WORKDAY INC. 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 in Part I, Item 1 of this Quarterly Report on Form 10-Q. Overview Founded in 2005, Workday delivers financial management, human capital management, planning, and analytics applications designed for the world's largest companies, educational institutions, and government agencies. We help organizations better manage their financial and human capital resources with one system that helps enable them to plan, execute, analyze, and extend - all powered by machine learning. Our diverse customer base includes medium and large, global companies, as well as smaller organizations that primarily use our planning product. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our HCM application in 2006 and our Financial Management application in 2007. Since then we have continued to invest in innovation and have consistently introduced new services to our customers. We have achieved significant growth in a relatively short period of time with a substantial amount of our growth coming 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. We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with contract terms of three years or longer and with subscription fees largely based on the size of the customer's workforce. We generally recognize revenue from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription services revenue from subscriptions to our HCM application. We market our applications primarily through our direct sales force. 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 12,400 and 11,000 employees as ofApril 30, 2020 , and 2019, respectively. 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. 27 -------------------------------------------------------------------------------- Table of Conten t s We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our product 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 inEurope andAsia , by investing in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, acquiring, building and/or leasing additional office space, and expanding our ecosystem of service partners to support local deployments. We expect to make further significant investments in our data center capacity as we plan for future growth. We are also investing in personnel to service our growing customer base. We also regularly evaluate acquisitions and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings. We expect to continue making such acquisitions and investments in the future, and we plan to reinvest a significant portion of our incremental revenues in future periods to grow our business and continue our leadership role in the industry. While we remain focused on improving operating margins, these acquisitions and 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 could make it difficult to determine if we are allocating our resources efficiently. Since inception, we have also 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 service 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. Due to our ability to leverage the expanding partner ecosystem, we expect that the rate of professional services revenue growth will decline over time and continue to be lower than subscription revenue growth. Impact of the COVID-19 Pandemic InDecember 2019 , a novel strain of coronavirus disease ("COVID-19") was reported and inMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic ("COVID-19 pandemic"). This pandemic is having widespread, rapidly evolving, and unpredictable impacts on global societies, economies, financial markets, and business practices. We have temporarily closed the majority of our global offices, required most of our employees to work remotely, implemented travel restrictions, and shifted certain of our customer, industry, analyst, investor, and employee events to virtual-only experiences. These precautionary measures that have been adopted, particularly if extended for prolonged periods, could have increasingly negative effects on our customer success efforts, sales and marketing efforts, and revenue growth rates or other financial metrics, or create operational or other challenges, any of which could harm our business, operating results, and financial condition. Going forward, the extent to which the COVID-19 pandemic will impact our business is highly uncertain, but in the near to intermediate term, we may experience an increase in delayed purchasing decisions from prospective customers, reduced customer demand, reduced customer spend, and delayed payments. Because our near-term revenues are relatively predictable as a result of our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our operating results and financial condition until future periods. For example, beginning inMarch 2020 , we began experiencing and continue to experience unfavorable impacts to our new subscription bookings. Due to the seasonality of the software subscription industry, we sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year, with the first quarter generating a smaller percentage of our annual new business. If the economic uncertainty remains for a prolonged period, we may experience a greater impact on our business from the COVID-19 pandemic. Despite the economic challenges brought on by the COVID-19 pandemic, we are committed to the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy. Our software applications support business critical processes of customers. As many customers have also transitioned their employees to work-from-home arrangements, we believe this transition promotes the long-term shift of human resources and financial applications to the cloud. For further discussion of the potential impacts of the COVID-19 pandemic on our business, operating results, and financial condition, see Risk Factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q. 28 -------------------------------------------------------------------------------- Table of Conten t s Components of Results of Operations Revenues We primarily derive our revenues from subscription services and professional services. Subscription services revenue primarily consists of fees that give our customers access to our cloud applications, which include related customer support. Professional services revenue includes fees for deployment services, optimization services, and training. Subscription services revenue accounted for 87% of our total revenues during the three months endedApril 30, 2020 , and represented 97% of our total unearned revenue as ofApril 30, 2020 . Subscription services revenue is driven primarily by the number of customers, the number of workers at each customer, the specific 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. Pricing for our applications varies based on many factors, including the complexity and maturity of the application and its acceptance in the marketplace. New products or services offerings by competitors in the future could also impact the mix and pricing of our offerings. Subscription services revenue is recognized over time as services are delivered and consumed concurrently over the contractual term, beginning on the date our service is made available to the customer. Our subscription contracts typically have a term of three years or longer and are generally non-cancelable. We generally invoice our customers annually in advance. Amounts that have been invoiced are initially recorded as unearned revenue. Our consulting engagements are generally billed on a time and materials basis or fixed price basis. For contracts billed on a time and materials basis, revenue is recognized over time as the professional services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of the professional services performed. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As our professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect these partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenue, we expect our professional services revenue as a percentage of total revenues to decline over time. Costs and Expenses Costs of subscription services revenue. Costs of subscription services revenue consists 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 revenue. Costs of professional services revenue consists primarily of employee-related expenses associated with these services, the costs of subcontractors, and travel expenses. 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 expenses. Marketing programs consist of advertising, events, corporate communications, brand building, and product marketing activities. Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized. 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. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. General and administrative. General and administrative expenses consist of employee-related costs for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses. 29 -------------------------------------------------------------------------------- Table of Conten t s Results of Operations Revenues Our total revenues for the three months endedApril 30, 2020 , and 2019, were as follows (in thousands, except percentages): Three Months Ended April 30, 2020 2019 % Change Subscription services$ 881,956 $ 701,024 26 % Professional services 136,429 124,031 10 % Total revenues$ 1,018,385 $ 825,055 23 % Total revenues were$1.0 billion for the three months endedApril 30, 2020 , compared to$825 million during the prior year period, an increase of$193 million , or 23%. Subscription services revenue was$882 million for the three months endedApril 30, 2020 , compared to$701 million for the prior year period, an increase of$181 million , or 26%. The increase in subscription services revenue was due primarily to an increased number of customer contracts as compared to the prior year period. Professional services revenue was$136 million for the three months endedApril 30, 2020 , compared to$124 million for the prior year period, an increase of$12 million , or 10%. The increase in professional services revenue was due primarily to Workday performing deployment and integration services for a greater number of customers than in the prior year period. Operating Expenses GAAP operating expenses were$1.2 billion for the three months endedApril 30, 2020 , compared to$948 million for the prior year period, an increase of$214 million , or 23%. The increase was primarily due to increases of$123 million in employee-related costs driven by higher headcount and$79 million related to a one-time cash bonus paid to all of our non-executive employees to help accommodate unforeseen costs and needs brought on by the COVID-19 pandemic. We use the non-GAAP financial measure of non-GAAP 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. We believe that non-GAAP operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. We also believe that non-GAAP operating expenses provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Non-GAAP operating expenses are calculated by excluding 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. Non-GAAP operating expenses were$888 million for the three months endedApril 30, 2020 , compared to$717 million for the prior year period, an increase of$171 million , or 24%. The increase was primarily due to increases of$79 million related to a one-time cash bonus paid to all of our non-executive employees to help accommodate unforeseen costs and needs brought on by the COVID-19 pandemic and$76 million in employee-related costs driven by higher headcount. Reconciliations of our GAAP to non-GAAP operating expenses were as follows (in thousands):
Three Months Ended
Share-Based
GAAP Operating Compensation Other Operating Non-GAAP Operating
Expenses Expenses (1) Expenses (2) Expenses (3)
Costs of subscription services $ 145,263 $ (13,892) $ (9,643) $ 121,728
Costs of professional services 160,367 (22,566) (3,101) 134,700
Product development 443,484 (122,022) (12,150) 309,312
Sales and marketing 318,557 (46,950) (10,576) 261,031
General and administrative 95,171 (31,242) (2,781) 61,148
Total costs and expenses $ 1,162,842 $ (236,672) $ (38,251) $ 887,919
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Table of Conten t s
Three Months Ended
Share-Based
GAAP Operating Compensation Other Operating Non-GAAP Operating
Expenses Expenses (1) Expenses (2) Expenses (3)
Costs of subscription services $ 112,469 $ (10,415) $ (12,660) $ 89,394
Costs of professional services 130,750 (16,150) (3,459) 111,141
Product development 347,831 (91,237) (13,631) 242,963
Sales and marketing 272,936 (38,854) (12,834) 221,248
General and administrative 84,455 (28,579) (3,298) 52,578
Total costs and expenses $ 948,441 $ (185,235) $ (45,882) $ 717,324
(1)Share-based compensation expenses were $237 million and $185 million for the
three months ended April 30, 2020 , and 2019, respectively. The increase in
share-based compensation expenses includes the impact of restricted stock units
("RSUs") granted to existing and new employees.
(2)Other operating expenses include employer payroll tax-related items on
employee stock transactions of $22 million and $27 million for the three months
ended April 30, 2020 , and 2019, respectively. In addition, other operating
expenses include amortization of acquisition-related intangible assets of $16
million and $19 million for the three months ended April 30, 2020 , and 2019,
respectively.
(3)See "Non-GAAP Financial Measures" below for further information.
Costs of Subscription Services
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in costs of subscription services were $145 million for
the three months ended April 30, 2020 , compared to $112 million for the prior
year period, an increase of $33 million , or 29%. The increase was primarily due
to increases of $9 million in employee-related costs driven by higher headcount,
$6 million in third-party costs for hardware maintenance and data center
capacity, $5 million related to the one-time employee cash bonus in light of the
COVID-19 pandemic, and $5 million in depreciation expense related to equipment
in our data centers.
Non-GAAP operating expenses in costs of subscription services were $122 million
for the three months ended April 30, 2020 , compared to $89 million for the prior
year period, an increase of $33 million , or 36%. The increase was primarily due
to increases of $6 million in employee-related costs driven by higher headcount,
$6 million in third-party costs for hardware maintenance and data center
capacity, $5 million related to the one-time employee cash bonus in light of the
COVID-19 pandemic, and $5 million in depreciation expense related to equipment
in our data centers.
We expect that GAAP and non-GAAP 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
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in costs of professional services were $160 million for
the three months ended April 30, 2020 , compared to $131 million for the prior
year period, an increase of $29 million , or 23%. The increase was primarily due
to increases of $23 million to staff our deployment and integration engagements
and $12 million related to the one-time employee cash bonus in light of the
COVID-19 pandemic.
Non-GAAP operating expenses in costs of professional services were $135 million
for the three months ended April 30, 2020 , compared to $111 million for the
prior year period, an increase of $24 million , or 21%. The increase was
primarily due to increases of $17 million to staff our deployment and
integration engagements and $12 million related to the one-time employee cash
bonus in light of the COVID-19 pandemic.
Going forward, we expect GAAP and non-GAAP costs of professional services as a
percentage of total revenues to continue to decline as we continue to rely on
our service partners to deploy our applications and as the number of our
customers continues to grow. For fiscal 2021, we anticipate GAAP and non-GAAP
professional services margins to be lower than fiscal 2020, as we invest in
programs to ensure ongoing customer success.
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Table of Conten t s
Product Development
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in product development were $443 million for the three
months ended April 30, 2020 , compared to $348 million for the prior year period,
an increase of $95 million , or 27%. The increase was primarily due to increases
of $58 million in employee-related costs driven by higher headcount and
$31 million related to the one-time employee cash bonus in light of the COVID-19
pandemic.
Non-GAAP operating expenses in product development were $309 million for the
three months ended April 30, 2020 , compared to $243 million for the prior year
period, an increase of $66 million , or 27%. The increase was primarily due to
increases of $31 million related to the one-time employee cash bonus in light of
the COVID-19 pandemic and $29 million in employee-related costs driven by higher
headcount.
We expect that GAAP and non-GAAP product development expenses will continue to
increase in absolute dollars as we improve and extend our applications and
develop new technologies.
Sales and Marketing
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in sales and marketing were $319 million for the three
months ended April 30, 2020 , compared to $273 million for the prior year period,
an increase of $46 million , or 17%. The increase was primarily due to increases
of $27 million in employee-related costs driven by higher headcount and higher
commissionable sales volume and $25 million related to the one-time employee
cash bonus in light of the COVID-19 pandemic, partially offset by a decrease of
$10 million resulting from reduced travel.
Non-GAAP operating expenses in sales and marketing were $261 million for the
three months ended April 30, 2020 , compared to $221 million for the prior year
period, an increase of $40 million , or 18%. The increase was primarily due to
increases of $25 million related to the one-time employee cash bonus in light of
the COVID-19 pandemic and $20 million in employee-related costs driven by higher
headcount and higher commissionable sales volume, partially offset by a decrease
of $10 million resulting from reduced travel.
We expect that GAAP and non-GAAP sales and marketing expenses will increase in
absolute dollars as we continue to invest in our domestic and international
selling and marketing activities to expand brand awareness and attract new
customers.
General and Administrative
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in general and administrative were $95 million for the
three months ended April 30, 2020 , compared to $84 million for the prior year
period, an increase of $11 million , or 13%. The increase was primarily due to
increases of $7 million in employee-related costs driven by higher headcount and
$6 million related to the one-time employee cash bonus in light of the COVID-19
pandemic.
Non-GAAP operating expenses in general and administrative were $61 million for
the three months ended April 30, 2020 , compared to $53 million for the prior
year period, an increase of $8 million , or 16%. The increase was primarily due
to increases of $6 million related to the one-time employee cash bonus in light
of the COVID-19 pandemic and $5 million in employee-related costs driven by
higher headcount.
We expect GAAP and non-GAAP general and administrative expenses will continue to
increase in absolute dollars as we further invest in our infrastructure and
support our global expansion.
Operating Margins
GAAP operating margins improved from (15.0)% for the three months ended
April 30, 2019 , to (14.2)% for the three months ended April 30, 2020 . The
improvement in our GAAP operating margins in the three months ended April 30,
2020 , was primarily due to higher revenues, along with reduced employer payroll
tax on employee stock transactions and reduced amortization of
acquisition-related intangible assets. The improvement was partially offset by
higher operating expenses resulting from higher headcount and the one-time
employee cash bonus in light of the COVID-19 pandemic.
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Table of Conten t s
We use the non-GAAP financial measure of non-GAAP operating margins 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. We believe that non-GAAP operating
margins reflect our ongoing business in a manner that allows for meaningful
period-to-period comparisons and analysis of trends in our business. We also
believe that non-GAAP operating margins provide useful information to investors
and others in understanding and evaluating our operating results and prospects
in the same manner as management and in comparing financial results across
accounting periods and to those of peer companies.
Non-GAAP operating margins are calculated using GAAP revenues and non-GAAP
operating expenses. See "Non-GAAP Financial Measures" below for further
information.
Non-GAAP operating margins declined from 13.1% for the three months ended
April 30, 2019 , to 12.8% for the three months ended April 30, 2020 . The
reduction in our non-GAAP operating margins in the three months ended April 30,
2020 , was primarily due to higher operating expenses resulting from higher
headcount and the one-time employee cash bonus in light of the COVID-19
pandemic, partially offset by higher revenues.
Reconciliations of our GAAP to non-GAAP operating margins were as follows:
Three Months Ended
GAAP Operating Share-Based Other Operating Non-GAAP Operating
Expenses Compensation Expenses Expenses Expenses (1)
Operating margin (14.2) % 23.2 % 3.8 % 12.8 %
Three Months Ended
GAAP Operating Share-Based Other Operating Non-GAAP Operating
Expenses Compensation Expenses Expenses Expenses (1)
Operating margin (15.0) % 22.5 % 5.6 % 13.1 %
(1)See "Non-GAAP Financial Measures" below for further information.
Other Income (Expense), Net
Other expense, net was $11 million for the three months ended April 30, 2020 , as
compared to other income, net of $7 million for the prior year period. The
decrease in other income primarily resulted from prior year activity that did
not recur during the current fiscal quarter. During the three months ended April
30, 2019 , we recognized a gain from the sale of a marketable equity investment
of $7 million and we capitalized interest costs of $4 million , which reduced
interest expense. During the three months ended April 30, 2020 , we recognized
unrealized losses and impairments on non-marketable equity investments of $4
million .
Liquidity and Capital Resources
As of April 30, 2020 , our principal sources of liquidity were cash, cash
equivalents, and marketable securities totaling $2.6 billion , which were
primarily held for working capital purposes. Our cash equivalents and marketable
securities are composed primarily of U.S. treasury securities, U.S. agency
obligations, corporate bonds, commercial paper, and money market funds.
In April 2020 , we entered into a credit agreement ("Credit Agreement") pursuant
to which the lenders would extend to Workday a senior unsecured term loan
facility in an aggregate principal amount of $750 million ("Term Loan") and an
unsecured revolving credit facility in an aggregate principal amount of $750
million ("Revolving Credit Facility"). On April 2, 2020 , $500 million of the
Term Loan was funded. The remaining $250 million of the Term Loan may be funded
until July 15, 2020 . We can also borrow up to $750 million under the Revolving
Credit Facility until April 2, 2025 . For further information, see Note 10, Debt,
of the Notes to Condensed Consolidated Financial Statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q.
We have financed our operations primarily through customer payments, sales of
equity securities, and issuance of debt. Our future capital requirements depend
on many factors, including our customer growth rate, subscription renewal
activity, the timing of construction of facilities in Pleasanton, California ,
and the acquisition of additional facilities, the timing and extent of
development efforts, the expansion of sales and marketing activities, the
introduction of new and enhanced services offerings, the continuing market
acceptance of our services, and acquisition activities. We may enter into
arrangements to acquire or invest in complementary businesses, services,
technologies, or intellectual property rights in the future. We also may choose
to seek additional equity or debt financing.
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Table of Conten t s Our cash flows for the three months endedApril 30, 2020 , and 2019, were as follows (in thousands): Three Months Ended April 30, 2020 2019 Net cash provided by (used in): Operating activities$ 263,683 $ 209,163 Investing activities (277,347) (67,355) Financing activities 499,331 3,362 Effect of exchange rate changes (265) (327)
Net increase (decrease) in cash, cash equivalents, and restricted cash $
485,402 $ 144,843
Operating Activities
Cash provided by operating activities was $264 million and $209 million for the
three months ended April 30, 2020 , and 2019, respectively. The improvement in
cash flow provided by operating activities was primarily due to increases in
sales and the related cash collections, partially offset by higher cash
operating expenses driven by increased headcount and the one-time employee cash
bonus in light of the COVID-19 pandemic.
We expect our business to continue to generate sufficient operating cash flows;
however, if the COVID-19 pandemic worsens or is prolonged, our customers may
increasingly delay payments or request price concessions, which could materially
impact our operating cash flows in any given period.
Investing Activities
Cash used in investing activities for the three months ended April 30, 2020 , was
$277 million , which was primarily the result of capital expenditures for data
center and office space projects of $60 million , purchases of non-marketable
equity and other investments of $52 million , and the timing of purchases and
maturities of marketable securities.
Cash used in investing activities for the three months ended April 30, 2019 , was
$67 million , which was primarily the result of capital expenditures for data
center and office space projects of $66 million , capital expenditures related to
the construction of our development center of $34 million , and the timing of
purchases and maturities of marketable securities. These payments were partially
offset by proceeds of $51 million from sales of marketable equity investments.
We expect capital expenditures, excluding owned real estate projects, will be
approximately $280 million for fiscal 2021. These capital outlays will largely
be used to expand the infrastructure of our data centers. We do not expect to
make additional investments in owned real estate projects during fiscal 2021.
Financing Activities
Cash provided by financing activities was $499 million for the three months
ended April 30, 2020 , which was primarily due to proceeds of $500 million from
borrowings on the Term Loan, net of debt discount and debt issuance costs of $2
million . In addition, cash flows from financing activities included $4 million
of proceeds from the issuance of common stock from employee equity plans.
Cash provided by financing activities was $3 million for the three months ended
April 30, 2019 , which was primarily due to proceeds from the issuance of common
stock from employee equity plans.
In the second quarter of fiscal 2021, our 1.50% convertible senior notes ("2020
Notes") become due, which will result in a cash outflow of $250 million . We may
use the proceeds of future borrowings under the Credit Agreement to fund the
repayment of the 2020 Notes.
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Table of Conten t s
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 non-GAAP operating expenses and non-GAAP operating
margins meet the definition of a non-GAAP financial measure.
Non-GAAP Operating Expenses and Non-GAAP Operating Margins
Our non-GAAP operating expenses and non-GAAP operating margins exclude the
components listed below. 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 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 to better
understand the long-term performance of our core business and to facilitate
comparison of our results to those of peer companies. Share-based compensation
expenses are determined using a number of factors, including our stock price,
volatility, and forfeiture rates that are beyond our control and generally
unrelated to operational decisions and performance in any particular period.
Further, share-based compensation expenses are not reflective of the value
ultimately received by the grant recipients.
•Other Operating Expenses. Other operating expenses includes employer payroll
tax-related items on employee stock transactions and amortization of
acquisition-related intangible assets. The amount of employer payroll
tax-related items on employee stock transactions is dependent on our stock price
and other factors that are beyond our control and do not correlate to the
operation of the business. For business combinations, we generally allocate a
portion of the purchase price to intangible assets. The amount of the allocation
is based on estimates and assumptions made by management and is subject to
amortization. The amount of purchase price allocated to intangible assets and
the term of its related amortization can vary significantly and are unique to
each acquisition and thus we do not believe it is reflective of our ongoing
operations.
Limitations on the Use of Non-GAAP Financial Measures
A limitation of our non-GAAP financial measures of non-GAAP operating expenses
and non-GAAP operating margins 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. Further,
the non-GAAP financial measure of non-GAAP operating expenses has certain
limitations because it does not reflect all items of expense that affect our
operations and are reflected in the GAAP financial measure of total operating
expenses. 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.
We compensate for these limitations by reconciling the non-GAAP financial
measures to the most comparable GAAP financial measures. These non-GAAP
financial measures should be considered in addition to, not as a substitute for
or in isolation from, measures prepared in accordance with GAAP. 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.
See "Results of Operations-Operating Expenses and Results of
Operations-Operating Margins" for reconciliations from the most directly
comparable GAAP financial measures, GAAP operating expenses and GAAP operating
margins, to the non-GAAP financial measures, non-GAAP operating expenses and
non-GAAP operating margins, for the three months ended April 30, 2020 , and 2019.
Contractual Obligations
Our contractual obligations primarily consist of our convertible senior notes,
borrowings under our Credit Agreement, leases for office space and co-location
facilities for data center capacity, and third-party hosted infrastructure
platforms for business operations. We do not consider outstanding purchase
orders to be contractual obligations as they represent authorizations to
purchase rather than binding agreements.
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Table of Conten t s
Convertible Senior Notes
In June 2013 , we issued $250 million of 1.50% convertible senior notes due July
15, 2020 . In September 2017 , we completed an offering of $1.15 billion of 0.25%
convertible senior notes due October 1, 2022 ("2022 Notes" and together with the
2020 Notes, referred to as the "Notes"). We are not required to make principal
payments under the Notes prior to maturity. If the Notes are not converted to
Class A common stock prior to their maturity dates, we are required to repay
$250 million in principal on July 15, 2020 , and $1.15 billion in principal on
October 1, 2022 . We are also required to make interest payments on a semi-annual
basis at the interest rates described in Note 10, Debt, of the Notes to
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Credit Agreement
In April 2020 , we entered into a credit agreement pursuant to which the lenders
would extend to Workday a senior unsecured term loan facility in an aggregate
principal amount of $750 million and an unsecured revolving credit facility in
an aggregate principal amount of $750 million . The Term Loan matures on April 2,
2025 , and provides for quarterly repayment in installments of the principal
amount, beginning October 2020 , at a rate of 1.25% of the principal amount per
quarter through January 2022 , and 2.50% of the principal amount per quarter
thereafter. The Revolving Credit Facility may be borrowed, repaid, and
reborrowed until April 2, 2025 , at which time all amounts borrowed must be
repaid. The Term Loan and Revolving Credit Facility bear interest at the
interest rates described in Note 10, Debt, of the Notes to Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
The following table summarizes our contractual cash obligations under the Credit
Agreement as of April 30, 2020 . The table excludes the $250 million portion of
the Term Loan that may be funded prior to July 15, 2020 , and assumes interest
rates consistent with those in effect for our Term Loan as of April 30, 2020 .
The Revolving Credit Facility is excluded as there were no outstanding
borrowings as of April 30, 2020 .
Payments Due by Period
(in thousands)
Remainder of Fiscal 2022 - Fiscal 2024 -
Total Fiscal 2021 Fiscal 2023 Fiscal 2025 Thereafter
Term Loan $ 500,000 $ 12,500 $ 75,000 $ 100,000 $ 312,500
Interest obligation on Term Loan 52,923 10,235 22,663 18,151 1,874
Total $ 552,923 $ 22,735 $ 97,663 $ 118,151 $ 314,374
Leases
During the remainder of fiscal 2021, we anticipate leasing additional office
space near our headquarters and in various other locations around the world to
support our growth. In addition, our existing lease agreements often provide us
with an option to renew. We expect our future operating lease obligations will
increase as we expand our operations.
Third-Party Hosted Infrastructure Platforms for Business Operations
We have entered into non-cancelable agreements with third-party hosted
infrastructure platform vendors with various expiration dates. As of April 30,
2020 , future non-cancelable minimum payments under these agreements were
approximately $471 million .
Off-Balance Sheet Arrangements
Through April 30, 2020 , we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities, that would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
GAAP. The preparation of these condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of certain assets, liabilities, revenues, costs and expenses, and related
disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our
actual results may differ from these estimates under different assumptions or
conditions.
During the three months ended April 30, 2020 , there were no significant changes
to our critical accounting policies and estimates as described in the
consolidated financial statements contained in the Annual Report on Form 10-K
for the year ended January 31, 2020 , filed with the Securities and Exchange
Commission ("SEC") on March 3, 2020 .
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Table of Conten t s
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