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EX-32.2 - EXHIBIT 32.2 - Workday, Inc.wday-07312017xex322.htm
EX-32.1 - EXHIBIT 32.1 - Workday, Inc.wday-07312017xex321.htm
EX-31.2 - EXHIBIT 31.2 - Workday, Inc.wday-07312017xex312.htm
EX-31.1 - EXHIBIT 31.1 - Workday, Inc.wday-07312017xex311.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 July 31, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth 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
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 July 31, 2017, there were approximately 208 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)
 
July 31, 2017
 
January 31, 2017
 
 
*As Adjusted
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
748,599

 
$
539,923

Marketable securities
1,349,191

 
1,456,822

Trade and other receivables, net
370,557

 
409,780

Deferred costs
54,015

 
51,330

Prepaid expenses and other current assets
63,862

 
66,590

Total current assets
2,586,224

 
2,524,445

Property and equipment, net
438,754

 
365,877

Deferred costs, noncurrent
117,736

 
117,249

Acquisition-related intangible assets, net
39,110

 
48,787

Goodwill
158,540

 
158,354

Other assets
66,763

 
53,570

Total assets
$
3,407,127

 
$
3,268,282

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
39,948

 
$
26,824

Accrued expenses and other current liabilities
80,410

 
61,582

Accrued compensation
105,229

 
110,625

Unearned revenue
1,118,565

 
1,086,212

Current portion of convertible senior notes, net
332,422

 

Total current liabilities
1,676,574

 
1,285,243

Convertible senior notes, net
216,038

 
534,423

Unearned revenue, noncurrent
104,178

 
135,331

Other liabilities
39,940

 
36,677

Total liabilities
2,036,730

 
1,991,674

Stockholders’ equity:
 
 
 
Common stock
208

 
202

Additional paid-in capital
2,945,596

 
2,681,200

Accumulated other comprehensive income (loss)
(22,197
)
 
2,071

Accumulated deficit
(1,553,210
)
 
(1,406,865
)
Total stockholders’ equity
1,370,397

 
1,276,608

Total liabilities and stockholders’ equity
$
3,407,127

 
$
3,268,282

*
See Note 2 for a summary of adjustments.

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 July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
*As Adjusted
 
 
*As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription services
$
434,527

 
$
306,070

 
$
834,263

 
$
586,238

Professional services
90,793

 
67,587

 
170,918

 
135,096

Total revenues
525,320

 
373,657

 
1,005,181

 
721,334

Costs and expenses (1):
 
 
 
 
 
 
 
Costs of subscription services
65,931

 
51,379

 
125,729

 
100,579

Costs of professional services
92,264

 
66,473

 
169,177

 
125,900

Product development
221,103

 
161,886

 
417,542

 
303,664

Sales and marketing
171,952

 
134,899

 
327,661

 
262,518

General and administrative
55,699

 
45,705

 
106,901

 
86,888

Total costs and expenses
606,949

 
460,342

 
1,147,010

 
879,549

Operating loss
(81,629
)
 
(86,685
)
 
(141,829
)
 
(158,215
)
Other income (expense), net
938

 
(21,193
)
 
(725
)
 
(27,031
)
Loss before provision for (benefit from) income taxes
(80,691
)
 
(107,878
)
 
(142,554
)
 
(185,246
)
Provision for (benefit from) income taxes
1,841

 
(65
)
 
4,022

 
1,070

Net loss
$
(82,532
)
 
$
(107,813
)
 
$
(146,576
)
 
$
(186,316
)
Net loss per share, basic and diluted
$
(0.40
)
 
$
(0.55
)
 
$
(0.71
)
 
$
(0.95
)
Weighted-average shares used to compute net loss per share, basic and diluted
207,028

 
197,223

 
205,453

 
195,887


(1)      Costs and expenses include share-based compensation expenses as follows:
 
 
 
 
Costs of subscription services
$
6,580

 
$
4,968

 
$
12,271

 
$
9,365

Costs of professional services
9,301

 
5,969

 
17,322

 
11,262

Product development
56,923

 
38,314

 
107,952

 
71,282

Sales and marketing
25,942

 
20,844

 
49,101

 
39,846

General and administrative
22,777

 
18,127

 
42,665

 
34,702

*
See Note 2 for a summary of adjustments.

See Notes to Condensed Consolidated Financial Statements
4



Workday, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
*As Adjusted
 
 
*As Adjusted
Net loss
$
(82,532
)
 
$
(107,813
)
 
$
(146,576
)
 
$
(186,316
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in foreign currency translation adjustment
1,243

 
(248
)
 
966

 
433

Net change in unrealized gains (losses) on available-for-sale investments
146

 
382

 
(629
)
 
934

Net change in market value of effective foreign currency forward exchange contracts
(23,396
)
 
6,310

 
(24,605
)
 
(4,754
)
Other comprehensive income (loss), net of tax
(22,007
)
 
6,444

 
(24,268
)
 
(3,387
)
Comprehensive loss
$
(104,539
)
 
$
(101,369
)
 
$
(170,844
)
 
$
(189,703
)
*
See Note 2 for a summary of adjustments.

See Notes to Condensed Consolidated Financial Statements
5



Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
*As Adjusted
 
 
*As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(82,532
)
 
$
(107,813
)
 
$
(146,576
)
 
$
(186,316
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
34,021

 
26,662

 
67,398

 
52,786

Share-based compensation expenses
121,523

 
88,222

 
229,311

 
166,457

Amortization of deferred costs
14,009

 
10,917

 
27,646

 
21,356

Amortization of debt discount and issuance costs
6,785

 
6,690

 
13,735

 
13,289

Gain on sale of cost method investment
(526
)
 
(65
)
 
(526
)
 
(65
)
Impairment of cost method investment

 
15,000

 

 
15,000

Other
1,933

 
1,918

 
4,611

 
1,600

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Trade and other receivables, net
(71,422
)
 
(52,337
)
 
40,393

 
45,982

Deferred costs
(19,437
)
 
(19,541
)
 
(30,818
)
 
(28,767
)
Prepaid expenses and other assets
(8,968
)
 
(10,070
)
 
(12,018
)
 
(7,682
)
Accounts payable
10,778

 
1,542

 
10,213

 
(180
)
Accrued expenses and other liabilities
(13,472
)
 
(6,517
)
 
(9,383
)
 
(972
)
Unearned revenue
22,434

 
51,914

 
1,162

 
76,851

Net cash provided by (used in) operating activities
15,126

 
6,522

 
195,148

 
169,339

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of marketable securities
(285,197
)
 
(557,180
)
 
(898,448
)
 
(1,191,136
)
Maturities of marketable securities
371,471

 
539,315

 
813,341

 
1,164,903

Sales of available-for-sale securities
180,863

 
28,652

 
189,937

 
28,852

Business combinations, net of cash acquired

 
(3,670
)
 

 
(3,670
)
Owned real estate projects
(22,996
)
 
(6,788
)
 
(52,535
)
 
(25,774
)
Capital expenditures, excluding owned real estate projects
(38,528
)
 
(26,539
)
 
(69,121
)
 
(61,017
)
Purchases of cost method investments
(5,000
)
 
(200
)
 
(5,450
)
 
(300
)
Sale and maturities of cost method investments
732

 
315

 
732

 
315

Other

 
(684
)
 

 
(296
)
Net cash provided by (used in) investing activities
201,345

 
(26,779
)
 
(21,544
)
 
(88,123
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from issuance of common stock from employee equity plans
32,274

 
25,395

 
34,527

 
28,776

Other
(32
)
 
195

 
(76
)
 
571

Net cash provided by (used in) financing activities
32,242

 
25,590

 
34,451

 
29,347

Effect of exchange rate changes
715

 
(144
)
 
583

 
494

Net increase (decrease) in cash, cash equivalents and restricted cash
249,428

 
5,189

 
208,638

 
111,057

Cash, cash equivalents and restricted cash at the beginning of period
501,104

 
405,955

 
541,894

 
300,087

Cash, cash equivalents and restricted cash at the end of period
$
750,532

 
$
411,144

 
$
750,532

 
$
411,144

*    See Note 2 for a summary of adjustments.



See Notes to Condensed Consolidated Financial Statements
6



 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Supplemental cash flow data
 
 
 
 
 
 
 
Cash paid for interest, net of amounts capitalized
$
46

 
$
2,652

 
$
46

 
$
2,656

Cash paid for income taxes
1,262

 
3,566

 
2,608

 
4,147

Non-cash investing and financing activities:
 
 
 
 
 
 
 
Vesting of early exercise stock options
$
282

 
$
460

 
$
564

 
$
920

Property and equipment, accrued but not paid
33,219

 
11,426

 
33,219

 
11,426

Non-cash additions to property and equipment
485

 
394

 
627

 
915

 
July 31, 2017
 
July 31, 2016
 
 
*As Adjusted
Reconciliation of cash, cash equivalents and restricted cash as shown in the statement of cash flows
 
 
 
Cash and cash equivalents
$
748,599

 
$
405,529

Restricted cash included in Other assets
1,933

 
1,615

Restricted cash included in Property and equipment, net

 
4,000

Total cash, cash equivalents and restricted cash
$
750,532

 
$
411,144


See Notes to Condensed Consolidated Financial Statements
7



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 quarter ended July 31, 2017 shown in this report are not necessarily indicative of results to be expected for the full year ending January 31, 2018. 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, 2017, filed with the SEC on March 20, 2017.
Effective February 1, 2017, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the "as adjusted" footnote.
Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to current period presentation.
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 period of benefit for 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 where 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.

8


Note 2. Accounting Standards and Significant Accounting Policies
Recently Adopted Accounting Pronouncements
ASU No. 2014-09
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("Topic 605"), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to Topic 606 and Subtopic 340-40 as the "new standard."
We early adopted the requirements of the new standard as of February 1, 2017, utilizing the full retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, trade and other receivables, and deferred commissions as detailed below. We applied the new standard using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts. Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract, which was generally three years or longer. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-line basis over a period of benefit that we have determined to be five years or the related contractual renewal period, depending on whether the contract is an initial or renewal contract, respectively.
ASU No. 2016-09
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, and classification in the statement of cash flows. As of February 1, 2017, we adopted the applicable provisions of ASU No. 2016-09 as follows:
The guidance requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense in the statement of operations when the awards vest or are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statement of cash flows. We adopted the guidance prospectively effective February 1, 2017. Amounts previously recorded to Additional paid-in capital related to windfall tax benefits prior to February 1, 2017 remain in Stockholders' equity.
The guidance eliminates the requirement that excess tax benefits must be realized (through a reduction in income taxes payable) before companies can recognize them. We have applied the modified retrospective transition method upon adoption. The previously unrecognized excess tax effects were recorded as a deferred tax asset in the amount of $448.0 million, of which $447.8 million was fully offset by a valuation allowance, and the remaining $0.2 million resulted in a cumulative-effect adjustment to Accumulated deficit as of February 1, 2017.
ASU No. 2016-18
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230), which requires that a statement of cash flows explain the change during the period for the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for our fiscal year beginning February 1, 2018. We early adopted ASU No. 2016-18 retrospectively, effective February 1, 2017. As a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the condensed consolidated statement of cash flows, net cash flows for the three and six months ended July 31, 2016 increased by $4 million and $6 million, respectively.

9


We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASU No. 2014-09 and ASU No. 2016-18. Select condensed consolidated balance sheet line items, which reflect the adoption of the new ASU's are as follows (in thousands):
 
January 31, 2017
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Assets
 
 
 
 
 
 
 
Trade and other receivables, net
$
383,908

 
$
25,872

 
a
 
$
409,780

Prepaid expenses and other current assets
88,336

 
(21,746
)
 
a
 
66,590

Deferred costs
27,537

 
23,793

 
a
 
51,330

Deferred costs, noncurrent
43,310

 
73,939

 
a
 
117,249

Liabilities
 
 
 
 
 
 
 
Unearned revenue
$
1,097,417

 
$
(11,205
)
 
a
 
$
1,086,212

Unearned revenue, noncurrent
135,970

 
(639
)
 
a
 
135,331

Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of the new ASUs are as follows (in thousands, except per share data):
 
Three Months Ended July 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription services
$
306,228

 
$
(158
)
 
a
 
$
306,070

Professional services
71,495

 
(3,908
)
 
a
 
67,587

Total revenues
377,723

 
(4,066
)
 
a
 
373,657

Costs and expenses:
 
 


 
 
 
 
Sales and marketing
139,177

 
(4,278
)
 
a
 
134,899

Operating loss
(86,897
)
 
212

 
a
 
(86,685
)
Net loss
$
(108,025
)
 
$
212

 
a
 
$
(107,813
)
Net loss per share, basic and diluted
$
(0.55
)
 
$

 
a
 
$
(0.55
)
 
Six Months Ended July 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription services
$
586,231

 
$
7

 
a
 
$
586,238

Professional services
136,922

 
(1,826
)
 
a
 
135,096

Total revenues
723,153

 
(1,819
)
 
a
 
721,334

Costs and expenses:
 
 
 
 
 
 
 
Sales and marketing
266,668

 
(4,150
)
 
a
 
262,518

Operating loss
(160,546
)
 
2,331

 
a
 
(158,215
)
Net loss
$
(188,647
)
 
$
2,331

 
a
 
$
(186,316
)
Net loss per share, basic and diluted
$
(0.96
)
 
$
0.01

 
a
 
$
(0.95
)

10


Select unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of the new ASUs are as follows (in thousands):
 
Three Months Ended July 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(108,025
)
 
$
212

 
a
 
$
(107,813
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Amortization of deferred costs
6,140

 
4,777

 
a
 
10,917

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade and other receivables, net
(55,992
)
 
3,655

 
a
 
(52,337
)
Deferred costs
(10,486
)
 
(9,055
)
 
a
 
(19,541
)
Prepaid expenses and other assets
(11,902
)
 
1,832

 
a, b
 
(10,070
)
Unearned revenue
53,071

 
(1,157
)
 
a
 
51,914

Net cash provided by (used in) operating activities
6,258

 
264

 
b
 
6,522

Change in restricted cash
(4,000
)
 
4,000

 
b
 

Net cash provided by (used in) investing activities
(30,779
)
 
4,000

 
b
 
(26,779
)
Net increase (decrease) in cash and cash equivalents
925

 
4,264

 
b
 
5,189

Cash, cash equivalents and restricted cash at the beginning of period
404,604

 
1,351

 
b
 
405,955

Cash, cash equivalents and restricted cash at the end of period
$
405,529

 
$
5,615

 
b
 
$
411,144

 
Six Months Ended July 31, 2016
 
As Previously Reported
 
Adjustments
 
 
 
As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net loss
$
(188,647
)
 
$
2,331

 
a
 
$
(186,316
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Amortization of deferred costs
12,013

 
9,343

 
a
 
21,356

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Trade and other receivables, net
45,055

 
927

 
a
 
45,982

Deferred costs
(15,274
)
 
(13,493
)
 
a
 
(28,767
)
Prepaid expenses and other assets
(12,678
)
 
4,996

 
a, b
 
(7,682
)
Unearned revenue
79,340

 
(2,489
)
 
a
 
76,851

Net cash provided by (used in) operating activities
167,724

 
1,615

 
b
 
169,339

Change in restricted cash
(4,000
)
 
4,000

 
b
 

Net cash provided by (used in) investing activities
(92,123
)
 
4,000

 
b
 
(88,123
)
Net increase (decrease) in cash and cash equivalents
105,442

 
5,615

 
b
 
111,057

Cash, cash equivalents and restricted cash at the end of period
$
405,529

 
$
5,615

 
b
 
$
411,144

a
Adjusted to reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.
b
Adjusted to reflect the adoption of ASU No. 2016-18, Statement of Cash Flows, Restricted Cash.
Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition, trade and other receivables, and deferred commissions that were updated as a result of adopting ASU No. 2014-09, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 31, 2017, filed with the SEC on March 20, 2017, that have had a material impact on our condensed consolidated financial statements and related notes.

11


Revenue Recognition
We derive our revenues primarily from subscription services and professional services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Subscription Services Revenues
Subscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, and analytics, with routine customer support. Revenue is generally recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts are generally three years or longer in length, billed annually in advance, and non-cancelable.
Professional Services Revenues
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majority of our consulting contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.
Contracts with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within our contracts.
Trade and Other Receivables
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, which is not material. Other receivables represent unbilled receivables related to subscription and professional services contracts.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in Sales and marketing expenses in the accompanying condensed consolidated statements of operations.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC Topic 840 Leases. The guidance is effective for our fiscal year beginning February 1, 2019. Early adoption is permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior to the issuance of this ASU, existing guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. The guidance is effective for our fiscal year beginning February 1, 2018. Early adoption is permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

12


In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance is effective for our fiscal year beginning February 1, 2019. Early adoption is permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
Note 3. Marketable Securities
At July 31, 2017, marketable securities consisted of the following (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
U.S. agency obligations
$
979,868

 
$
2

 
$
(995
)
 
$
978,875

U.S. treasury securities
295,492

 
3

 
(140
)
 
295,355

Corporate bonds
222,987

 
8

 
(227
)
 
222,768

Commercial paper
418,897

 

 

 
418,897

Money market funds
81,669

 

 

 
81,669

 
$
1,998,913

 
$
13

 
$
(1,362
)
 
$
1,997,564

Included in cash and cash equivalents
$
648,374

 
$

 
$
(1
)
 
$
648,373

Included in marketable securities
$
1,350,539

 
$
13

 
$
(1,361
)
 
$
1,349,191

At January 31, 2017, marketable securities consisted of the following (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
U.S. agency obligations
$
908,874

 
$
179

 
$
(535
)
 
$
908,518

U.S. treasury securities
192,028

 
48

 
(25
)
 
192,051

Corporate bonds
290,272

 
42

 
(429
)
 
289,885

Commercial paper
323,106

 

 

 
323,106

Money market funds
24,425

 

 

 
24,425

 
$
1,738,705

 
$
269

 
$
(989
)
 
$
1,737,985

Included in cash and cash equivalents
$
281,163

 
$

 
$

 
$
281,163

Included in marketable securities
$
1,457,542

 
$
269

 
$
(989
)
 
$
1,456,822

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 July 31, 2017. The unrealized losses on marketable securities which have been in a net loss position for 12 months or greater were not material as of July 31, 2017. 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 consider all marketable securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities 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 are reflected in cash and cash equivalents. We sold $181 million and $29 million of our marketable securities during the three months ended July 31, 2017 and 2016, respectively, and $190 million and $29 million of our marketable securities during the six months ended July 31, 2017 and 2016, respectively. The realized gains from the sales are immaterial.
Note 4.    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 — Other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs that are supported by little or no market activity.

13


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of July 31, 2017 (in thousands):
Description
Level 1
 
Level 2
 
Level 3
 
Total
U.S. agency obligations
$

 
$
978,875

 
$

 
$
978,875

U.S. treasury securities
295,355

 

 

 
295,355

Corporate bonds

 
222,768

 

 
222,768

Commercial paper

 
418,897

 

 
418,897

Money market funds
81,669

 

 

 
81,669

Foreign currency derivative assets

 
257

 

 
257

Total assets
$
377,024

 
$
1,620,797

 
$

 
$
1,997,821

Foreign currency derivative liabilities
$

 
$
23,610

 
$

 
$
23,610

Total liabilities
$

 
$
23,610

 
$

 
$
23,610

The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of January 31, 2017 (in thousands):
Description
Level 1
 
Level 2
 
Level 3
 
Total
U.S. agency obligations
$

 
$
908,518

 
$

 
$
908,518

U.S. treasury securities
192,051

 

 

 
192,051

Corporate bonds

 
289,885

 

 
289,885

Commercial paper

 
323,106

 

 
323,106

Money market funds
24,425

 

 

 
24,425

Foreign currency derivative assets

 
7,909

 

 
7,909

Total assets
$
216,476

 
$
1,529,418

 
$

 
$
1,745,894

Foreign currency derivative liabilities
$

 
$
2,127

 
$

 
$
2,127

Total liabilities
$

 
$
2,127

 
$

 
$
2,127

Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value in the condensed consolidated balance sheets (in thousands): 
 
July 31, 2017
 
January 31, 2017
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value
0.75% Convertible senior notes
$
333,768

 
$
435,750

 
$
325,620

 
$
402,259

1.50% Convertible senior notes
218,030

 
347,513

 
213,180

 
310,470

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 net carrying amount before unamortized debt issuance costs represents the unamortized debt discount (see Note 10). 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 the last trading day of each reporting period.
Based on the closing price of our common stock of $102.11 on July 31, 2017, the if-converted value of the 0.75% convertible senior notes and the if-converted value of the 1.50% convertible senior notes were greater than their respective principal amounts.

14


Note 5. Deferred Costs
Deferred costs, which primarily consist of deferred sales commissions, were $172 million and $169 million as of July 31, 2017 and January 31, 2017, respectively. Amortization expense for the deferred costs was $14 million and $11 million for the three months ended July 31, 2017 and 2016, respectively, and $28 million and $21 million for the six months ended July 31, 2017 and 2016, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.
Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
July 31, 2017
 
January 31, 2017
Land
$
6,592

 
$
6,592

Buildings
174,262

 
115,302

Computers, equipment and software
362,979

 
323,311

Computers, equipment and software acquired under capital leases
14,639

 
18,298

Furniture and fixtures
28,376

 
24,462

Leasehold improvements
118,207

 
108,673

Property and equipment, gross (1)
705,055

 
596,638

Less accumulated depreciation and amortization
(266,301
)
 
(230,761
)
Property and equipment, net
$
438,754

 
$
365,877

(1)  
Property and equipment, gross includes construction-in-progress for owned real estate projects of $147 million and $115 million that has not yet been placed in service as of July 31, 2017 and January 31, 2017, respectively.
Depreciation expense totaled $28 million and $22 million for the three months ended July 31, 2017 and 2016, respectively, and $55 million and $44 million for the six months ended July 31, 2017 and 2016, respectively. Interest costs capitalized to property and equipment totaled $2 million and $0.4 million for the three months ended July 31, 2017 and 2016, respectively, and $3 million and $0.6 million for the six months ended July 31, 2017 and 2016, respectively.
Note 7. Acquisition-related Intangible Assets, Net
Acquisition-related intangible assets, net consisted of the following (in thousands):
 
July 31, 2017
 
January 31, 2017
Acquired developed technology
$
64,900

 
$
64,900

Customer relationship assets
1,000

 
1,000

 
65,900

 
65,900

Less accumulated amortization
(26,790
)
 
(17,113
)
Acquisition-related intangible assets, net
$
39,110

 
$
48,787

Amortization expense related to acquired developed technology and customer relationship assets was $5 million and $1 million for the three months ended July 31, 2017 and 2016, respectively, and $10 million and $3 million for the six months ended July 31, 2017 and 2016, respectively.
As of July 31, 2017, our future estimated amortization expense related to acquired developed technology and customer relationship assets is as follows (in thousands):
Fiscal Period:
 
2018
$
9,609

2019
18,904

2020
10,281

2021
316

Total
$
39,110


15


Note 8. Other Assets
Other assets consisted of the following (in thousands):
 
July 31, 2017
 
January 31, 2017
Cost method investments
$
19,248

 
$
14,004

Acquired land leasehold interest, net
9,623

 
9,676

Deposits
4,081

 
3,488

Net deferred tax assets
3,753

 
4,336

Other
30,058

 
22,066

Total
$
66,763

 
$
53,570

Our cost method investments include investments in private companies in which we do not have the ability to exert significant influence. The investments are tested for impairment at least annually, and more frequently upon the occurrence of certain events.
Note 9. Derivative Instruments
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.
Our foreign currency contracts are classified within Level 2 of the fair value hierarchy 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.
Cash Flow Hedges
We are exposed to foreign currency fluctuations resulting from customer contracts denominated in foreign currencies. We have a hedging program in which we enter 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) ("OCI") on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the condensed consolidated statements of operations in the same period that the underlying revenues are earned. The changes in value of these contracts resulting from changes in forward points are excluded from the assessment of hedge effectiveness and are recorded as incurred in Other income (expense), net on the condensed consolidated statements of operations. Cash flows from such forward contracts are classified as operating activities.
As of July 31, 2017 and January 31, 2017, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $404 million and $252 million, respectively. All contracts have maturities not greater than 25 months. The notional value represents the amount that will be bought or sold upon maturity of the forward contract.
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 income (expense), net on the 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. Cash flows from such forward contracts are classified as operating activities.
As of July 31, 2017 and January 31, 2017, we had outstanding forward contracts with total notional values of $55 million and $51 million, respectively.

16


The fair values of outstanding derivative instruments were as follows (in thousands):
 
 
Condensed Consolidated Balance Sheets Location
 
July 31, 2017
 
January 31, 2017
Derivative Assets:
 
 
 
 
 
 
Foreign currency forward contracts designated as cash flow hedges
 
Prepaid expenses and other current assets and Other assets
 
$
167

 
$
7,149

Foreign currency forward contracts not designated as hedges
 
Prepaid expenses and other current assets
 
90

 
760

Derivative Liabilities:
 
 
 
 
 
 
Foreign currency forward contracts designated as cash flow hedges
 
Accrued expenses and other current liabilities and Other liabilities
 
$
21,925

 
$
1,605

Foreign currency forward contracts not designated as hedges
 
Accrued expenses and other current liabilities
 
1,685

 
522

Gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):
 
 
Condensed Consolidated Statement of Operations and Statement of Comprehensive Loss Locations
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
 
2017
 
2016
 
2017
 
2016
Gains (losses) recognized in OCI (effective portion) (1)
 
Net change in market value of effective foreign currency forward exchange contracts
 
$
(22,923
)
 
$
6,453

 
$
(23,898
)
 
$
(4,501
)
Gains (losses) reclassified from OCI into income (effective portion)
 
Revenues
 
473

 
143

 
707

 
253

Gains (losses) recognized in income (amount excluded from effectiveness testing and ineffective portion)
 
Other income (expense), net
 
767

 
165

 
1,390

 
316

(1) 
Of the total effective portion of foreign currency forward contracts designated as cash flow hedges as of July 31, 2017, net losses of $2 million are expected to be reclassified out of OCI within the next 12 months.
Gains (losses) associated with foreign currency forward contracts not designated as cash flow hedges were as follows (in thousands):
 
 
Condensed Consolidated Statement of Operations Location
 
Three Months Ended July 31,
 
Six Months Ended July 31,
Derivative Type
 
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts not designated as hedges
 
Other income (expense), net
 
$
(2,619
)
 
$
1,098

 
$
(2,625
)
 
$
(541
)
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.

17


As of July 31, 2017, information related to these offsetting arrangements was as follows (in thousands):
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
Net Assets Exposed
 
 
 
 
 
Financial Instruments
 
Cash Collateral Received
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty A
 
$
11

 
$

 
$
11

 
$
(11
)
 
$

 
$

Counterparty B
 
244

 

 
244

 
(244
)
 

 

Counterparty C
 
2

 

 
2

 
(2
)
 

 

Total
 
$
257

 
$

 
$
257

 
$
(257
)
 
$

 
$

 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
Net Liabilities Exposed
 
 
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty A
 
$
3,804

 
$

 
$
3,804

 
$
(11
)
 
$

 
$
3,793

Counterparty B
 
17,283

 

 
17,283

 
(244
)
 

 
17,039

Counterparty C
 
2,486

 

 
2,486

 
(2
)
 

 
2,484

Counterparty D
 
37

 

 
37

 

 

 
37

Total
 
$
23,610

 
$

 
$
23,610

 
$
(257
)
 
$

 
$
23,353

Note 10. 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 "the 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.

18


Holders of the 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:
if the last reported sale price of Class A common stock for at least 20 trading days during a period of 30 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 were 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 on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes. The equity components are not remeasured as long as they continue to meet the conditions for equity classification.
We allocated the total issuance costs incurred to the Notes on a prorated basis using the aggregate principal balances. In accounting for the issuance costs related to the 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 on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes. 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 and $0.7 million for each of the three and six month periods ended July 31, 2017 and 2016, respectively. 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 and $0.3 million for each of the three and six month periods ended July 31, 2017 and 2016, respectively.
The Notes, net consisted of the following (in thousands):
 
July 31, 2017
 
January 31, 2017
 
2018 Notes
 
2020 Notes
 
2018 Notes
 
2020 Notes
Principal amounts:
 
 
 
 
 
 
 
    Principal
$
350,000

 
$
250,000

 
$
350,000

 
$
250,000

    Unamortized debt discount
(16,232
)
 
(31,970
)
 
(24,380
)
 
(36,820
)
Net carrying amount before unamortized debt issuance costs
333,768

 
218,030

 
325,620

 
213,180

    Unamortized debt issuance costs
(1,346
)
 
(1,992
)
 
(2,050
)
 
(2,327
)
Net carrying amount
$
332,422

 
$
216,038

 
$
323,570

 
$
210,853

Carrying amount of the equity component (1)
$
74,892

 
$
66,007

 
$
74,892

 
$
66,007

(1) 
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 July 31, 2017, the 2018 Notes have a remaining life of approximately 11 months and are classified as current on the condensed consolidated balance sheet. The 2020 Notes have a remaining life of 35 months and are classified as non-current on the condensed consolidated balance sheet.

19


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 Notes (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
2018
Notes
 
2020
Notes
 
2018
Notes
 
2020
Notes
 
2018
Notes
 
2020
Notes
 
2018
Notes
 
2020
Notes
Contractual interest expense
$
657

 
$
937

 
$
657

 
$
937

 
$
1,313

 
$
1,875

 
$
1,313

 
$
1,875

Interest cost related to amortization of debt issuance costs
352

 
167

 
352

 
170

 
704

 
335

 
704

 
337

Interest cost related to amortization of the debt discount
4,104

 
2,444

 
3,873

 
2,295

 
8,148

 
4,850

 
7,692

 
4,556

We capitalized interest costs related to the Notes of $2 million and $0.4 million for the three months ended July 31, 2017 and 2016, respectively, and $3 million and $0.6 million for the six months ended July 31, 2017 and 2016, respectively.
Notes Hedges
In connection with the issuance of the 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, respectively, subject to anti-dilution adjustments substantially similar to those in the Notes. The Purchased Options will expire in 2018 for the 2018 Notes and in 2020 for the 2020 Notes, if not earlier exercised. The Purchased Options are intended to offset potential economic dilution to our Class A common stock upon any conversion of the Notes. The Purchased Options are separate transactions and are not part of the terms of the Notes.
We paid an aggregate amount of $144 million for the Purchased Options, which is included in Additional paid-in capital in the condensed consolidated balance sheets.
Warrants
In connection with the issuance of the Notes, we also entered into warrant transactions to sell warrants ("the Warrants") to acquire, subject to anti-dilution adjustments, up to approximately 4.2 million shares in July 2018 and 3.1 million shares in July 2020 of our Class A common stock at an exercise price of $107.96 per share. If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of our Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants will have a dilutive effect on our earnings per share assuming that we are profitable. The Warrants are separate transactions, and are not part of the terms of the Notes or the Purchased Options.
We received aggregate proceeds of $93 million from the sale of the Warrants, which is recorded in Additional paid-in capital in the condensed consolidated balance sheets.
Note 11. Commitments and Contingencies
Facility and Computing Infrastructure-related Commitments
We have entered into non-cancelable agreements for certain of our offices and data centers 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 17). Our 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 generally 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 $20 million and $17 million for the three months ended July 31, 2017 and 2016, respectively, and $39 million and $34 million for the six months ended July 31, 2017 and 2016, 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.
Additionally, we have entered into a non-cancelable agreement with a computing infrastructure vendor that expires on October 31, 2024.

20


Legal Matters
We are a party to various legal proceedings and claims which arise in the ordinary course of business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, as of July 31, 2017, 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 12. Common Stock and Stockholders’ Equity
Common Stock
As of July 31, 2017, there were 134 million shares of Class A common stock and 74 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 10 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 10 million shares in March 2017, and as of July 31, 2017, we had approximately 62 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 1 and December 1 and exercisable on or about the succeeding November 30 and May 31, respectively, of each year. Pursuant to the terms of the ESPP, the share reserve increased by 2 million shares in March 2017. As of July 31, 2017, 7 million shares of Class A common stock were available for issuance under the ESPP.
Stock Options
The Stock Plans provide for the issuance of incentive and nonstatutory options to employees and non-employees. 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 six months ended July 31, 2017 is as follows:
 
Outstanding
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (in millions)
Balance as of January 31, 2017
9,096,592

 
$
4.34

 
$
716

Stock options granted

 

 
 
Stock options exercised
(1,587,000
)
 
4.60

 
 
Stock options canceled
(7,975
)
 
7.95

 
 
Balance as of July 31, 2017
7,501,617

 
$
4.28

 
$
734

Vested and expected to vest as of July 31, 2017
7,501,012

 
$
4.28

 
$
734

Exercisable as of July 31, 2017
7,485,406

 
$
4.25

 
$
732

As of July 31, 2017, there was a total of $1 million in unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately five months.

21


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 six months ended July 31, 2017 is as follows: 
 
Number of  Shares
 
Weighted-Average
Grant Date Fair Value
Balance as of January 31, 2017
11,502,721

 
$
78.45

RSUs granted
6,240,657

 
85.03

RSUs vested
(3,194,939
)
 
77.38

RSUs forfeited
(582,767
)
 
76.77

Balance as of July 31, 2017
13,965,672

 
$
81.71

As of July 31, 2017, there was a total of $1.0 billion in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately three years.
Performance-based Restricted Stock Units
During fiscal 2017, 0.3 million shares of performance-based restricted stock units ("PRSUs") were granted to all employees other than executive management and included both service conditions and performance conditions related to company-wide goals . These performance conditions were met and the PRSUs vested on March 15, 2017. During the six months ended July 31, 2017, we recognized $6 million in compensation cost related to these PRSUs.
Additionally, during the second quarter of fiscal 2018, 0.3 million shares of PRSUs were granted to all employees other than executive management and included both service conditions and performance conditions related to company-wide goals. We expect to grant additional shares related to this program for employees hired in fiscal 2018. These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2018 and if the individual employee continues to provide service through the vesting date of March 15, 2018. During the three and six months ended July 31, 2017, we recognized $6 million in compensation cost related to these PRSUs, and there is a total of $28 million in unrecognized compensation cost which is expected to be recognized over a weighted-average period of approximately seven months.
Note 13. Unearned Revenue and Performance Obligations
$398 million and $282 million of subscription services revenue was recognized during the three months ended July 31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. $759 million and $533 million of subscription services revenue was recognized during the six months ended July 31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. Professional services revenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods was not material.
Transaction Price Allocated to the Remaining Performance Obligations
As of July 31, 2017, approximately $4.4 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately two thirds of these remaining performance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of July 31, 2017 was not material.

22


Note 14. Other Income (Expense), Net
Other income (expense), net consisted of the following (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Interest income
$
5,051

 
$
2,897

 
$
9,080

 
$
5,111

Interest expense (1)
(6,840
)
 
(7,914
)
 
(13,826
)
 
(15,945
)
Gain from sale of cost method investment
526

 
65

 
526

 
65

Impairment of cost method investment

 
(15,000
)
 

 
(15,000
)
Other income (expense)
2,201

 
(1,241
)
 
3,495

 
(1,262
)
Other income (expense), net
$
938

 
$
(21,193
)
 
$
(725
)
 
$
(27,031
)
(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, net of capitalized interest costs (see Note 10).
Note 15. 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 expense of $4 million and $1 million for the six months ended July 31, 2017 and 2016, respectively. The income tax provision for the six months ended July 31, 2017 was primarily attributable to state taxes and income tax expense in profitable foreign jurisdictions. The income tax provision for the six months ended July 31, 2016 was primarily attributable to $2 million state taxes and income tax expenses in profitable foreign jurisdictions, partially offset by a $1 million benefit from the release of valuation allowances related to certain acquired intangible assets from a business acquisition.
We are subject to income tax audits in the U.S. and foreign jurisdictions. We record liabilities related to uncertain tax positions and 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. As of July 31, 2017, we continue to maintain a full valuation allowance on our deferred tax assets except for certain jurisdictions.
Note 16. 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 units and 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.

23


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 July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
* As Adjusted
 
 
* As Adjusted
 
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
$
(52,997
)
 
$
(29,535
)
 
$
(65,950
)
 
$
(41,863
)
 
$
(93,625
)
 
$
(52,951
)
 
$
(113,315
)
 
$
(73,001
)
Denominator: