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EX-32.1 - EXHIBIT 32.1 - Workday, Inc.wday-10312015xex321.htm
EX-32.2 - EXHIBIT 32.2 - Workday, Inc.wday-10312015xex322.htm
EX-31.2 - EXHIBIT 31.2 - Workday, Inc.wday-10312015xex312.htm
EX-31.1 - EXHIBIT 31.1 - Workday, Inc.wday-10312015xex311.htm

 
 
 
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, 2015
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, 2015, there were approximately 194 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,
2015
 
January 31,
2015
 (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
219,893

 
$
298,192

Marketable securities
1,676,454

 
1,559,517

Accounts receivable, net
170,851

 
188,357

Deferred costs
19,499

 
20,471

Prepaid expenses and other current assets
70,378

 
42,502

Total current assets
2,157,075

 
2,109,039

Property and equipment, net
195,004

 
140,136

Deferred costs, noncurrent
23,548

 
20,998

Goodwill and acquisition-related intangible assets, net
70,353

 
34,779

Other assets
65,173

 
53,681

Total assets
$
2,511,153

 
$
2,358,633

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,953

 
$
10,623

Accrued expenses and other current liabilities
45,995

 
24,132

Accrued compensation
63,834

 
56,152

Capital leases
80

 
3,207

Unearned revenue
624,819

 
547,151

Total current liabilities
751,681

 
641,265

Convertible senior notes, net
507,947

 
490,501

Unearned revenue, noncurrent
93,206

 
85,593

Other liabilities
32,792

 
15,299

Total liabilities
1,385,626

 
1,232,658

Stockholders’ equity:
 
 
 
Common stock
191

 
186

Additional paid-in capital
2,156,551

 
1,948,300

Accumulated other comprehensive income (loss)
(54
)
 
(140
)
Accumulated deficit
(1,031,161
)
 
(822,371
)
Total stockholders’ equity
1,125,527

 
1,125,975

Total liabilities and stockholders’ equity
$
2,511,153

 
$
2,358,633

 
(1) 
Amounts as of January 31, 2015 were derived from the January 31, 2015 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,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Subscription services
$
242,700

 
$
164,403

 
$
667,435

 
$
431,462

Professional services
62,566

 
50,667

 
171,484

 
130,125

Total revenues
305,266

 
215,070

 
838,919

 
561,587

Costs and expenses(1):
 
 
 
 
 
 
 
Costs of subscription services
39,791

 
27,426

 
106,860

 
73,258

Costs of professional services
61,963

 
44,363

 
164,887

 
121,590

Product development
124,020

 
85,270

 
338,700

 
227,905

Sales and marketing
111,658

 
80,681

 
312,983

 
227,371

General and administrative
38,008

 
28,796

 
106,707

 
76,781

Total costs and expenses
375,440

 
266,536

 
1,030,137

 
726,905

Operating loss
(70,174
)
 
(51,466
)
 
(191,218
)
 
(165,318
)
Other expense, net
(6,722
)
 
(8,047
)
 
(17,737
)
 
(21,999
)
Loss before provision for (benefit from) income taxes
(76,896
)
 
(59,513
)
 
(208,955
)
 
(187,317
)
Provision for (benefit from) income taxes
915

 
399

 
(165
)
 
1,199

Net loss
$
(77,811
)
 
$
(59,912
)
 
$
(208,790
)
 
$
(188,516
)
Net loss per share, basic and diluted
$
(0.41
)
 
$
(0.33
)
 
$
(1.10
)
 
$
(1.03
)
Weighted-average shares used to compute net loss per share, basic and diluted
190,727

 
184,310

 
189,185

 
182,770


(1)      Costs and expenses include share-based compensation expenses as follows:
 
 
 
 
Costs of subscription services
$
3,203


$
1,959


$
8,424


$
4,622

Costs of professional services
5,424


4,214


14,022


9,931

Product development
29,547


19,191


78,990


46,796

Sales and marketing
15,321


8,678


36,908


22,807

General and administrative
15,164


12,966


42,353


32,508


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,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(77,811
)
 
$
(59,912
)
 
$
(208,790
)
 
$
(188,516
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in foreign currency translation adjustment
(318
)
 
(201
)
 
(518
)
 
(177
)
Net change in unrealized gains (losses) on available-for-sale investments
(237
)
 
302

 
(574
)
 
(28
)
Net change in market value of effective foreign currency forward exchange contracts
181

 

 
1,178

 

Other comprehensive income (loss), net of tax
(374
)
 
101

 
86

 
(205
)
Comprehensive loss
$
(78,185
)
 
$
(59,811
)
 
$
(208,704
)
 
$
(188,721
)

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,
 
2015
 
2014
 
2015
 
2014
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(77,811
)
 
$
(59,912
)
 
$
(208,790
)
 
$
(188,516
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
22,260

 
15,682

 
60,717

 
42,679

Share-based compensation expenses
68,659

 
47,008

 
180,697

 
116,664

Amortization of deferred costs
5,389

 
5,740

 
17,749

 
14,113

Amortization of debt discount and issuance costs
6,422

 
6,083

 
19,008

 
18,005

Gain on sale of cost method investment

 

 
(3,220
)
 

Other
48

 
1,808

 
(1,334
)
 
2,654

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Accounts receivable
(14,727
)
 
(18,598
)
 
17,420

 
(27,052
)
Deferred costs
(8,744
)
 
(4,340
)
 
(19,327
)
 
(14,236
)
Prepaid expenses and other assets
(9,522
)
 
1,586

 
(24,998
)
 
(8,512
)
Accounts payable
(3,719
)
 
4,056

 
461

 
1,603

Accrued expense and other liabilities
32,172

 
15,271

 
41,270

 
1,760

Unearned revenue
34,719

 
26,658

 
85,063

 
94,566

Net cash provided by (used in) operating activities
55,146

 
41,042

 
164,716

 
53,728

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of marketable securities
(623,377
)
 
(454,219
)
 
(1,485,422
)
 
(1,490,404
)
Maturities of marketable securities
551,270

 
368,984

 
1,261,863

 
1,136,456

Sales of available-for-sale securities
69,187

 

 
98,711

 
8,138

Business combinations, net of cash acquired
(23,577
)
 

 
(31,538
)
 
(26,317
)
Purchases of property and equipment
(40,280
)
 
(27,699
)
 
(96,252
)
 
(65,981
)
Purchases of cost method investments
(700
)
 

 
(16,450
)
 
(10,000
)
Sale of cost method investment

 

 
3,538

 

Other

 

 

 
1,000

Net cash provided by (used in) investing activities
(67,477
)
 
(112,934
)
 
(265,550
)
 
(447,108
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from issuance of common stock from employee equity plans
2,360

 
2,615

 
25,096

 
20,780

Principal payments on capital lease obligations
(663
)
 
(1,123
)
 
(3,127
)
 
(8,285
)
Shares repurchased for tax withholdings on vesting of restricted stock

 

 

 
(8,291
)
Other
246

 
91

 
1,025

 
151

Net cash provided by (used in) financing activities
1,943

 
1,583

 
22,994

 
4,355

Effect of exchange rate changes
(297
)
 
(183
)
 
(459
)
 
(159
)
Net increase (decrease) in cash and cash equivalents
(10,685
)
 
(70,492
)
 
(78,299
)
 
(389,184
)
Cash and cash equivalents at the beginning of period
230,578

 
262,634

 
298,192

 
581,326

Cash and cash equivalents at the end of period
$
219,893

 
$
192,142

 
$
219,893

 
$
192,142

Supplemental cash flow data
 
 
 
 
 
 
 
Cash paid for interest
$
8

 
$
56

 
$
3,252

 
$
3,614

Cash paid for taxes
618

 
46

 
1,652

 
166

Non-cash investing and financing activities:
 
 
 
 
 
 
 
Vesting of early exercise stock options
$
472

 
$
472

 
$
1,416

 
$
1,416

Purchases of property and equipment, accrued but not paid
17,237

 
9,052

 
17,237

 
9,052


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 were originally incorporated in March 2005 in Nevada and in June 2012, we reincorporated in Delaware. As used in this report the terms "Workday," "registrant," "we," "us," and "our" mean Workday, Inc. and its subsidiaries unless the context indicates otherwise.
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, 2015 shown in this report are not necessarily indicative of results to be expected for the full year ending January 31, 2016. 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, 2015, filed on March 25, 2015. 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.
Certain prior year amounts related to cost method investments have been reclassified within Note 7 of the notes to the condensed consolidated financial statements. The reclassifications had no effect on total Other assets as previously reported.
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 condensed consolidated 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 commissions, 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 condensed 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, who is our chief executive officer, 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.
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, 2018. Early adoption is permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

7


In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. Early adoption is permitted. As of October 31, 2015, we have $7 million of net deferred financing costs that would be reclassified from a long-term asset to a reduction in the carrying amount of our debt.
Note 2. Marketable Securities
At October 31, 2015, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Aggregate
Fair Value
U.S. agency obligations
$
1,251,287

 
$
145

 
$
(161
)
 
$
1,251,271

U.S. treasury securities
215,780

 
37

 
(60
)
 
215,757

U.S. corporate securities
118,324

 
16

 
(41
)
 
118,299

Commercial paper
91,127

 

 

 
91,127

Money market funds
141,216

 

 

 
141,216

 
$
1,817,734

 
$
198

 
$
(262
)
 
$
1,817,670

Included in cash and cash equivalents
$
141,216

 
$

 
$

 
$
141,216

Included in marketable securities
$
1,676,518

 
$
198

 
$
(262
)
 
$
1,676,454

At January 31, 2015, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Aggregate
Fair Value
U.S. agency obligations
$
1,303,829

 
$
422

 
$
(16
)
 
$
1,304,235

U.S. treasury securities
180,559

 
91

 
(1
)
 
180,649

U.S. corporate securities
99,618

 
27

 
(13
)
 
99,632

Commercial paper
89,984

 

 

 
89,984

Money market funds
142,137

 

 

 
142,137

 
$
1,816,127

 
$
540

 
$
(30
)
 
$
1,816,637

Included in cash and cash equivalents
$
257,120

 
$

 
$

 
$
257,120

Included in marketable securities
$
1,559,007

 
$
540

 
$
(30
)
 
$
1,559,517

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, 2015. No marketable securities held as of October 31, 2015 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 greater than three months and the remainder of the securities is reflected in cash and cash equivalents. During the three and nine months ended October 31, 2015, we sold $69 million and $99 million, respectively, of our marketable securities and the realized gains from the sales are immaterial.

8


Note 3. Deferred Costs
Deferred costs consisted of the following (in thousands):
 
October 31,
2015
 
January 31,
2015
Current:
 
 
 
Deferred professional service costs
$
905

 
$
3,606

Deferred sales commissions
18,594

 
16,865

Total
$
19,499

 
$
20,471

Noncurrent:
 
 
 
Deferred professional service costs
$
581

 
$
1,254

Deferred sales commissions
22,967

 
19,744

Total
$
23,548

 
$
20,998

Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
October 31,
2015
 
January 31,
2015
Computers, equipment and software
$
201,408

 
$
139,569

Computers, equipment and software acquired under capital leases
25,019

 
34,112

Furniture and fixtures
19,023

 
13,082

Leasehold improvements
83,371

 
47,496

 
328,821

 
234,259

Less accumulated depreciation and amortization
(133,817
)
 
(94,123
)
Property and equipment, net
$
195,004

 
$
140,136

Depreciation expense totaled $18 million and $13 million for the three months ended October 31, 2015 and 2014, respectively, and $51 million and $33 million for the nine months ended October 31, 2015 and 2014, respectively.
These amounts include depreciation of assets recorded under capital leases of $0.5 million and $2 million for the three months ended October 31, 2015 and 2014, respectively, and $3 million and $7 million for the nine months ended October 31, 2015 and 2014, respectively.
Note 5. Business Combination
On August 28, 2015, we acquired a cloud-based educational video platform company for the purpose of integrating media management technology across 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 $24 million, net of cash acquired.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Cash
$
2,003

Developed technology
16,476

Deferred revenue
(218
)
Deferred tax liability
(4,414
)
Net liabilities assumed
(283
)
Net assets acquired
13,564

Goodwill
12,016

Total purchase consideration
$
25,580


9


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 the goodwill balance is not deductible for U.S. income tax purposes.
Note 6. Goodwill and Acquisition-related Intangible Assets, Net
Developed technology from acquisitions is typically amortized over a useful life of three to four years. The future estimated amortization related to the acquired developed technology is $1 million and $6 million for fiscal 2016 and 2017, respectively. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the last three months of the fiscal year.
Goodwill and acquisition-related intangible assets, net consisted of the following (in thousands):
 
October 31,
2015
 
January 31,
2015
Acquired developed technology
$
21,936

 
$
4,200

Customer relationship assets
338

 
338

 
22,274

 
4,538

Less accumulated amortization
(3,866
)
 
(2,071
)
Acquisition-related intangible assets, net
18,408

 
2,467

Goodwill
51,945

 
32,312

Goodwill and acquisition-related intangible assets, net
$
70,353

 
$
34,779

Note 7. Other Assets
Other assets consisted of the following (in thousands):
 
October 31,
2015
 
January 31,
2015
Cost method investments
$
29,042

 
$
12,910

Acquired land leasehold interest, net
9,807

 
9,886

Issuance costs of convertible senior notes, net
6,981

 
8,543

Technology patents, net
3,250

 
3,942

Other
16,093

 
18,400

Total
$
65,173

 
$
53,681

Amortization expense on our land leasehold interest and technology patents was $0.3 million for each of the three month periods ended October 31, 2015 and 2014 and $0.8 million for each of the nine month periods ended October 31, 2015 and 2014.
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.

10


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 independent reports that utilize quoted market prices for comparable instruments. We validate, on a sample basis, the derived prices provided by the independent pricing vendors 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): 
 
Fair Value Measurements as of
October 31, 2015
Description
Level 1
 
Level 2
 
Total
U.S. agency obligations
$

 
$
1,251,271

 
$
1,251,271

U.S. treasury securities
215,757

 

 
215,757

U.S. corporate securities

 
118,299

 
118,299

Commercial paper

 
91,127

 
91,127

Money market funds
141,216

 

 
141,216

 
$
356,973

 
$
1,460,697

 
$
1,817,670

Included in cash and cash equivalents
 
 
 
 
$
141,216

Included in marketable securities
 
 
 
 
$
1,676,454

 
Fair Value Measurements as of
January 31, 2015
Description
Level 1
 
Level 2
 
Total
U.S. agency obligations
$

 
$
1,304,235

 
$
1,304,235

U.S. treasury securities
180,649

 

 
180,649

U.S. corporate securities

 
99,632

 
99,632

Commercial paper

 
89,984

 
89,984

Money market funds
142,137

 

 
142,137

 
$
322,786

 
$
1,493,851

 
$
1,816,637

Included in cash and cash equivalents
 
 
 
 
$
257,120

Included in marketable securities
 
 
 
 
$
1,559,517

Financial Liabilities
The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows (in thousands):
 
October 31, 2015
 
January 31, 2015
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
0.75% Convertible senior notes
$
306,250

 
$
402,500

 
$
295,276

 
$
407,750

1.50% Convertible senior notes
201,697

 
298,281

 
195,225

 
299,063

The difference between the principal amount of the notes, $350 million for the 0.75% convertible senior notes and $250 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, 2015 and January 31, 2015.
Based on the closing price of our common stock of $78.97 on October 31, 2015, the if-converted value of the 0.75% convertible senior notes and the if-converted value of the 1.50% convertible senior notes was greater than their respective principal amounts.

11


Derivative Financial Instruments
We conduct business on a global basis in multiple foreign currencies, subjecting Workday to foreign currency risk. To mitigate this risk, we utilize hedging contracts as described below. We do not enter into any derivatives for trading or speculative purposes.
We are subject to master netting agreements with certain counterparties of the foreign exchange contracts, under which we are permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is our policy to present the derivatives gross in the condensed consolidated balance sheets. Our foreign currency forward contracts are not subject to any credit contingent features or collateral requirements and we do not believe we are subject to significant counterparty concentration risk given the short-term nature, volume, and size of the derivative contracts outstanding.
Cash flow hedges
We are exposed to foreign currency fluctuations resulting from customer contracts denominated in foreign currencies. We initiated a hedging program in the first quarter of the current fiscal year by entering into foreign currency forward contracts related to certain customer contracts. We designate these forward contracts as cash flow hedging instruments as the accounting criteria for such designation have been met. The effective portion of the gains or losses resulting from changes in the fair value of these hedges is recorded in Accumulated other comprehensive income (loss) on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item in the condensed consolidated statements of operations in the same period that the underlying revenues are earned. Interest charges on our forward contracts are excluded from the assessment of hedge effectiveness and are recorded as incurred in Other expense, net in the condensed consolidated statements of operations.
As of October 31, 2015, we had foreign currency forward contracts designed as cash flow hedges with a total notional value of $77 million which have maturities not greater than 15 months. The notional value represents the amount that will be bought or sold upon maturity of the forward contract. As of October 31, 2015, the fair value amount of the derivative assets of $2 million is included in Prepaid expenses and other current assets, and the fair value amount of the derivative liabilities of $0.3 million is included in Accrued expenses and other current liabilities on our condensed consolidated balance sheets.
We recognized an unrealized gain in Accumulated other comprehensive income (loss) for the effective portion of our derivative instruments of $0.2 million and $1 million for the three and nine months ended October 31, 2015, respectively. The realized gains reclassified from Accumulated other comprehensive income (loss) to the related revenue line item in the condensed consolidated statements of operations were immaterial for the three and nine months ended October 31, 2015.
During the three and nine months ended October 31, 2015, all cash flow hedges were considered effective.
Foreign currency forward contracts not designated as hedges
We also enter 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 recorded 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.
As of October 31, 2015 and January 31, 2015, we had outstanding forward contracts with total notional values of $14 million and $10 million, respectively. All contracts have terms of less than 60 days to maturity. The fair value amount of the derivative assets was $0.4 million and the fair value amount of the derivative liabilities was less than $0.1 million as of both October 31, 2015 and January 31, 2015. These assets and liabilities are included in Prepaid expenses and other current assets and in Accrued expenses and other current liabilities, respectively, on our condensed consolidated balance sheets.
We recognized net gains on derivative instruments not designated as hedging instruments of $0.3 million for each of the three and nine month periods ended October 31, 2015, and less than $0.1 million for each of the three and nine month periods ended October 31, 2014. Gains or losses on derivative instruments not designated as hedging instruments are recorded 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.

12


Note 9. Convertible Senior Notes, Net
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 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. 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 million (together with the 2018 Notes, referred to as Notes). The 2020 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 1.50% on January 15 and July 15 of each year. 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 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.

13


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 million and equity issuance costs of $2 million. Amortization expense for the liability issuance costs was $0.4 million for each of the three month periods ended October 31, 2015 and 2014, and $1 million for each of the nine month periods ended October 31, 2015 and 2014. For the 2020 Notes, we recorded liability issuance costs of $5 million and equity issuance costs of $2 million. Amortization expense for the liability issuance costs was $0.2 million for each of the three month periods ended October 31, 2015 and 2014, and $0.5 million for each of the nine month periods ended October 31, 2015 and 2014.
The Notes, net consisted of the following (in thousands):
 
October 31, 2015
 
January 31, 2015
 
2018 Notes
 
2020 Notes
 
2018 Notes
 
2020 Notes
Principal amounts:
 
 
 
 
 
 
 
 Principal
$
350,000

 
$
250,000

 
$
350,000

 
$
250,000

Unamortized debt discount(1)
(43,750
)
 
(48,303
)
 
(54,724
)
 
(54,775
)
 Net carrying amount
$
306,250

 
$
201,697

 
$
295,276

 
$
195,225

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 million and $2 million for the 2018 Notes and 2020 Notes, respectively, in equity issuance costs.
As of October 31, 2015, the remaining life of the 2018 Notes and 2020 Notes is approximately 32 months and 56 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,
 
2015
 
2014
 
2015
 
2014
 
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

 
$
1,969

 
$
2,813

Interest cost related to amortization of debt issuance costs
353

 
168

 
353

 
168

 
1,057

 
505

 
1,057

 
505

Interest cost related to amortization of the debt discount
3,710

 
2,191

 
3,503

 
2,059

 
10,974

 
6,472

 
10,362

 
6,081

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 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, 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 $144 million for the Purchased Options, which is included in Additional paid-in capital in the condensed consolidated balance sheets.

14


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 $93 million from the sale of the Warrants, which is recorded in Additional paid-in capital in the condensed consolidated balance sheets.
Note 10. Commitments and Contingencies
Leases
We have entered into non-cancelable operating lease agreements for certain of our offices and data centers in the U.S. and other countries with various expiration dates. Certain of our office leases are with an affiliate of our Chairman, David Duffield, who is also a significant stockholder (see Note 15). The operating 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. This includes payments for office and data center square footage, as well as data center power capacity for certain data centers. We recognize these expenses on a straight-line basis over the period in which we benefit from the lease and we have accrued for rent expense incurred but not paid. Total rent expense was $9 million and $6 million for the three months ended October 31, 2015 and 2014, respectively, and $23 million and $16 million for the nine months ended October 31, 2015 and 2014, respectively.
In January 2014, we entered into a 95-year lease for a 6.9-acre parcel of vacant land in Pleasanton, California, under which we paid $2 million for base rent from commencement through December 31, 2020. Annual rent payments of $0.2 million plus increases based on increases in the consumer price index begin on January 1, 2021 and continue through the end of the lease.
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, 2015, there were 112 million shares of Class A common stock and 80 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 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 (together with the EIP, the Stock Plans). Pursuant to the terms of the EIP, the share reserve increased by 9 million shares on March 25, 2015, and as of October 31, 2015, we had approximately 56 million shares of Class A common stock available for future grants.
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 16 and December 16 and exercisable on or about the succeeding December 15 and June 15, respectively, of each year. Pursuant to the terms of the ESPP, the share reserve increased by 2 million shares on March 25, 2015. On May 29, 2015, 0.2 million shares of Class A common shares were purchased under the ESPP at a weighted-average price of $67.08 per share, resulting in cash proceeds of $17 million. As of October 31, 2015, 5 million shares of Class A common stock were available for issuance under the ESPP.

15


Stock Options
The Stock Plans provide for the issuance of incentive and nonstatutory options to employees and non-employees. We have also issued nonstatutory options outside of the Stock Plans. Options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over five years. A summary of information related to stock option activity during the nine months ended October 31, 2015 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, 2015
16,663,557

 
$
4.06

 
$
1,256

Stock option grants

 

 
 
Stock options exercised
(2,617,865
)
 
3.27

 
 
Stock options canceled
(168,409
)
 
10.72

 
 
Balance as of October 31, 2015
13,877,283

 
$
4.13

 
$
1,039

Vested and expected to vest as of October 31, 2015
13,753,535

 
$
4.09

 
$
1,030

Exercisable as of October 31, 2015
12,054,196

 
$
3.49

 
$
910

As of October 31, 2015, there was a total of $22 million in unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately 1.5 years.
Common Stock Subject to Repurchase
The Stock 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. We had $3 million and $4 million recorded in liabilities related to early exercises of stock options as of October 31, 2015 and January 31, 2015, respectively.
Restricted Stock Units
The Stock Plans provide for the issuance of restricted stock units ("RSUs") to employees. RSUs generally vest over four years. A summary of information related to RSU activity during the nine months ended October 31, 2015 is as follows: 
 
Number of  Shares
 
Weighted-Average
Grant Date Fair Value
Balance as of January 31, 2015
6,409,132

 
$
76.93

RSUs granted
4,869,597

 
85.96

RSUs vested
(1,465,043
)
 
77.64

RSUs forfeited
(388,053
)
 
80.45

Balance as of October 31, 2015
9,425,633

 
$
81.34

As of October 31, 2015, there was a total of $648 million in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 3.0 years.
Restricted Stock Awards
The Stock Plans provide for the issuance of restricted stock awards to employees. Restricted stock awards generally vest over five years. Under the EIP, 0.6 million restricted awards of Class B common stock are outstanding with weighted average grant date fair value of $12.95, all of which are subject to forfeiture as of October 31, 2015. During the three months ended October 31, 2015, 0.2 million shares of restricted stock awards vested with weighted average grant date fair value of $12.73.
As of October 31, 2015, there was a total of $7 million in unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 2.1 years.

16


Performance-based Restricted Stock Units
As of October 31, 2015, there are 0.1 million shares of performance-based restricted stock units (PRSUs) outstanding which were granted to all employees other than executive management and include performance conditions related to company-wide goals and service conditions. We expect to grant additional shares related to this program for employees hired in fiscal 2016. These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2016 and if the individual employee continues to provide service through the vesting date of March 15, 2016.
As of October 31, 2015, there was a total of $6 million in unrecognized compensation cost related to these performance-based restricted stock units, which will be recognized over a weighted-average period of approximately 5 months.
Note 12. Other Expense, Net
Other expense, net consisted of the following (in thousands):
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2014
 
2015
 
2014
Interest income
$
1,126

 
$
737

 
$
3,079

 
$
2,101

Interest expense (1)
(8,001
)
 
(7,778
)
 
(23,838
)
 
(23,251
)
Gain from sale of cost method investment

 

 
3,220

 

Other income (expense)
153

 
(1,006
)
 
(198
)
 
(849
)
Other expense, net
$
(6,722
)
 
$
(8,047
)
 
$
(17,737
)
 
$
(21,999
)
(1) 
Interest expense includes the contractual interest expense related to the 2018 Notes and 2020 Notes and non-cash interest related to amortization of the debt discount and debt issuance costs (See Note 9).
Note 13. Income Taxes
We compute the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax income or loss and adjust for discrete tax items in the period. We reported a tax benefit of $0.2 million for the nine months ended October 31, 2015, and a tax provision of $1 million for the nine months ended October 31, 2014. The income tax benefit for the nine months ended October 31, 2015 consisted of:
$2.8 million provision primarily resulting from income tax expense in profitable foreign jurisdictions and U.S. income tax expense on estimated taxable income before considering the realization of excess tax benefits from stock-based compensation;
$3 million tax benefit from the release of an acquired uncertain tax position, including interest and penalties, due to the lapse of statute of limitations.
The tax expense of $1 million for the nine months ended October 31, 2014 was primarily attributable to the income tax expense in profitable foreign jurisdictions.
We are subject to income tax audits in the U.S. and foreign jurisdictions. We record liabilities related to uncertain tax positions. We believe that we have provided adequate reserves for income tax uncertainties in all open tax years. Due to our history of tax losses, all years remain open to tax audit.
We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. We determined that there continues to be a need for a full valuation allowance on our deferred tax assets as of October 31, 2015.
On December 1, 2015, the United States Tax Court issued its final decision with respect to Altera Corporation’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of share-based compensation expense in an inter-company cost-sharing arrangement with the taxpayer’s foreign subsidiary for fiscal years 2004 through 2007. In its decision, the Court accepted Altera’s position of excluding share-based compensation in its cost sharing arrangement and concluded that the related IRS Regulations were invalid. Although the final decision has been issued, it is subject to appeal by the IRS. The IRS has 90 days to decide whether to appeal. We currently estimate that this court case will not have a material impact to our effective tax rate and income tax expense due to our current full valuation allowance position. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.


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, including our outstanding stock options, outstanding warrants, common stock related to unvested early exercised stock options, common stock related to unvested restricted stock awards and convertible senior notes to the extent dilutive, and common stock issuable pursuant to the ESPP. 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,
 
2015
 
2014
 
2015
 
2014
 
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
$
(45,622
)
 
$
(32,189
)
 
$
(32,981
)
 
$
(26,931
)
 
$
(120,938
)
 
$
(87,852
)
 
$
(100,214
)
 
$
(88,302
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
111,826

 
78,901

 
101,462

 
82,848

 
109,582

 
79,603

 
97,159

 
85,611

Basic and diluted net loss per share
$
(0.41
)
 
$
(0.41
)
 
$
(0.33
)
 
$
(0.33
)
 
$
(1.10
)
 
$
(1.10
)
 
$
(1.03
)
 
$
(1.03
)
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,
 
2015
 
2014
Outstanding common stock options
13,877

 
17,754

Shares subject to repurchase
757

 
1,299

Unvested restricted stock awards, units, and PRSUs
10,136

 
7,378

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

Shares issuable pursuant to the ESPP
262

 
231

 
39,554

 
41,184


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 average term of the agreements is 10 years and the total rent due under the agreements is $6 million for the fiscal year ended January 31, 2016, and $67 million in total. Rent expense under these agreements was $1 million for each of the three month periods ended October 31, 2015 and 2014, and $4 million and $3 million for the nine months ended October 31, 2015 and 2014, respectively.

18


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,
 
2015
 
2014
 
2015
 
2014
United States
$
256,507

 
$
179,823

 
$
703,846

 
$
468,640

International
48,759

 
35,247

 
135,073

 
92,947

Total
$
305,266

 
$
215,070

 
$
838,919

 
$
561,587

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, 2015 and 2014. No customer individually accounted for more than 10% of our accounts receivable, net as of October 31, 2015 or January 31, 2015.


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.

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, our Time Tracking and Grants Management applications in 2012, Recruiting in 2014, and Insight Applications, Professional Services Automation and Inventory in 2015.
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 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 the significant growth of our employee population. We had approximately 4,900 and approximately 3,500 employees as of October 31, 2015 and 2014, 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 ability to sell our applications globally, particularly in Europe and Asia, through investments in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, adding new offices, and expanding our ecosystem of services partners to support local deployments. We expect to make further significant investments in our data center infrastructure as we plan for future 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 total 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. Over time, we expect professional services revenues and the cost of professional services as a percentage of total revenues will 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 80% of our total revenues during the three months ended October 31, 2015 and represented 97% of our total unearned revenue as of October 31, 2015. 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, and the price of our applications.
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 products or services 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 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 yet been invoiced represent backlog and are not reflected in our condensed consolidated financial statements.
The majority of our consulting engagements are 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 our applications and providing customer support, the costs of data center capacity, and depreciation of 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. 
Product development. Product development expenses consist primarily of employee-related costs. 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 costs, sales commissions, marketing programs and travel. 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 generally 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 costs 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, 2015 and 2014 were as follows: 
 
Three Months Ended 
 October 31,
 
 
 
Nine Months Ended 
 October 31,
 
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Subscription services
$
242,700

 
$
164,403

 
48%
 
$
667,435

 
$
431,462

 
55%
Professional services
62,566

 
50,667

 
23%
 
171,484

 
130,125

 
32%
Total revenues
$
305,266

 
$
215,070

 
42%
 
$
838,919

 
$
561,587

 
49%
Total revenues were $305 million for the three months ended October 31, 2015, compared to $215 million during the prior year period, an increase of $90 million, or 42%. Subscription services revenues were $243 million for the three months ended October 31, 2015, compared to $164 million for the prior year period, an increase of $79 million, or 48%. The increase in subscription services 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 $63 million for the three months ended October 31, 2015, compared to $51 million for the prior year period, an increase of $12 million, or 23%. 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 $839 million for the nine months ended October 31, 2015, compared to $562 million during the prior year period, an increase of $277 million, or 49%. Subscription services revenues were $667 million for the nine months ended October 31, 2015, compared to $431 million for the prior year period, an increase of $236 million, or 55%. The increase in subscription services 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 $171 million for the nine months ended October 31, 2015, compared to $130 million for the prior year period, an increase of $41 million, or 32%. 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.
Core Operating Expenses
We use 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. We believe that core operating expenses reflects 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. We also believe 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 we focus 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 expenses, and certain other expenses, which consist of employer payroll tax-related items 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, 2015
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands, except percentages)
Costs of subscription services
$
36,524

 
$
3,203

 
$
64

 
$
39,791

Costs of professional services
56,432

 
5,424

 
107

 
61,963

Product development
92,879

 
29,547

 
1,594

 
124,020

Sales and marketing
96,141

 
15,321

 
196

 
111,658

General and administrative
22,448

 
15,164

 
396

 
38,008

Total costs and expenses
$
304,424

 
$
68,659

 
$
2,357

 
$
375,440

Operating income (loss)
$
842

 
$
(68,659
)
 
$
(2,357
)
 
$
(70,174
)
Operating margin
0.3
%
 
(22.5
)%
 
(0.8
)%
 
(23.0
)%
 
 
Three Months Ended October 31, 2014
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands, except percentages)
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
(1.4
)%
 
(21.9
)%
 
(0.6
)%
 
(23.9
)%
 
Nine Months Ended October 31, 2015
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands, except percentages)
Costs of subscription services
$
98,110

 
$
8,424

 
$
326

 
$
106,860

Costs of professional services
150,234

 
14,022

 
631

 
164,887

Product development
254,735

 
78,990

 
4,975

 
338,700

Sales and marketing
274,921

 
36,908

 
1,154

 
312,983

General and administrative
62,855

 
42,353

 
1,499

 
106,707

Total costs and expenses
$
840,855

 
$
180,697

 
$
8,585

 
$
1,030,137

Operating loss
$
(1,936
)
 
$
(180,697
)
 
$
(8,585
)
 
$
(191,218
)
Operating margin
(0.2
)%
 
(21.6
)%
 
(1.0
)%
 
(22.8
)%

24


 
Nine Months Ended October 31, 2014
 
Core
Operating
Expenses(1)
 
Share-Based
Compensation
Expenses
 
Other
Operating
Expenses
 
Total
Operating
Expenses
 
(in thousands, except percentages)
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
(7.9
)%
 
(20.8
)%
 
(0.7
)%
 
(29.4
)%
(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 (1.4)% for the three months ended October 31, 2014 to 0.3% for the three months ended October 31, 2015, and from (7.9)% for the nine months ended October 31, 2014 to (0.2)% for the nine months ended October 31, 2015. The improvements in our core operating margins in the three and nine months ended October 31, 2015 were primarily due to higher subscription services revenues, higher professional services revenues and improvements in 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 tables above.
Core operating expenses increased by $86 million, or 40% and $235 million, or 39% for the three and nine months ended October 31, 2015, respectively, 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 $37 million for the three months ended October 31, 2015, compared to $25 million for the prior year period, an increase of $12 million, or 48%. The increase was primarily due to increases of $3 million in employee-related costs driven by higher headcount, $3 million in depreciation expense related to our data centers, $3 million in service contracts expense to expand data center capacity and $1 million in facilities and IT expenses.
Core operating expenses in costs of subscription services were $98 million for the nine months ended October 31, 2015, compared to $69 million for the prior year period, an increase of $29 million, or 42%. The increase was primarily due to increases of $9 million in employee-related costs driven by higher headcount, $8 million in depreciation expense related to our data centers, $5 million in facilities and IT expenses and $5 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 $56 million for the three months ended October 31, 2015, compared to $40 million for the prior year period, an increase of $16 million, or 40%. This increase was primarily due to increases of $12 million to staff our deployment and integration engagements and $3 million related to our annual partner conference which was held during the three months ended October 31, 2015. The prior year annual partner conference was held during the three months ended July 31, 2014.
Core operating expenses in costs of professional services were $150 million for the nine months ended October 31, 2015, compared to $111 million for the prior year period, an increase of $39 million, or 35%. This increase was primarily due to increases of $27 million to staff our deployment and integration engagements, $4 million in facility and IT-related expenses and $1 million related to our annual partner conference.

25


Over time, we expect costs of professional services as a percentage of total revenues to continue to decline as we increasingly rely on third parties to deploy our applications and as the number of our customers continues to grow. For fiscal 2016, we continue to expect professional services margins to be lower than fiscal 2015 as we invest in building our partnership ecosystem in new market segments and geographies.
Product development
Core operating expenses in product development were $93 million for the three months ended October 31, 2015, compared to $65 million for the prior year period, an increase of $28 million, or 43%. The increase was primarily due to increases of $19 million in employee-related costs driven by higher headcount and $5 million in facility and IT-related expenses.
Core operating expenses in product development were $255 million for the nine months ended October 31, 2015, compared to $179 million for the prior year period, an increase of $76 million, or 42%. The increase was primarily due to increases of $53 million in employee-related costs driven by higher headcount and $14 million in facility and IT-related expenses.
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 $96 million for the three months ended October 31, 2015, compared to $72 million for the prior year period, an increase of $24 million, or 33%. The increase was primarily due to increases of $15 million in employee-related costs driven by higher headcount and higher commissionable sales volume, $3 million in advertising, marketing and event costs, $3 million in facility and IT-related expenses and $2 million in travel expenses.
Core operating expenses in sales and marketing were $275 million for the nine months ended October 31, 2015, compared to $204 million for the prior year period, an increase of $71 million, or 35%. The increase was primarily due to increases of $41 million in employee-related costs driven by higher headcount and higher commissionable sales volume, $13 million in advertising, marketing and event costs, $8 million in facility and IT-related expenses and $5 million in travel 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 $22 million for the three months ended October 31, 2015, compared to $16 million for the prior year period, an increase of $6 million, or 38%. The increase was primarily due to $3 million in higher employee-related costs driven by higher headcount and $3 million in higher professional fees.
Core operating expenses in general and administrative were $63 million for the nine months ended October 31, 2015, compared to the $44 million for the prior year period, an increase of $19 million, or 43%. The increase was primarily due to $9 million in higher employee-related costs driven by higher headcount and $7 million in higher professional fees.
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 $69 million and $181 million for the three and nine months ended October 31, 2015, respectively, compared to $47 million and $117 million for the prior year periods, respectively. The increases in share-based compensation expenses were primarily due to grants of RSUs to existing and new employees during the nine months ended October 31, 2015. During the three and nine months ended October 31, 2015, the realized excess tax benefits related to share-based compensation were immaterial.
Other Operating Expenses
Other operating expenses include employer payroll tax-related items on employee stock transactions of $1 million and $7 million for the three and nine months ended October 31, 2015, respectively, and $1 million and $3 million for the three and nine months ended October 31, 2014, respectively. In addition, other operating expenses included amortization of acquisition-related intangible assets of $1 million and $2 million for the three and nine months ended October 31, 2015, respectively, and $0.3 and $0.8 million for the three and nine months ended October 31, 2014, respectively.    

26


Other Expense, Net
Other expense, net, decreased $1 million for the three months ended October 31, 2015 and $4 million for the nine months ended October 31, 2015 as compared to the respective prior year periods. The decrease for the nine months ended October 31, 2015 is primarily due to the gain on sale of a cost method investment in the second quarter of the current fiscal year of $3 million. The contractual cash interest expense related to the 2018 and 2020 Notes was $2 million and $5 million for the three and nine months ended October 31, 2015, respectively, as well as the three and nine months ended October 31, 2014, respectively. The non-cash interest expense related to amortization of the debt discount and amortization of debt issuance costs with respect to the 2018 and 2020 Notes was $6 million and $19 million for the three and nine months ended October 31, 2015, respectively, and $6 million and $18 million for the three and nine months ended October 31, 2014, respectively.
Liquidity and Capital Resources
As of October 31, 2015, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1.9 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, the possible construction on the leased land in Pleasanton, California and acquisition activities. We may enter into arrangements to acquire or invest in complementary businesses, services, technologies or intellectual property rights in the future. We also may choose to seek additional equity or debt financing.
Our cash flows for the three and nine months ended October 31, 2015 and 2014 were as follows:
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Net cash provided by (used in):
 
 
 
 
 
 
 
Operating activities
$
55,146

 
$
41,042

 
$
164,716

 
$
53,728

Investing activities
(67,477
)
 
(112,934
)
 
(265,550
)
 
(447,108
)
Financing activities
1,943

 
1,583

 
22,994

 
4,355

Effect of exchange rate changes
(297
)
 
(183
)
 
(459
)
 
(159
)
Net increase (decrease) in cash and cash equivalents
$
(10,685
)
 
$
(70,492
)
 
$
(78,299
)
 
$
(389,184
)
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.
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Net cash provided by (used in) operating activities
$
55,146

 
$
41,042

 
$
164,716

 
$
53,728

Purchases of property and equipment
(40,280
)
 
(27,699
)
 
(96,252
)
 
(65,981
)
Free cash flows
$
14,866

 
$
13,343

 
$
68,464

 
$
(12,253
)
 
 
 
 
 
 
 
 
 
Trailing Twelve Months Ended
October 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
(in thousands)
 
 
 
 
Net cash provided by (used in) operating activities
$
212,991

 
$
88,521

 
 
 
 
Purchases of property and equipment
(133,917
)
 
(78,322
)
 
 
 
 
Purchases of other intangible assets

 
(15,000
)
 
 
 
 
Free cash flows
$
79,074

 
$
(4,801
)
 
 
 
 

27


Operating Activities
We use net cash provided by (used in) operating activities as a key financial metric. Cash provided by operating activities was $55 million and $41 million for the three months ended October 31, 2015 and 2014, respectively. The improvement in cash flow provided by operating activities was primarily due to increased cash collections driven by growth in our customer sales contracts, partially offset by increases in our headcount and other operational expenses.
Net cash provided by operating activities was $165 million and $54 million for the nine months ended October 31, 2015 and 2014, respectively. The improvement in cash flow was primarily due to increased cash collections driven by growth in our customer sales contracts, 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, 2015 was $67 million, which was primarily the result of the timing of purchases and maturities of marketable securities, capital expenditures of $40 million, and a net cash outflow of $24 million related to an acquisition. These payments were partially offset by proceeds of $69 million from the sale of available-for-sale securities. We expect capital expenditures will be approximately $150 million for the year ending January 31, 2016. 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, California in 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, 2014 was $113 million, which was primarily the result of the timing of purchases and maturities of marketable securities and capital expenditures of $28 million.
Cash used in investing activities for the nine months ended October 31, 2015 was $266 million, which was primarily the result of the timing of purchases and maturities of marketable securities, capital expenditures of $96 million, a net cash outflow of $32 million related to acquisitions, and purchases of cost method investments of $16 million. These payments were partially offset by proceeds of $99 million from the sale of available-for-sale securities, and proceeds of $4 million from the sale of a cost method investment.
Cash used in investing activities for the nine months ended October 31, 2014 was $447 million, which was primarily the result of the timing of purchases and maturities of marketable securities, capital expenditures of $66 million, a net cash outflow of $26 million related to an acquisition, and a purchase of a cost method investment of $10 million. These payments were partially offset by proceeds of $8 million from the sale of available-for-sale securities.
Financing Activities
For the three months ended October 31, 2015, cash provided by financing activities was $2 million, which was primarily due to proceeds from the issuance of common stock from employee equity plans.
For the three months ended October 31, 2014, cash provided by financing activities was $2 million, which was primarily due to $3 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $1 million in principal payments on our capital lease obligations.
For the nine months ended October 31, 2015, cash provided by financing activities was $23 million, which was primarily due to $25 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $3 million in principal payments on our capital lease obligations.
For the nine months ended October 31, 2014, cash provided by financing activities was $4 million, which was primarily due to $21 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $8 million of Class A common share repurchases for tax withholdings on vesting of restricted stock and $8 million in principal payments on our capital lease obligations.
Free Cash Flows
In addition to net cash provided by (used in) operating activities, management uses free cash flows as a key financial metric. Free cash flows improved by $2 million to $15 million for the three months ended October 31, 2015, compared to $13 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 $80 million to $68 million for the nine months ended October 31, 2015, compared to $(12) 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.

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Non-GAAP Financial Measures
Regulation S-K Item 10(e), “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 expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. For restricted stock unit awards, the amount of share-based compensation expenses is not reflective of the value ultimately received by the grant recipients. Moreover, determining the fair value of certain of the share-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related share-based awards. Unlike cash compensation, the value of stock options and shares offered under the ESPP, which are elements of our ongoing share-based compensation expenses, is determined using a complex formula that incorporates factors, such as market volatility and forfeiture rates, that are beyond our control.
Other Operating Expenses. Other operating expenses include employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of 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. We use 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 paid for or acquired under capital leases, so that we can evaluate our progress on free cash flows independent of our capital financing decisions. We believe 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 tax-related items, 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. We encourage 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.

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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, 2015 and 2014.
See “Liquidity and Capital Resources” for a reconciliation of free cash flows to the most comparable GAAP measure, “Net cash provided by (used in) operating activities,” for the three and nine months ended October 31, 2015 and 2014.
Commitments
Our principal commitments primarily consist of obligations under leases for office space and co-location facilities for data center capacity as well as computer equipment. As of October 31, 2015, the future non-cancelable minimum payments under operating leases were $231 million. During the remainder of the year ended January 31, 2016, we ant