is also a significant stockholder (see Note 15).
The facility lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. We recognize rent expense on a straight-line basis over the period in which we benefit from the lease and have accrued for rent expense incurred but not paid. Rent expense totaled $5.7 million and $3.6 million for the three months ended October 31, 2014 and 2013, respectively, and $14.9 million and $7.4 million for the nine months ended October 31, 2014 and 2013, respectively.
We leased certain equipment and related software from various third parties. The equipment lease terms contain a bargain purchase option and are therefore classified as capital leases.
Legal Matters
We are a party to various legal proceedings and claims which arise in the ordinary course of business. In our opinion, there was not at least a reasonable possibility that we had incurred a material loss, or a material loss in excess of a recorded accrual, with respect to such loss contingencies.

Note 11. Common Stock and Stockholders’ Equity
Common Stock
As of October 31, 2014, there were 102.9 million shares of Class A common stock and 84.1 million shares of Class B common stock outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting, transferability and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock can be converted into a share of Class A common stock at any time at the option of the holder.
Employee Equity Plans
Our 2012 Equity Incentive Plan (EIP) serves as the successor to our 2005 Stock Plan. Pursuant to the terms of the EIP, the share reserve increased by 9.2 million shares on March 31, 2014. As of October 31, 2014, we had approximately 49.7 million shares of Class A common stock available for future grants under the EIP.

15


We also have a 2012 Employee Stock Purchase Plan (ESPP). Under the ESPP, eligible employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about June 1 and December 1 and exercisable on or about the succeeding November 30 and May 31, respectively, of each year. We commenced our first purchase period under the ESPP on June 1, 2013. On May 31, 2014, 194,231 shares of Class A common shares were purchased under the ESPP at a weighted-average price of $66.61 per share, resulting in cash proceeds of $12.9 million. Pursuant to the terms of the ESPP, the share reserve increased by 1.8 million shares on March 31, 2014. As of October 31, 2014, 3.4 million shares of Class A common stock were available for issuance under the ESPP.
Stock Options
The EIP provides for the issuance of stock option awards to employees. Stock option awards generally vest over five years. A summary of information related to stock option activity during the nine months ended October 31, 2014 is as follows (in millions, except share and per share data):
 
 
Outstanding
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance as of January 31, 2014
20,706,207

 
$
3.93

 
$
1,773

Stock option grants

 

 
 
Stock options exercised
(2,706,189
)
 
2.90

 
 
Stock options canceled
(250,830
)
 
9.65

 
 
Balance as of October 31, 2014
17,749,188

 
$
4.01

 
$
1,624

Vested and expected to vest as of October 31, 2014
17,355,265

 
$
3.92

 
$
1,589

Exercisable as of October 31, 2014
13,378,551

 
$
2.95

 
$
1,238

Common Stock Subject to Repurchase
The equity plans allow for the early exercise of stock options for certain individuals as determined by the board of directors. We have the right to purchase at the original exercise price any unvested (but issued) common shares during the repurchase period following termination of services of an employee. The consideration received for an exercise of an option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The shares and liabilities are reclassified into equity as the awards vest. As of October 31, 2014 and January 31, 2014, we had $4.9 million and $6.4 million, respectively, recorded in liabilities related to early exercises of stock options.
Restricted Stock Awards
The EIP provides for the issuance of restricted stock awards to employees. Restricted stock awards generally vest over five years. During the three months and nine months ended October 31, 2014, 67,000 and 201,000 shares of restricted stock awards vested and 831,500 restricted awards of Class B common stock are outstanding with weighted average grant date fair value of $12.88, all of which are subject to forfeiture as of October 31, 2014. As of October 31, 2014, there was a total of $10.4 million in unrecognized compensation cost related to restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 3.1 years.
Restricted Stock Units
The EIP provides for the issuance of restricted stock units to employees. Restricted stock units generally vest over four years. A summary of information related to restricted stock units activity during the nine months ended October 31, 2014 is as follows: 

16


 
Number of Shares
 
Weighted-Average
Grant Date Fair Value
Balance as of January 31, 2014
3,966,728

 
$
70.72

Restricted stock units granted
3,441,394

 
81.51

Restricted stock units vested
(820,842
)
 
70.18

Restricted stock units forfeited
(150,437
)
 
74.70

Balance as of October 31, 2014
6,436,843

 
$
76.47


As of October 31, 2014, there was a total of $430.7 million in unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted-average period of approximately 3.2 years.
Performance-based Restricted Stock Awards
We granted 11,550 and 99,000 shares of performance-based restricted stock units (PRSUs) during the three and nine months ended October 31, 2014, with a weighted average grant date fair value per share of $86.17 and $84.13, respectively. The PRSU awards, which were granted to all employees, include performance conditions related to company-wide goals and service conditions. These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2015 and if the individual employee continues to provide service through the vesting date of March 15, 2015.
As of October 31, 2014, there was a total of $4.9 million in unrecognized compensation cost related to all performance-based restricted stock units, which is expected to be recognized over a weighted-average period of approximately 0.4 years.

Note 12. Other Expense, net
Other expense, net consisted of the following (in thousands):
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2014
 
2013
 
2014
 
2013
Interest income
$
737

 
$
576

 
$
2,101

 
$
1,377

Interest expense (1)
(7,778
)
 
(7,663
)
 
(23,251
)
 
(11,964
)
Other income (expense)
(1,006
)
 
194

 
(849
)
 
(41
)
Other expense, net
$
(8,047
)
 
$
(6,893
)
 
$
(21,999
)
 
$
(10,628
)
 
(1)
Interest expense includes the contractual interest expense related to the 2018 Notes and 2020 Notes, non-cash interest related to amortization of the debt discount and amortization of debt issuance costs (See Note 9).

Note 13. Income Taxes
The effective tax rate for the three months and nine months ended October 31, 2014 and 2013 was less than one percent, primarily as a result of the estimated and actual tax loss for the fiscal year 2015 and 2014, respectively. Our tax expense relates to state minimum taxes and income taxes associated with our non-U.S. operations.
There were no material changes to the unrecognized tax benefits for the three months and nine months ended October 31, 2014. We intend to review the measurement of the uncertain tax positions attributable to prior years as a result of additional analysis that will be performed once the information necessary to perform the analysis is available. As a result of the additional analysis, it is reasonably possible that the total amount of unrecognized tax benefits related to prior years could be reduced significantly in the next 12 months. An estimate of the range of the reduction cannot be made as the information necessary to complete the analysis is not available. Due to a valuation allowance, the recognition of any unrecognized tax benefits will not impact the effective tax rate. Due to our history of tax losses, all years remain open to tax audit. However, subsequent to October 31, 2014, the Internal Revenue Service concluded its audit of our calendar 2011 and one month period ended January 31, 2012 federal tax returns and issued a final determination letter. The audit adjustments were immaterial.



17


Note 14. Net Loss Per Share
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, our outstanding stock options, outstanding warrants, stock related to unvested early exercised stock options and stock related to unvested restricted stock awards to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common shares outstanding would have been anti-dilutive.
The net loss per share attributable to common stockholders is allocated based on the contractual participation rights of the Class A common shares and Class B common shares as if the loss for the year had been distributed. As the liquidation and dividend rights are identical, the net loss attributable to common stockholders is allocated on a proportionate basis.
We consider shares issued upon the early exercise of options subject to repurchase and unvested restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares. In future periods to the extent we are profitable, we will subtract earnings allocated to these participating securities from net income to determine net income attributable to common stockholders.
The following table presents the calculation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share data):
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Net loss per share, basic and diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of distributed net loss
$
(32,981
)
 
$
(26,931
)
 
$
(19,998
)
 
$
(27,536
)
 
$
(100,214
)
 
$
(88,302
)
 
$
(39,899
)
 
$
(76,628
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
101,462

 
82,848

 
73,365

 
101,020

 
97,159

 
85,611

 
58,642

 
112,627

Basic and diluted net loss per share
$
(0.33
)
 
$
(0.33
)
 
$
(0.27
)
 
$
(0.27
)
 
$
(1.03
)
 
$
(1.03
)
 
$
(0.68
)
 
$
(0.68
)
The anti-dilutive securities excluded from the weighted-average shares used to calculate the diluted net loss per common share were as follows (in thousands):
 
 
As of October 31,
 
2014
 
2013
Outstanding common stock options
17,754

 
22,263

Shares subject to repurchase
1,299

 
1,936

Unvested restricted stock awards, units, and PRSUs
7,378

 
5,055

Shares related to the convertible senior notes
7,261

 
7,261

Shares subject to warrants related to the issuance of convertible senior notes
7,261

 
7,261

 
40,953

 
43,776


Note 15. Related-Party Transactions
We currently lease certain office space from an affiliate of our Chairman, Mr. Duffield, adjacent to our corporate headquarters in Pleasanton, California under various lease agreements. The term of the agreements is 10 years and the total rent due under the agreements is $3.0 million for the fiscal year ended January 31, 2015, and $50.2 million in total. Rent expense under these agreements for the three months ended October 31, 2014 and 2013 was $1.1 million and $0.4 million, respectively, and for the nine months ended October 31, 2014 and 2013 were $2.6 million and $0.9 million, respectively.

18


In June 2010, we entered into a capital lease agreement with an affiliate of Mr. Duffield. The lease agreement provides for an equipment lease financing facility to be drawn upon for purchases of certain equipment for use in our business operations. The capital lease under this agreement was paid in full during the three months ended July 31, 2014. The amounts paid in the three months ended October 31, 2013 was $0.4 million. The amounts paid in the nine months ended October 31, 2014 and 2013 were $0.1 million and $1.9 million, respectively.

Note 16. Geographic Information
Revenue by geography is generally based on the address of the customer as defined in our master subscription agreement. The following tables set forth revenue by geographic area (in thousands):
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2014
 
2013
 
2014
 
2013
United States
$
179,823

 
$
107,802

 
$
468,640

 
$
275,836

International
35,247

 
20,070

 
92,947

 
51,236

Total
$
215,070

 
$
127,872

 
$
561,587

 
$
327,072

No single country other than the United States had revenues greater than 10% of total revenues for the three and nine months ended October 31, 2014 or 2013. No customer individually accounted for more than 10% of our accounts receivable, net as of October 31, 2014 or January 31, 2014.


19


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “seek,” “strive,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
As used in this report, the terms “Workday,” “registrant,” “we,” “us,” and “our” mean Workday, Inc. and its subsidiaries unless the context indicates otherwise.

20


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, as well as in the section entitled “Risk Factors.”

Overview
Workday provides financial management, human capital management, and analytics applications designed for the world's largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer Internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources.
We were founded in 2005 to deliver cloud applications to global enterprises. Our applications are designed around the way people work today – in an environment that is global, collaborative, fast-paced and mobile. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our Human Capital Management (HCM) application in 2006. Since then we have continued to invest in innovation and have consistently introduced new services to our customers, including our Financial Management application in 2007, our Procurement and Employee Expense Management applications in 2008, our Payroll and mobile applications in 2009, our Talent Management application in 2010, our native iPad application and Workday integration platform in 2011, Time Tracking and Grants Management applications in 2012, Big Data Analytics in 2013 and Recruiting in 2014.
We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with three-year terms and with subscription fees largely based on the size of the customer’s workforce. We generally recognize revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription services revenues from subscriptions to our HCM application. We market our applications primarily through our direct sales force.
We have achieved significant growth in a relatively short period of time. Our diverse customer base includes large, global companies and our direct sales force generally targets organizations with more than 1,000 workers. A substantial majority of our growth comes from new customers. Our current financial focus is on growing our revenues and expanding our customer base. While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to our significant growth in employees. We had approximately 3,500 and approximately 2,300 employees as of October 31, 2014 and 2013, respectively.
We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our application development efforts to deliver additional compelling applications and to address customers’ evolving needs. In addition, we plan to continue to expand our sales and marketing organizations to sell our applications globally. We expect to make further significant investments in our data center infrastructure in the fourth quarter of fiscal 2015 as we update our technology and plan for future customer growth. We are also investing in personnel to service our growing customer base. These investments will increase our costs on an absolute basis in the near-term. Many of these investments will occur in advance of experiencing any direct benefit from them and will make it difficult to determine if we are allocating our resources efficiently. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs and by utilizing more of the capacity of our data centers.
Since inception, we have invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. Additionally, we continue to expand our professional services partner ecosystem to further support our customers. We believe our investment in professional services, as well as partners building consulting practices around Workday, will drive additional customer subscriptions and continued growth in revenues. In addition, over time we expect professional services revenues and the cost of professional services as a percentage of total revenues to decline as we increasingly rely on our partners to deploy Workday applications and as the number of our existing customers continues to grow.

21



Components of Results of Operations
Revenues
We primarily derive our revenues from subscription services fees and professional services fees. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include routine customer support at no additional cost. Professional services fees include deployment services, optimization services, and training.
Subscription services revenues accounted for 76% of our revenues during the three months ended October 31, 2014 and represented over 90% of our total unearned revenue as of October 31, 2014. Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the number of applications subscribed to by each customer, the price of our applications, and to a lesser extent, renewal rates.
The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Compared to our other offerings, our HCM application has been available for a longer period of time, is more established in the marketplace and has benefited from continued enhancements of the functionality over a longer period of time, all of which help us to improve our pricing for that application. However, new product or service offerings by competitors in the future could impact the mix and pricing of our offerings.
Subscription services fees are recognized ratably as revenues over the contract term generally beginning on the date the application is made available to the customer, which is generally within one week of contract signing. Our subscription contracts typically have a term of three years and are non-cancelable. We generally invoice our customers in advance, in annual installments. Amounts that have been invoiced are initially recorded as unearned revenue. Amounts that have not been invoiced represent backlog and are not reflected in our condensed consolidated financial statements.
Our consulting engagements are typically billed on a time and materials basis, and revenues are typically recognized as the services are performed. We offer a number of training options intended to support our customers in configuring, using and administering our services. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As Workday’s professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenues, we expect professional services revenues as a percentage of total revenues to decline over time.
Costs and Expenses
Costs of subscription services revenues. Costs of subscription services revenues consist primarily of employee-related expenses related to hosting and supporting our applications, the costs of data center capacity, and depreciation of owned and leased computer equipment and software.
Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The percentage of total revenues derived from professional services was 24% for the three months ended October 31, 2014. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscriptions.
Product development. Product development expenses consist primarily of employee-related expenses. We continue to focus our product development efforts on adding new features and applications, increasing the functionality and enhancing the ease of use of our cloud applications.
Sales and marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs and travel-related expenses. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities. Commissions earned by our sales force that can be associated specifically with a non-cancelable subscription contract are deferred and amortized over the same period that revenues are recognized for the related non-cancelable contract.
General and administrative. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees and other corporate expenses.


22


Results of Operations
Revenues
Our total revenues for the three and nine months ended October 31, 2014 and 2013 were as follows:
 
 
Three Months Ended
October 31,
 
 
 
Nine Months Ended
October 31,
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
 
(in thousands, except percentages)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Subscription services
$
164,403

 
$
93,925

 
75
%
 
$
431,462

 
$
243,454

 
77
%
Professional services
50,667

 
33,947

 
49

 
130,125

 
83,618

 
56

Total revenues
$
215,070

 
$
127,872

 
68

 
$
561,587

 
$
327,072

 
72

Total revenues were $215.1 million for the three months ended October 31, 2014, compared to $127.9 million during the prior year period, an increase of $87.2 million, or 68%. Subscription services revenues were $164.4 million for the three months ended October 31, 2014, compared to $93.9 million for the prior year period, an increase of $70.5 million, or 75%. The increase in subscription revenues was due primarily to the recognition of revenue for an increased number of customer contracts as compared to the prior year period. Professional services revenues were $50.7 million for the three months ended October 31, 2014, compared to $33.9 million for the prior year period, an increase of $16.8 million, or 49%. The increase in professional services revenues was due primarily to the addition of new customers and a greater number of customers requesting deployment and integration services.
Total revenues were $561.6 million for the nine months ended October 31, 2014, compared to $327.1 million during the prior year period, an increase of $234.5 million, or 72%. Subscription services revenues were $431.5 million for the nine months ended October 31, 2014, compared to $243.5 million for the prior year period, an increase of $188.0 million, or 77%. The increase in subscription revenues was due primarily to an increased number of customer contracts as compared to the prior year period. Professional services revenues were $130.1 million for the nine months ended October 31, 2014, compared to $83.6 million for the prior year period, an increase of $46.5 million, or 56%. The increase in professional services revenues was due primarily to a greater number of customers requesting deployment and integration services.
Core Operating Expenses
Management uses the non-GAAP financial measure of core operating expenses 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 our financial performance and the ability of operations to generate cash. Management believes that core operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as it excludes expenses that are not reflective of ongoing operating results. Management also believes that core operating expenses provide useful information to investors and others in understanding and evaluating our 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.
The following discussion of our core operating expenses and the components of our core operating expenses highlights the factors that our management focuses upon in evaluating our operating margin and operating expenses. The increases or decreases in operating expenses discussed in this section do not include changes relating to share-based compensation, and certain other expenses, which consist of employer payroll taxes on employee stock transactions and amortization of acquisition-related intangible assets.


23


Reconciliation of our core operating expenses to the nearest GAAP measure, total operating expenses, is as follows:
 
 
Three Months Ended October 31, 2014
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands)
Costs of subscription services
$
25,454

 
$
1,959

 
$
13

 
$
27,426

Costs of professional services
40,080

 
4,214

 
69

 
44,363

Product development
65,451

 
19,191

 
628

 
85,270

Sales and marketing
71,518

 
8,678

 
485

 
80,681

General and administrative
15,500

 
12,966

 
330

 
28,796

Total costs and expenses
$
218,003

 
$
47,008

 
$
1,525

 
$
266,536

Operating loss
$
(2,933
)
 
$
(47,008
)
 
$
(1,525
)
 
$
(51,466
)
Operating margin
(1
)%
 
(22
)%
 
(1
)%
 
(24
)%
 
 
Three Months Ended October 31, 2013
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands)
Costs of subscription services
$
17,293

 
$
783

 
$

 
$
18,076

Costs of professional services
28,792

 
1,559

 
164

 
30,515

Product development
41,927

 
7,032

 
390

 
49,349

Sales and marketing
49,381

 
4,583

 
87

 
54,051

General and administrative
10,366

 
5,726

 
188

 
16,280

Total costs and expenses
$
147,759

 
$
19,683

 
$
829

 
$
168,271

Operating loss
$
(19,887
)
 
$
(19,683
)
 
$
(829
)
 
$
(40,399
)
Operating margin
(16
)%
 
(15
)%
 
(1
)%
 
(32
)%
 
 
Nine Months Ended October 31, 2014
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands)
Costs of subscription services
$
68,535

 
$
4,622

 
$
101

 
$
73,258

Costs of professional services
111,455

 
9,931

 
204

 
121,590

Product development
179,011

 
46,796

 
2,098

 
227,905

Sales and marketing
203,568

 
22,807

 
996

 
227,371

General and administrative
43,585

 
32,508

 
688

 
76,781

Total costs and expenses
$
606,154

 
$
116,664

 
$
4,087

 
$
726,905

Operating loss
$
(44,567
)
 
$
(116,664
)
 
$
(4,087
)
 
$
(165,318
)
Operating margin
(8
)%
 
(20
)%
 
(1
)%
 
(29
)%

24


 
Nine Months Ended October 31, 2013
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands)
Costs of subscription services
$
47,879

 
$
1,446

 
$
8

 
$
49,333

Costs of professional services
73,365

 
2,835

 
511

 
76,711

Product development
113,455

 
12,404

 
940

 
126,799

Sales and marketing
128,664

 
7,431

 
470

 
136,565

General and administrative
29,791

 
12,766

 
413

 
42,970

Total costs and expenses
$
393,154

 
$
36,882

 
$
2,342

 
$
432,378

Operating loss
$
(66,082
)
 
$
(36,882
)
 
$
(2,342
)
 
$
(105,306
)
Operating margin
(20
)%
 
(11
)%
 
(1
)%
 
(32
)%
 
(1)
See “Non-GAAP Financial Measures” below for further information.
Core operating margins
Core operating margins, calculated using GAAP revenues and core operating expenses, improved from (16)% for the three months ended October 31, 2013 to (1)% for the three months ended October 31, 2014 and improved from (20)% for the nine months ended October 31, 2013 to (8)% for the nine months ended October 31, 2014. The improvements in our core operating margins in the three and nine months ended October 31, 2014 were primarily due to higher subscription services revenues, higher professional services revenues driven by improved utilization rates and increased demand for services, and improvements to operating leverage. In evaluating our results, we generally focus on core operating expenses. We believe that our core operating expenses reflect our ongoing business in a manner that allows meaningful period-to-period comparisons. Our core operating expenses are reconciled to the most comparable GAAP measure, “total operating expenses,” in the table above.
Core operating expenses increased by $70.2 million, or 48% and $213.0 million, or 54%, respectively, for the three and nine months ended October 31, 2014 compared to the prior year periods. The increases were primarily due to higher employee-related costs driven by higher headcount.
Costs of subscription services
Core operating expenses in costs of subscription services were $25.5 million for the three months ended October 31, 2014, compared to $17.3 million for the prior year period, an increase of $8.2 million, or 47%. The increase was primarily due to an increase of $2.6 million in employee-related costs driven by higher headcount, an increase of $2.2 million in depreciation expense related to our data centers and an increase of $1.4 million in service contracts expense to expand data center capacity.
Core operating expenses in costs of subscription services were $68.5 million for the nine months ended October 31, 2014, compared to $47.9 million for the prior year period, an increase of $20.6 million, or 43%. The increase was primarily due to an increase of $7.2 million in depreciation expense related to our data centers, an increase of $7.1 million in employee-related costs driven by higher headcount and an increase of $3.8 million in service contracts expense to expand data center capacity.
We expect that core operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our data center capacity and operations.
Costs of professional services
Core operating expenses in costs of professional services were $40.1 million for the three months ended October 31, 2014, compared to $28.8 million for the prior year period, a $11.3 million increase, or 39%. This increase was primarily due to increases of $7.8 million to staff our deployment and integration engagements.
Core operating expenses in costs of professional services were $111.5 million for the nine months ended October 31, 2014, compared to $73.4 million for the prior year period, a $38.1 million increase, or 52%. This increase was primarily due to

25


increases of $28.9 million to staff our deployment and integration engagements and $2.7 million in facility and IT-related expenses.
We continue to expect professional services margins to fluctuate over time and anticipate the margin will decrease in the fourth quarter due to normal holiday season slowing.
Product development
Core operating expenses in product development were $65.5 million for the three months ended October 31, 2014, compared to $41.9 million for the prior year period, an increase of $23.6 million, or 56%. The increase was primarily due to increases of $16.9 million in employee compensation costs due to higher headcount, $1.9 million in facility and IT-related expenses, $1.8 million in depreciation expense for our development cloud data center, $1.0 million in consulting expenses and $1.0 million in third party costs for hardware maintenance and data center capacity.
Core operating expenses in product development were $179.0 million for the nine months ended October 31, 2014, compared to $113.5 million for the prior year period, an increase of $65.5 million, or 58%. The increase was primarily due to increases of $47.1 million in employee compensation costs due to higher headcount, $5.1 million in facility and IT-related expenses, $4.7 million in depreciation expense for our development cloud data center and $4.2 million in third party costs for hardware maintenance and data center capacity.
We expect that product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.
Sales and marketing
Core operating expenses in sales and marketing were $71.5 million for the three months ended October 31, 2014, compared to $49.4 million for the prior year period, an increase of $22.1 million, or 45%. The increase was primarily due to increases of $14.3 million in employee compensation costs due to higher headcount and higher commissionable sales volume, $5.2 million in advertising, marketing and event costs and $1.7 million in travel expenses.
Core operating expenses in sales and marketing were $203.6 million for the nine months ended October 31, 2014, compared to $128.7 million for the prior year period, an increase of $74.9 million, or 58%. The increase was primarily due to increases of $51.1 million in employee compensation costs due to higher headcount and higher commissionable sales volume, $15.2 million in advertising, marketing and event costs, $4.6 million in travel expenses and $3.3 million in facility and IT-related expenses.
We expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to invest in the expansion of our domestic and international selling and marketing activities to build brand awareness and attract new customers.
General and administrative
Core operating expenses in general and administrative were $15.5 million for the three months ended October 31, 2014, compared to $10.4 million for the prior year period, an increase of $5.1 million, or 49%. The increase was primarily due to $3.9 million in higher employee compensation costs due to higher headcount and $1.6 million in higher consulting fees.
Core operating expenses in general and administrative were $43.6 million for the nine months ended October 31, 2014, compared to $29.8 million for the prior year period, an increase of $13.8 million, or 46%. The increase was primarily due to $9.5 million in higher employee compensation costs due to higher headcount and $3.3 million in facility and IT-related expenses.
We expect general and administrative expenses will continue to increase in absolute dollars as we further invest in our infrastructure and support our international expansion.
Share-Based Compensation Expenses
Share-based compensation expenses were $47.0 million and $116.7 million, respectively, for the three and nine months ended October 31, 2014, compared to $19.7 million and $36.9 million, respectively, for the prior year periods. The increase in share-based compensation expenses was primarily due to grants of restricted stock units to existing and new employees during

26


fiscal 2014 and the nine months ended October 31, 2014, as well as our changing of the cycle in which we grant additional equity awards to existing employees resulting in two grants within the last four fiscal quarters. The next grant to existing employees is planned for the first quarter of fiscal 2016. During the three and nine months ended October 31, 2014, the realized excess tax benefits related to share-based compensation were immaterial.
Other Operating Expenses
Other operating expenses include employer payroll tax on employee stock transactions of $1.3 million and $3.3 million, respectively, for the three and nine months ended October 31, 2014 and $0.8 million and $2.3 million, respectively, for the prior year periods. In addition, other operating expenses included amortization of acquisition-related intangible assets of $0.3 million and $0.8 million, respectively, for the three and nine months ended October 31, 2014.
Other Expense, Net
Other expense, net, increased by $1.2 million and $11.4 million for the three and nine months ended October 31, 2014, compared to the prior year respective periods. The increase for the nine months ended October 31, 2014 was primarily due to the increased interest expense related to our 0.75% convertible senior notes due October 15, 2018 (2018 Notes) and 1.50% convertible senior notes due October 15, 2020 (2020 Notes, and together with the 2018 Notes, the Notes), as we incurred a full period of interest expense in the nine months ended October 31, 2014. We issued the Notes in June 2013, and therefore incurred interest on the Notes for only a portion of the nine months ended October 31, 2013. The contractual cash interest expense was $1.6 million and $4.8 million, respectively, for the three and nine months ended October 31, 2014, and $1.6 million and $2.4 million, respectively for prior year periods. The non-cash interest expense related to amortization of the debt discount and amortization of debt issuance costs was $6.1 million and $18.0 million, respectively, for the three and nine months ended October 31, 2014, and $5.8 million and $8.6 million, respectively, for the prior year periods.

Liquidity and Capital Resources
As of October 31, 2014, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1.8 billion, which were held for working capital purposes. Our cash equivalents and marketable securities are comprised primarily of U.S. agency obligations, U.S. treasury securities, U.S. corporate securities, commercial paper, and money market funds.
We have financed our operations primarily through sales of equity securities, customer payments, and issuance of debt. Our future capital requirements will depend on many factors, including our customer growth rate, subscription renewal activity, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of our services, and acquisition activities. We also may choose to seek additional equity or debt financing.
Our cash flows for the three and nine months ended October 31, 2014 and 2013 were as follows:
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net cash provided by (used in):
 
 
 
 
 
 
 
Operating activities
$
41,042

 
$
7,076

 
$
53,728

 
$
11,470

Investing activities
(112,934
)
 
(260,304
)
 
(447,108
)
 
(444,675
)
Financing activities
1,583

 
(776
)
 
4,355

 
532,561

Effect of exchange rate changes
(183
)
 
32

 
(159
)
 
(54
)
Net increase (decrease) in cash and cash equivalents
$
(70,492
)
 
$
(253,972
)
 
$
(389,184
)
 
$
99,302

In evaluating our performance internally, we focus on long-term, sustainable growth in free cash flows. We define free cash flows, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus purchases of property and equipment, property and equipment acquired under capital leases and purchases of other (non-acquisition-related) intangible assets. See “Non-GAAP Financial Measures” below for further information.

27


 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2014
 
2013
 
2014
 
2013
GAAP cash flows from operating activities
$
41,042

 
$
7,076

 
$
53,728

 
$
11,470

Capital expenditures
(27,699
)
 
(16,757
)
 
(65,981
)
 
(48,384
)
Property and equipment acquired under capital lease

 

 

 
(115
)
Free cash flows
$
13,343

 
$
(9,681
)
 
$
(12,253
)
 
$
(37,029
)
 
 
 
 
 
 
 
 
 
Trailing Twelve Months Ended
October 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
GAAP cash flows from operating activities
$
88,521

 
$
17,410

 
 
 
 
Capital expenditures
(78,322
)
 
(57,479
)
 
 
 
 
Property and equipment acquired under capital lease

 
(945
)
 
 
 
 
Purchase of other intangible assets
(15,000
)
 

 
 
 
 
Free cash flows
$
(4,801
)
 
$
(41,014
)
 
 
 
 
Operating Activities
For the three months ended October 31, 2014, cash provided by operating activities was $41.0 million, as compared to $7.1 million for the prior year period. The improvement in cash flow was primarily due to increased cash collections driven by growth in customer demand for our services, partially offset by increases in our headcount and other operational expenses.
For the nine months ended October 31, 2014, cash provided by operating activities was $53.7 million as compared to $11.5 million for the prior year period. The improvement in cash flow was primarily due to increased cash collections driven by growth in customer demand for our services, partially offset by increases in our headcount and other operational expenses.
Investing Activities
Cash used in investing activities for the three months ended October 31, 2014 was $112.9 million, which was primarily the result of the timing of purchases and maturities of marketable securities and capital expenditures of $27.7 million. We expect capital expenditures will be approximately $100 million to $110 million for the year ended January 31, 2015. We expect that these capital outlays will largely be used to expand the infrastructure of our data centers and to build out additional office space to support our growth. We acquired a leasehold interest in land in Pleasanton adjacent to our existing office space during the three months ended January 31, 2014. We are actively evaluating construction alternatives for this site and therefore have not yet factored any related development costs into our expected capital expenditures described above.
Cash used in investing activities for the three months ended October 31, 2013 was $260.3 million, which was primarily the result of investing the proceeds of our June 2013 convertible senior notes offering and capital expenditures of $16.8 million. These cash uses were partially offset by the maturities of marketable securities.
Cash used in investing activities for the nine months ended October 31, 2014 was $447.1 million, which was primarily the result of the timing of purchases and maturities of marketable securities, capital expenditures of $66.0 million and a $10.0 million cost method investment. These payments were partially offset by proceeds of $8.1 million from the sale of available-for-sale securities.
Cash used in investing activities for the nine months ended October 31, 2013 was $444.7 million, which was primarily the result of investing the proceeds of our June 2013 convertible senior notes offering and capital expenditures of $48.4 million. These cash uses were partially offset by the maturities of marketable securities.
Financing Activities
For the three months ended October 31, 2014, cash provided by financing activities was $1.6 million, which was primarily due to $2.6 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $1.1 million in principal payments on our capital lease obligations.

28


For the three months ended October 31, 2013, cash used in financing activities was $0.8 million, which was primarily due to $2.8 million in principal payments on our capital lease obligations, offset by $2.6 million of proceeds from the exercise of stock options.
For the nine months ended October 31, 2014, cash provided by financing activities was $4.4 million, which was primarily due to $20.8 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $8.3 million of Class A common share repurchases for tax withholdings on vesting of restricted stock and $8.3 million in principal payments on our capital lease obligations.
For the nine months ended October 31, 2013, cash provided by financing activities was $532.6 million, which was primarily due to $584.3 million in net proceeds from issuance of the Notes, $92.7 million in proceeds from the issuance of warrants related to the Notes and $9.3 million of proceeds from the exercise of stock options. These proceeds were partially offset by $143.7 million to purchase convertible senior notes hedges and $9.5 million in principal payments on our capital lease obligations.
Free Cash Flows
In addition to net cash used by operating activities, management uses free cash flows as a key financial metric. Free cash flows improved by $23.0 million to $13.3 million for the three months ended October 31, 2014, compared to $(9.7) million for the prior year period. The improvement was primarily due to increased sales and the related cash collections, partially offset by increased capital expenditures and higher operating expenses, driven primarily by increased headcount.
Free cash flows increased by $24.8 million to $(12.3) million for the nine months ended October 31, 2014, compared to $(37.0) million for the prior year period. The improvement was primarily due to increased sales and the related cash collections, partially offset by increased capital expenditures and higher operating expenses, driven primarily by increased headcount.
Non-GAAP Financial Measures
Item 10(e) of Regulation S-K, “Use of non-GAAP financial measures in Commission filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of core operating expenses, core operating margin and free cash flows each meet the definition of a non-GAAP financial measure.
Core Operating Expenses
We define core operating expenses as our total operating expenses excluding the following components, which we believe are not reflective of our ongoing operational expenses. In each case, for the reasons set forth below, management believes that excluding the component provides useful information to investors and others in understanding and evaluating our operating results and future prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies and to better understand the long-term performance of our core business.
 
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 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 share 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 issued under the Employee Stock Purchase Plan, which is an element 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 included employer payroll taxes on employee stock transactions for the three and nine months ended October 31, 2014 and 2013 and amortization of acquisition-related intangible assets for the three and nine months ended October 31, 2014. The amount of employer payroll taxes on share-based compensation 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

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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 our ongoing operations.
Free cash flows
We define free cash flows as net cash provided by (used in) operating activities minus purchases of property and equipment, property and equipment acquired under capital leases and purchases of other (non-acquisition-related) intangible assets. Management uses free cash flows as a measure of financial progress in our business, as it balances operating results, cash management and capital efficiency. When calculating free cash flows, we subtract the gross value of all equipment acquired in the period, even when acquired under capital leases, so that we can evaluate our progress on free cash flows independent of our capital financing decisions. 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.
Limitations on the use of non-GAAP financial measures
A limitation of our non-GAAP financial measures of core operating expenses, core operating margin and free cash flows is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Thus, our non-GAAP measures of core operating expenses, core operating margin and free cash flows should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Additionally, in the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher, which would affect our cash position. Further, the non-GAAP measure of core operating expenses has certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP measure of total operating expenses.
We compensate for these limitations by reconciling core operating expenses to the most comparable GAAP financial measure and reviewing these measures in conjunction with GAAP financial information. Management encourages investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
See “Results of Operations—Core Operating Expenses” for a reconciliation of the non-GAAP financial measure of core operating expenses to the most comparable GAAP measure, “total operating expenses,” for the three and nine months ended October 31, 2014 and 2013.
See “Liquidity and Capital Resources” for a reconciliation of free cash flows to the most comparable GAAP measure, “GAAP cash flows from operating activities,” for the three and nine months ended October 31, 2014 and 2013.

Commitments
Our principal commitments primarily consist of obligations under leases for office space and co-location facilities for data center capacity and our development and test data center, as well as computer equipment. As of October 31, 2014, the future non-cancelable minimum payments under operating leases were $165.3 million. During the remainder of the year ended January 31, 2015, we anticipate leasing additional office space near our headquarters and in various other locations around the world to support our growth. In addition, our existing lease agreements often provide us with an option to renew. We expect our future operating lease obligations will increase as we expand our operations.
We are not required to make principal payments under the Notes prior to maturity. If the Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay $350.0 million in principal on July 15, 2018 and $250.0 million in principal on July 15, 2020. We are also required to make interest payments on a semi-annual basis at the interest rates noted above.
We do not consider outstanding purchase orders to be purchase commitments as they represent authorizations to purchase rather than binding agreements.

Off-Balance Sheet Arrangements

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Through October 31, 2014, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
During the nine months ended October 31, 2014, there were no significant changes to our critical accounting policies and estimates as described in financial statements contained in the Annual Report on Form 10-K for the year ended January 31, 2014 filed with the Securities and Exchange Commission (SEC) on March 31, 2014. Subsequent to the filing of our Annual Report on Form 10-K, we added a policy related to business combinations (see Note 1).


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and British Pound Sterling. Due to the relative size of our international operations to date and the fact that the majority of our international contracts are currently in U.S. dollars, our foreign currency exposure has been fairly limited. We anticipate that our exposure to foreign currency fluctuations will increase over time, and we initiated a limited hedging program focused on certain currencies in fiscal 2015. For the current fiscal year and beyond, we expect the percentage of contracts denominated in currencies other than the U.S. dollars to increase.
Interest rate sensitivity
We had cash, cash equivalents and marketable securities totaling $1.8 billion as of October 31, 2014. Cash equivalents and marketable securities were invested primarily in U.S. agency obligations, U.S. treasury securities, corporate securities, commercial paper, and money market funds. The cash, cash equivalents and marketable securities are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our marketable securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
An immediate increase of 100-basis points in interest rates would have resulted in a $10.3 million market value reduction in our investment portfolio as of October 31, 2014. All of our investments earn less than 100-basis points and as a result, an immediate decrease of 100-basis points in interest rates would have increased the market value by $2.2 million as of October 31, 2014. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.
At January 31, 2014, we had cash, cash equivalents and marketable securities totaling $1.9 billion. The fixed-income portfolio was also subject to interest rate risk; however, the risk was not material.
Market Risk and Market Interest Risk
In June 2013, we issued $350.0 million of 2018 Notes and $250.0 million of 2020 Notes. Holders may convert the Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, holders of the 2018 Notes and 2020 Notes will receive cash, shares of Class A Common Stock or a combination of cash and shares of Class A Common Stock, at our election.
Concurrent with the issuance of the Notes, we entered into separate note hedge and warrant transactions. These separate transactions were completed to reduce the potential economic dilution from the conversion of the Notes.
Our Notes have fixed annual interest rates at 0.75% and 1.50% and, therefore, we do not have economic interest rate exposure on our Notes. However, the values of the Notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the 2018 Notes and the 2020 Notes are affected by our stock price. The carrying values of our 2018 Notes and 2020 Notes were $291.7 million and $193.1 million, respectively, as of October 31, 2014. These represent the liability component of the principal balance of our Notes as of October 31, 2014. The total estimated fair values of the 2018 Notes and 2020 Notes at October 31, 2014 were $460.7 million and $341.7 million, respectively, and the fair value was determined based on the quoted bid price of the Notes in an over-the-counter market as of the last day of trading for the three months ended at October 31, 2014, which were $131.63 and $136.69, respectively. For further information, see Note 9 of the notes to condensed consolidated financial statements.


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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report (Evaluation Date).
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other claims.
We have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement. We evaluate these claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, and the expected effect on us. Our technologies may be subject to injunction if they are found to infringe the rights of a third party. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling on such a claim.
The outcome of any litigation, regardless of its merits, is inherently uncertain. Any intellectual property claims and other lawsuits, and the disposition of such claims and lawsuits, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, lead to attempts on the part of other parties to seek similar claims and, in the case of intellectual property claims, require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements.
In general, the resolution of a legal matter could prevent us from offering our services to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of these matters is not expected to have a material adverse impact on our condensed consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations or cash flows, or both, of a particular quarter.


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ITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including the consolidated financial statements and the related notes included elsewhere in this report, before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that materially and adversely affect our business. If any of the following risks actually occurs, our business operations, financial condition, results of operations, and prospects could be materially and adversely affected. The market price of our securities could decline due to the materialization of these or any other risks, and you could lose part or all of your investment.

Risk Factors Related to Our Business
If our security measures are breached or unauthorized access to customer data is otherwise obtained, our applications may be perceived as not being secure, customers may reduce the use of or stop using our applications and we may incur significant liabilities.
Our applications involve the storage and transmission of our customers’ proprietary information, including personal or identifying information regarding their employees, customers and suppliers, as well as their finance and payroll data. As a result, unauthorized or excessive access or security breaches could result in the loss of information, litigation, indemnity obligations and other liabilities. While we have security measures in place to protect customer information and prevent data loss and other security breaches, if these measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and someone obtains unauthorized access to our customers’ data, our reputation could be damaged, our business may suffer and we could incur significant liabilities. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect to terminate or not renew their subscriptions, result in reputational damage, cause us to issue credits or refunds to our customers, or result in lawsuits, regulatory fines or other action or liabilities, which could adversely affect our operating results.
We depend on data centers and computing infrastructure operated by third parties and any disruption in these operations could adversely affect our business.
We host our applications and serve all of our customers from data centers located in Ashburn, Virginia; Lithia Springs, Georgia; Portland, Oregon; Dublin, Ireland; and Amsterdam, the Netherlands. While we control and have access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.
In addition, we rely upon Amazon Web Services (AWS), which provides a distributed computing infrastructure platform for business operations, to operate certain aspects of our services, including a portion of our big data analytics application and certain environments for development testing, training and sales demonstrations. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business could be adversely impacted.
Problems faced by our third-party data center operations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, or problems faced by AWS, could adversely affect the experience of our customers. Our third-party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data center operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers or AWS are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. Any changes in third-party service levels at our data centers or at AWS or any errors, defects, disruptions, or other performance problems with our applications could adversely affect our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits to customers for prepaid and unused subscription services, subject us to potential liability, result in contract terminations, or adversely affect our renewal rates.

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Furthermore, our financial management application is essential to our customers’ financial projections, reporting and compliance programs. Any interruption in our service may affect the availability, accuracy or timeliness of these programs and could damage our reputation, cause our customers to terminate their use of our applications, require us to indemnify our customers against certain losses and prevent us from gaining additional business from current or future customers.
If we fail to manage our technical operations infrastructure, or experience service outages or delays in the deployment of our applications, we may be subject to liabilities and our reputation and operating results may be adversely affected.
We have experienced significant growth in the number of users, transactions and data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters, the evolution of our applications and to reduce infrastructure latency associated with dispersed geographic locations. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity.
We have experienced, and may in the future experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks (internal and external), fraud, spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Our customer agreements typically provide service level commitments on a monthly basis. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our applications, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, or we could face contract terminations. Any extended service outages could result in customer losses, and adversely affect our reputation, revenues and operating results.
Catastrophic events may disrupt our business.
Our corporate headquarters are located in Pleasanton, California and we have a number of data centers located in Ashburn, Virginia; Lithia Springs, Georgia; Portland, Oregon; Dublin, Ireland; and Amsterdam, the Netherlands. We also rely on AWS’s distributed computing infrastructure platform. The west coast of the United States contains active earthquake zones and the southeast is subject to seasonal hurricanes. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational support, hosted services and sales activities. In the event of a major earthquake, hurricane or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have an adverse effect on our operating results.
Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our applications and adversely affect our business.
Our customers can use our applications to collect, use and store personal or identifying information regarding their employees, customers and suppliers. National and local governments and agencies in the countries in which our customers operate have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage and disclosure of personal information obtained from consumers and individuals. These laws are particularly stringent in Europe. If Workday employees fail to adhere to adequate data protection practices around the usage of our customer’s personal data, it may damage our reputation and brand. In addition, the affected customers or government authorities could initiate legal or regulatory action against us in connection with such incidents, which could result in significant fines, penalties and liabilities.
The costs of compliance with, and other burdens imposed by, privacy laws and regulations that are applicable to the businesses of our customers may adversely affect our customers’ ability and willingness to process, handle, store, use and transmit demographic and personal information from their employees, customers and suppliers, which could limit the use, effectiveness and adoption of our applications and reduce overall demand. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption, effectiveness or use of our applications.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the processing of

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personal information were to be curtailed in this manner, our software applications would be less effective, which may reduce demand for our applications and adversely affect our business.
We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and operational controls or adequately address competitive challenges.
We have recently experienced, and are continuing to experience, a period of rapid growth in our customers, headcount and operations. In particular, we grew from approximately 300 employees as of December 31, 2008 to approximately 3,500 employees as of October 31, 2014, and have also significantly increased the size of our customer base. We anticipate that we will significantly expand our operations and headcount in the near term, and will continue to expand our customer base. This growth has placed, and future growth will place, a significant strain on our management, general and administrative and operational infrastructure. Our success will depend in part on our ability to manage this growth effectively and to scale our operations. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. As we continue to grow, we also need to ensure that we maintain our corporate culture; that our policies and procedures evolve to reflect our current operations and are appropriately communicated to and observed by employees; and that we appropriately manage our corporate information assets, including confidential and proprietary information. Failure to effectively manage growth could result in difficulty or delays in deploying customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.