Edgar Filing: Workday, Inc.

Document

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, 2018



¨	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.)

6110 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 August 31, 2018, there were approximately 217 million shares of the registrant’s common stock outstanding, net of treasury stock.

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Workday, Inc.



		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of July 31, 2018 and January 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and Six Months ended July 31, 2018 and 2017	4

	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months ended July 31, 2018 and 2017	5

	Condensed Consolidated Statements of Cash Flows for the Three and Six Months ended July 31, 2018 and 2017	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Mine Safety Disclosures	56

Item 5.	Other Information	56

Item 6.	Exhibits	57

	Signatures	58

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Workday, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)



	July 31, 2018			January 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	1,693,743		$	1,134,355
Marketable securities	1,291,352			2,133,495
Trade and other receivables, net	457,496			528,208
Deferred costs	66,274			63,060
Prepaid expenses and other current assets	105,173			97,860
Total current assets	3,614,038			3,956,978
Property and equipment, net	678,525			546,609
Deferred costs, noncurrent	140,423			140,509
Acquisition-related intangible assets, net	35,927			34,234
Goodwill	175,073			159,376
Other assets	121,074			109,718
Total assets	$	4,765,060		$	4,947,424
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	32,910		$	20,998
Accrued expenses and other current liabilities	119,972			121,879
Accrued compensation	140,340			148,247
Unearned revenue	1,393,848			1,426,241
Current portion of convertible senior notes, net	226,877			341,509
Total current liabilities	1,913,947			2,058,874
Convertible senior notes, net	950,132			1,149,845
Unearned revenue, noncurrent	89,376			110,906
Other liabilities	36,381			47,434
Total liabilities	2,989,836			3,367,059
Stockholders’ equity:
Common stock	218			211
Additional paid-in capital	3,869,111			3,354,423
Treasury stock	(193,679		)	—
Accumulated other comprehensive income (loss)	(12,431		)	(46,413		)
Accumulated deficit	(1,887,995		)	(1,727,856		)
Total stockholders’ equity	1,775,224			1,580,365
Total liabilities and stockholders’ equity	$	4,765,060		$	4,947,424

See Notes to Condensed Consolidated Financial Statements

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Workday, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2018			2017			2018			2017
Revenues:
Subscription services	$	565,659		$	434,527		$	1,087,808		$	834,263
Professional services	106,061			90,793			202,555			170,918
Total revenues	671,720			525,320			1,290,363			1,005,181
Costs and expenses ⁽¹⁾:
Costs of subscription services	87,523			65,931			167,768			125,729
Costs of professional services	112,707			92,264			210,433			169,177
Product development	292,840			221,103			556,424			417,542
Sales and marketing	202,464			171,952			395,235			327,661
General and administrative	65,168			55,699			120,749			106,901
Total costs and expenses	760,702			606,949			1,450,609			1,147,010
Operating loss	(88,982		)	(81,629		)	(160,246		)	(141,829		)
Other income (expense), net	1,613			938			(2,235		)	(725		)
Loss before provision for (benefit from) income taxes	(87,369		)	(80,691		)	(162,481		)	(142,554		)
Provision for (benefit from) income taxes	(1,213		)	1,841			(1,915		)	4,022
Net loss	$	(86,156	)	$	(82,532	)	$	(160,566	)	$	(146,576	)
Net loss per share, basic and diluted	$	(0.40	)	$	(0.40	)	$	(0.75	)	$	(0.71	)
Weighted-average shares used to compute net loss per share, basic and diluted	215,932			207,028			214,517			205,453



⁽¹⁾ Costs and expenses include share-based compensation expenses as follows:
Costs of subscription services	$	8,521	$	6,580	$	16,398	$	12,271
Costs of professional services	12,518		9,301		23,310		17,322
Product development	75,354		56,923		143,865		107,952
Sales and marketing	29,367		25,942		54,979		49,101
General and administrative	21,303		22,777		41,170		42,665

See Notes to Condensed Consolidated Financial Statements

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Workday, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2018			2017			2018			2017
Net loss	$	(86,156	)	$	(82,532	)	$	(160,566	)	$	(146,576	)
Other comprehensive income (loss), net of tax:
Net change in foreign currency translation adjustment	(474		)	1,243			(1,261		)	966
Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax provision of $284, $0, $284, and $0, respectively	1,439			146			906			(629		)
Net change in market value of effective foreign currency forward exchange contracts, net of tax provision of $2,481, $0, $4,905, and $0, respectively	17,370			(23,396		)	34,337			(24,605		)
Other comprehensive income (loss), net of tax	18,335			(22,007		)	33,982			(24,268		)
Comprehensive loss	$	(67,821	)	$	(104,539	)	$	(126,584	)	$	(170,844	)

See Notes to Condensed Consolidated Financial Statements

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Workday, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2018			2017			2018			2017
Cash flows from operating activities
Net loss	$	(86,156	)	$	(82,532	)	$	(160,566	)	$	(146,576	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	42,226			33,501			80,890			65,298
Share-based compensation expenses	147,063			121,523			279,722			229,311
Amortization of deferred costs	17,061			14,009			33,421			27,646
Amortization of debt discount and issuance costs	17,490			6,785			35,629			13,735
Other	(4,894		)	1,927			(14,183		)	6,185
Changes in operating assets and liabilities, net of business combinations:
Trade and other receivables, net	(104,758		)	(71,422		)	63,944			40,393
Deferred costs	(23,943		)	(19,437		)	(36,549		)	(30,818		)
Prepaid expenses and other assets	(5,446		)	(8,968		)	3,042			(12,018		)
Accounts payable	5,987			10,778			13,941			10,213
Accrued expenses and other liabilities	(15,182		)	(13,472		)	(3,555		)	(9,383		)
Unearned revenue	68,168			22,434			(53,887		)	1,162
Net cash provided by (used in) operating activities	57,616			15,126			241,849			195,148
Cash flows from investing activities
Purchases of marketable securities	(526,216		)	(285,197		)	(1,434,342		)	(898,448		)
Maturities of marketable securities	655,205			371,471			1,341,881			813,341
Sales of marketable securities	914,938			180,863			942,297			189,937
Owned real estate projects	(49,537		)	(22,996		)	(88,770		)	(52,535		)
Capital expenditures, excluding owned real estate projects	(53,346		)	(38,528		)	(102,208		)	(69,121		)
Business combinations, net of cash acquired	(26,737		)	—			(26,737		)	—
Purchase of other intangible assets	(1,000		)	—			(1,000		)	—
Purchases of non-marketable equity and other investments	(1,000		)	(5,000		)	(3,400		)	(5,450		)
Sale and maturities of non-marketable equity and other investments	—			732			—			732
Net cash provided by (used in) investing activities	912,307			201,345			627,721			(21,544		)
Cash flows from financing activities
Payments on convertible senior notes	(350,005		)	—			(350,005		)	—
Proceeds from issuance of common stock from employee equity plans	38,686			32,274			41,297			34,527
Other	(59		)	(32		)	(116		)	(76		)
Net cash provided by (used in) financing activities	(311,378		)	32,242			(308,824		)	34,451
Effect of exchange rate changes	(162		)	715			(582		)	583
Net increase (decrease) in cash, cash equivalents, and restricted cash	658,383			249,428			560,164			208,638
Cash, cash equivalents, and restricted cash at the beginning of period	1,037,435			501,104			1,135,654			541,894
Cash, cash equivalents, and restricted cash at the end of period	$	1,695,818		$	750,532		$	1,695,818		$	750,532

See Notes to Condensed Consolidated Financial Statements

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	Three Months Ended July 31,				Six Months Ended July 31,
	2018		2017		2018		2017
Supplemental cash flow data
Cash paid for interest, net of amounts capitalized	$	14	$	46	$	33	$	46
Cash paid for income taxes	1,492		1,262		3,206		2,608
Non-cash investing and financing activities:
Vesting of early exercised stock options	$	—	$	282	$	—	$	564
Purchases of property and equipment, accrued but not paid	63,052		33,219		63,052		33,219
Non-cash additions to property and equipment	307		485		365		627



	July 31,
	2018		2017
Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of cash flows
Cash and cash equivalents	$	1,693,743	$	748,599
Restricted cash included in Other assets	2,075		1,933
Total cash, cash equivalents, and restricted cash	$	1,695,818	$	750,532

See Notes to Condensed Consolidated Financial Statements

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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. All intercompany balances and transactions have been eliminated. 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, 2018 shown in this report are not necessarily indicative of the results to be expected for the full year ending January 31, 2019. 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, 2018, filed with the SEC on March 14, 2018.

Certain prior period amounts reported in our condensed consolidated financial statements 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.

Note 2. Accounting Standards

Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. As of February 1, 2018, we adopted the applicable provisions of ASU No. 2016-01 as follows:

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•

Marketable equity investments (readily determinable fair values): For our equity investments previously classified as available-for-sale equity investments, we are required to account for changes in fair value of these investments in the condensed consolidated statements of operations. We have applied the modified retrospective transition method upon adoption, resulting in no impact to our condensed consolidated financial statements as of February 1, 2018.

•

Non-marketable equity investments (no readily determinable fair values): For our equity investments previously classified as cost method investments that do not qualify for the net asset value practical expedient, we measure them at fair value or the measurement alternative. The measurement alternative is defined as cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments resulting from impairment, fair value, or observable price changes are accounted for in the condensed consolidated statements of operations. We adopted the guidance prospectively effective February 1, 2018, and there was no impact to our condensed consolidated financial statements.

Going forward, the impact of this new standard could result in volatility in the condensed consolidated statements of operations.

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. We adopted this new standard effective February 1, 2018 using the modified retrospective transition method, resulting in a $0.4 million cumulative-effect adjustment to Accumulated deficit as of February 1, 2018.

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 Accounting Standards Codification Topic 840 Leases. The guidance is effective for our fiscal year beginning February 1, 2019 and must be applied using a modified retrospective approach. Early adoption is permitted. We plan to adopt this new standard in the first quarter of our fiscal 2020. We continue to evaluate the effect of adopting this guidance on our condensed consolidated financial statements and related disclosures. Upon adoption, we will recognize right-of-use assets and operating lease liabilities on our condensed consolidated balance sheets, which will increase our total assets and total liabilities. We are evaluating the accounting, transition, and disclosure requirements of this standard and cannot currently estimate the financial statement impact of adoption.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), to better align 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 and must be applied using a modified retrospective approach. Early adoption is permitted. We plan to adopt this new standard in the first quarter of our fiscal 2020. We are evaluating the accounting, transition, and disclosure requirements of this standard and cannot currently estimate the financial statement impact of adoption.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act (the "Tax Act") to retained earnings. The guidance is effective for our fiscal year beginning February 1, 2019 and must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. Early adoption is permitted. We plan to adopt the new standard in the first quarter of our fiscal 2020 and do not expect it to have a material impact on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, with certain exceptions. The guidance is effective for our fiscal year beginning February 1, 2019. Early adoption is permitted. We plan to adopt this new standard in the first quarter of our fiscal 2020 and do not expect it to have a material impact on our condensed consolidated financial statements.

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Note 3. Investments

Marketable Securities

At July 31, 2018, marketable securities consisted of the following (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Fair Value
U.S. agency obligations	$	283,022	$	—	$	(548	)	$	282,474
U.S. treasury securities	541,060		4		(674		)	540,390
Corporate bonds	373,800		40		(1,039		)	372,801
Commercial paper	107,110		—		—			107,110
	$	1,304,992	$	44	$	(2,261	)	$	1,302,775
Included in cash and cash equivalents	$	11,423	$	—	$	—		$	11,423
Included in marketable securities	$	1,293,569	$	44	$	(2,261	)	$	1,291,352

At January 31, 2018, marketable securities consisted of the following (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Fair Value
U.S. agency obligations	$	683,551	$	—	$	(1,127	)	$	682,424
U.S. treasury securities	797,977		—		(1,142		)	796,835
Corporate bonds	470,259		16		(1,154		)	469,121
Commercial paper	602,727		—		—			602,727
	$	2,554,514	$	16	$	(3,423	)	$	2,551,107
Included in cash and cash equivalents	$	417,613	$	—	$	(1	)	$	417,612
Included in marketable securities	$	2,136,901	$	16	$	(3,422	)	$	2,133,495

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, 2018. The unrealized losses on marketable securities which have been in a net loss position for 12 months or more were not material as of July 31, 2018. We classify our marketable securities as available-for-sale debt securities 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 is included in Cash and cash equivalents. We sold $915 million and $181 million of our marketable securities during the three months ended July 31, 2018 and 2017, respectively, and $942 million and $190 million of our marketable securities during the six months ended July 31, 2018 and 2017, respectively. The realized losses from the sales were immaterial.

Equity Investments

Equity investments consisted of the following (in thousands):



	July 31, 2018		January 31, 2018
Marketable equity investments	$	1,451,961	$	551,804
Non-marketable equity investments	30,405		28,005
	$	1,482,366	$	579,809

Marketable equity investments consist of money market funds and are included in Cash and cash equivalents on the condensed consolidated balance sheets. During the three and six months ended July 31, 2018, there were no unrealized gains or losses recognized for these investments.

Non-marketable equity investments consist of investments in privately held companies without readily determinable fair values and are included in Other assets on the condensed consolidated balance sheets. During the three and six months ended July 31, 2018, there were no adjustments made to the carrying value of the non-marketable equity investments as measured under the measurement alternative.

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Note 4. Fair Value Measurements

We measure our cash equivalents, marketable securities, and foreign currency derivative contracts 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.

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, 2018 (in thousands):



Description	Level 1		Level 2		Level 3		Total
U.S. agency obligations	$	—	$	282,474	$	—	$	282,474
U.S. treasury securities	540,390		—		—		540,390
Corporate bonds	—		372,801		—		372,801
Commercial paper	—		107,110		—		107,110
Money market funds	1,451,961		—		—		1,451,961
Foreign currency derivative assets	—		19,173		—		19,173
Total assets	$	1,992,351	$	781,558	$	—	$	2,773,909
Foreign currency derivative liabilities	$	—	$	1,986	$	—	$	1,986
Total liabilities	$	—	$	1,986	$	—	$	1,986



Description	Level 1		Level 2		Level 3		Total
U.S. agency obligations	$	—	$	682,424	$	—	$	682,424
U.S. treasury securities	796,835		—		—		796,835
Corporate bonds	—		469,121		—		469,121
Commercial paper	—		602,727		—		602,727
Money market funds	551,804		—		—		551,804
Foreign currency derivative assets	—		98		—		98
Total assets	$	1,348,639	$	1,754,370	$	—	$	3,103,009
Foreign currency derivative liabilities	$	—	$	32,912	$	—	$	32,912
Total liabilities	$	—	$	32,912	$	—	$	32,912

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 on the condensed consolidated balance sheets (in thousands):



	July 31, 2018				January 31, 2018
	Net Carrying Amount		Estimated Fair Value		Net Carrying Amount		Estimated Fair Value
0.75% Convertible senior notes	$	—	$	—	$	341,509	$	504,994
1.50% Convertible senior notes	226,877		390,623		221,378		385,550
0.25% Convertible senior notes	950,132		1,221,760		928,467		1,200,577

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In June 2013, we completed an offering of $350 million of 0.75% convertible senior notes due July 15, 2018 ("2018 Notes"), which were subsequently converted by note holders during the three months ended July 31, 2018. In June 2013, concurrent with the 2018 Notes offering, we issued $250 million of 1.50% convertible senior notes due July 15, 2020 ("2020 Notes"). 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 2018 Notes and 2020 Notes, referred to as the "Notes"). The estimated fair values of the Notes, which we have classified as Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of each reporting period. The if-converted value of the 2020 Notes exceeded the principal amount by $129 million. The if-converted value of the 2022 Notes was less than the principal amount by $180 million. The if-converted values were determined based on the closing price of our common stock of $124.02 on July 31, 2018. For further information, see Note 10.

Note 5. Deferred Costs

Deferred costs, which primarily consist of deferred sales commissions, were $207 million and $204 million as of July 31, 2018 and January 31, 2018, respectively. Amortization expense for the deferred costs was $17 million and $14 million for the three months ended July 31, 2018 and 2017, respectively, and $33 million and $28 million for the six months ended July 31, 2018 and 2017, 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, 2018			January 31, 2018
Land	$	13,199		$	8,451
Buildings	343,904			255,093
Computers, equipment, and software	474,669			411,177
Computers, equipment, and software acquired under capital leases	11,677			13,848
Furniture and fixtures	35,270			34,809
Leasehold improvements	145,856			132,209
Property and equipment, gross⁽¹⁾	1,024,575			855,587
Less accumulated depreciation and amortization	(346,050		)	(308,978		)
Property and equipment, net	$	678,525		$	546,609


⁽¹⁾	Property and equipment, gross includes construction-in-progress for owned real estate projects of $244 million and $177 million that have not yet been placed in service as of July 31, 2018 and January 31, 2018, respectively.

Depreciation expense totaled $36 million and $28 million for the three months ended July 31, 2018 and 2017, respectively, and $69 million and $55 million for the six months ended July 31, 2018 and 2017, respectively. Interest costs capitalized to property and equipment totaled $2 million and $2 million for the three months ended July 31, 2018 and 2017, respectively, and $4 million and $3 million for the six months ended July 31, 2018 and 2017, respectively.

Note 7. Acquisition-related Intangible Assets, Net

Acquisition-related intangible assets, net consisted of the following (in thousands):



	July 31, 2018			January 31, 2018
Acquired developed technology	$	81,800		$	69,700
Customer relationship assets	1,000			1,000
	82,800			70,700
Less accumulated amortization	(46,873		)	(36,466		)
Acquisition-related intangible assets, net	$	35,927		$	34,234

In the second quarter of fiscal 2019, we completed two acquisitions resulting in an increase of $12 million and $16 million in acquired developed technology and goodwill, respectively.

Amortization expense related to acquired developed technology and customer relationship assets was $5 million for each of the three month periods ended July 31, 2018 and 2017, and $10 million for each of the six month periods ended July 31, 2018 and 2017, respectively.

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As of July 31, 2018, our future estimated amortization expense related to acquired developed technology and customer relationship assets is as follows (in thousands):



Fiscal Period:
2019	$	11,770
2020	15,022
2021	5,058
2022	3,400
2023	677
Total	$	35,927

Note 8. Other Assets

Other assets consisted of the following (in thousands):



	July 31, 2018		January 31, 2018
Non-marketable equity and other investments	$	32,405	$	29,205
Prepayments for computing infrastructure platform	9,369		13,588
Technology patents, net	11,396		11,217
Acquired land leasehold interest, net	9,518		9,570
Deposits	4,823		4,492
Net deferred tax assets	2,201		1,884
Other	51,362		39,762
Total	$	121,074	$	109,718

Note 9. Derivative 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, 2018 and January 31, 2018, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $655 million and $549 million, respectively. All contracts have maturities not greater than 36 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.

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As of July 31, 2018 and January 31, 2018, we had outstanding forward contracts with total notional values of $201 million and $75 million.

The fair values of outstanding derivative instruments were as follows (in thousands):



	Condensed Consolidated Balance Sheets Location	July 31, 2018		January 31, 2018
Derivative Assets:
Foreign currency forward contracts designated as cash flow hedges	Prepaid expenses and other current assets	$	9,717	$	15
Foreign currency forward contracts designated as cash flow hedges	Other assets	9,071		4
Foreign currency forward contracts not designated as hedges	Prepaid expenses and other current assets	347		79
Foreign currency forward contracts not designated as hedges	Other assets	38		—
Total Derivative Assets		$	19,173	$	98
Derivative Liabilities:
Foreign currency forward contracts designated as cash flow hedges	Accrued expenses and other current liabilities	$	1,022	$	18,355
Foreign currency forward contracts designated as cash flow hedges	Other liabilities	81		11,650
Foreign currency forward contracts not designated as hedges	Accrued expenses and other current liabilities	883		2,805
Foreign currency forward contracts not designated as hedges	Other liabilities	—		102
Total Derivative Liabilities		$	1,986	$	32,912

Gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):



	Condensed Consolidated Statements of Operations and Statements of Comprehensive Loss Locations	Three Months Ended July 31,						Six Months Ended July 31,
		2018			2017			2018			2017
Gains (losses) recognized in OCI (effective portion) ⁽¹⁾	Net change in market value of effective foreign currency forward exchange contracts	$	17,891		$	(22,923	)	$	36,165		$	(23,898	)
Gains (losses) reclassified from OCI into income (effective portion)	Revenues	(1,960		)	473			(3,077		)	707
Gains (losses) recognized in income (amount excluded from effectiveness testing and ineffective portion)	Other income (expense), net	4,027			767			6,258			1,390


⁽¹⁾	Of the total effective portion of foreign currency forward contracts designated as cash flow hedges as of July 31, 2018, net losses of $6 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 Statements of Operations Location	Three Months Ended July 31,					Six Months Ended July 31,
Derivative Type	Condensed Consolidated Statements of Operations Location	2018		2017			2018		2017
Foreign currency forward contracts not designated as hedges	Other income (expense), net	$	1,884	$	(2,619	)	$	3,678	$	(2,625	)

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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 on the condensed consolidated balance sheets. Our foreign currency forward contracts are not subject to any credit contingent features or collateral requirements. We manage our exposure to counterparty risk by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.

As of July 31, 2018, information related to these offsetting arrangements was as follows (in thousands):



	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Condensed Consolidated Balance Sheets		Net Amounts of Assets Presented on the Condensed Consolidated Balance Sheets		Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets					Net Assets Exposed
	Gross Amounts of Recognized Assets						Financial Instruments			Cash Collateral Received		Net Assets Exposed
Derivative Assets:
Counterparty A	$	5,527	$	—	$	5,527	$	(78	)	$	—	$	5,449
Counterparty B	11,340		—		11,340		(1,541		)	—		9,799
Counterparty C	2,306		—		2,306		(367		)	—		1,939
Total	$	19,173	$	—	$	19,173	$	(1,986	)	$	—	$	17,187



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Condensed Consolidated Balance Sheets		Net Amounts of Liabilities Presented on the Condensed Consolidated Balance Sheets		Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets					Net Liabilities Exposed
	Gross Amounts of Recognized Liabilities						Financial Instruments			Cash Collateral Pledged		Net Liabilities Exposed
Derivative Liabilities:
Counterparty A	$	78	$	—	$	78	$	(78	)	$	—	$	—
Counterparty B	1,541		—		1,541		(1,541		)	—		—
Counterparty C	367		—		367		(367		)	—		—
Total	$	1,986	$	—	$	1,986	$	(1,986	)	$	—	$	—

Note 10. Convertible Senior Notes, Net

Convertible Senior Notes

In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 with a principal amount of $350 million. The 2018 Notes were unsecured, unsubordinated obligations, and interest was payable in cash in arrears at a fixed rate of 0.75% on January 15 and July 15 of each year. During the three months ended July 31, 2018, the 2018 Notes were converted by note holders and we repaid the $350 million principal balance in cash. We also distributed approximately 1.5 million shares of our Class A common stock to note holders during the three months ended July 31, 2018, which represents the conversion value in excess of the principal amount.

In June 2013, we issued 1.50% convertible senior notes due July 15, 2020 with a principal amount of $250 million. 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.

In September 2017, we issued 0.25% convertible senior notes due October 1, 2022 with a principal amount of $1.15 billion. The 2022 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.25% on April 1 and October 1 of each year. The 2022 Notes mature on October 1, 2022 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2022 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.

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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, conversion of the 2020 Notes is subject to the satisfaction of certain conditions, as described below. For the 2022 Notes, the initial conversion rate is 6.7982 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $147.10 per share of Class A common stock, subject to adjustment. Prior to the close of business on May 31, 2022, conversion of the 2022 Notes is subject to the satisfaction of certain conditions, as described below.

Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indentures) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indentures), holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest.

Holders of the 2020 Notes and 2022 Notes may convert all or a portion of their Notes prior to the close of business on March 13, 2020 and May 31, 2022, respectively, 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 fiscal 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.

On or after March 15, 2020 for the 2020 Notes and June 1, 2022 for the 2022 Notes, holders of the respective Notes may convert their Notes at any time until the close of business on the second scheduled trading day immediately preceding the respective maturity date of their Notes.

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 to interest expense over the respective terms of the Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification.

In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. 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 $0.3 million and $0.4 million for the three months ended July 31, 2018 and 2017, respectively, and $0.6 million and $0.7 million for the six months ended July 31, 2018 and 2017, 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, 2018 and 2017. For the 2022 Notes, we recorded liability issuance costs of $14 million and equity issuance costs of $4 million. Amortization expense for the liability issuance costs was $0.7 million and $1.4 million for the three and six months ended July 31, 2018.

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The Notes, net consisted of the following (in thousands):



	July 31, 2018								January 31, 2018
	2018 Notes		2020 Notes			2022 Notes			2018 Notes			2020 Notes			2022 Notes
Principal amounts:
Principal	$	—	$	250,000		$	1,150,000		$	350,000		$	250,000		$	1,150,000
Unamortized debt discount	—		(21,806		)	(187,952		)	(7,850		)	(26,968		)	(208,188		)
Unamortized debt issuance costs	—		(1,317		)	(11,916		)	(641		)	(1,654		)	(13,345		)
Net carrying amount	$	—	$	226,877		$	950,132		$	341,509		$	221,378		$	928,467
Carrying amount of the equity component ⁽¹⁾	$	74,887	$	66,007		$	219,702		$	74,892		$	66,007		$	219,702


⁽¹⁾	Included on the condensed consolidated balance sheets within Additional paid-in capital, net of $2 million, $2 million, and $4 million for the 2018 Notes, 2020 Notes, and 2022 Notes, respectively, in equity issuance costs.

As of July 31, 2018, the 2020 Notes and 2022 Notes have remaining lives of approximately 23 months and 50 months, respectively.

For more than 20 trading days during the 30 consecutive trading days ended April 30, 2018 and July 31, 2018, the last reported sale price of our Class A common stock exceeded 130% of the conversion price of the 2020 Notes. As a result, the 2020 Notes were convertible at the option of the holders during the second quarter of fiscal 2019 and will continue to be convertible during the third quarter of fiscal 2019. Accordingly, the 2020 Notes are classified as current on the condensed consolidated balance sheet as of July 31, 2018. From May 1, 2018 through the date of this filing, the amount of the principal balance of the 2020 Notes that has been converted or for which conversion has been requested was not material.

The effective interest rates of the liability components of the 2018 Notes, 2020 Notes, and 2022 Notes are 5.75%, 6.25%, and 4.60%, 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,
	2018						2017						2018						2017
	2018 Notes		2020 Notes		2022 Notes		2018 Notes		2020 Notes		2022 Notes		2018 Notes		2020 Notes		2022 Notes		2018 Notes		2020 Notes		2022 Notes
Contractual interest expense	$	540	$	938	$	719	$	657	$	937	$	—	$	1,196	$	1,875	$	1,438	$	1,313	$	1,875	$	—
Interest cost related to amortization of debt issuance costs	289		169		715		352		167		—		641		337		1,429		704		335		—
Interest cost related to amortization of the debt discount	3,567		2,601		10,175		4,104		2,444		—		7,850		5,162		20,236		8,148		4,850		—

We capitalized interest costs related to the Notes of $2 million and $2 million for the three months ended July 31, 2018 and 2017, respectively, and $4 million and $3 million for the six months ended July 31, 2018 and 2017, respectively.

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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 relating to the 2018 Notes gave us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2018 Notes, approximately 4.2 million shares of our Class A common stock for $83.28 per share, exercisable upon conversion of the 2018 Notes. During the three months ended July 31, 2018, we received approximately 1.5 million shares of our Class A common stock from the exercise of the Purchased Options relating to the 2018 Notes. These shares are held as treasury stock as of July 31, 2018.

The Purchased Options relating to the 2020 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2020 Notes, approximately 3.1 million shares of our Class A common stock for $81.74 per share, exercisable upon conversion of the 2020 Notes. The Purchased Options relating to the 2022 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2022 Notes, approximately 7.8 million shares of our Class A common stock for $147.10 per share, exercisable upon conversion of the 2022 Notes. The Purchased Options will expire in 2020 for the 2020 Notes and in 2022 for the 2022 Notes, if not exercised earlier.

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 relating to the 2018 Notes and 2020 Notes, and $176 million for the Purchased Options relating to the 2022 Notes. The amount paid for the Purchased Options is included in Additional paid-in capital on the condensed consolidated balance sheets.

Warrants

In connection with the issuance of the Notes, we also entered into warrant transactions to sell warrants ("Warrants") to acquire, subject to anti-dilution adjustments, up to approximately 4.2 million shares over 60 scheduled trading days beginning in October 2018, 3.1 million shares over 60 scheduled trading days beginning in October 2020, and 7.8 million shares over 60 scheduled trading days beginning in January 2023 of our Class A common stock at an exercise price of $107.96, $107.96, and $213.96 per share, respectively. 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 related to the 2018 Notes and the 2020 Notes, and $81 million from the sale of the Warrants related to the 2022 Notes. The proceeds from the sale of the Warrants are recorded in Additional paid-in capital on 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. We have accrued for rent expense incurred but not paid. Total rent expense was $24 million and $20 million for the three months ended July 31, 2018 and 2017, respectively, and $47 million and $39 million for the six months ended July 31, 2018 and 2017, 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 non-cancelable agreements with computing infrastructure vendors with various expiration dates.

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Legal Matters

We are a party to various legal proceedings and claims that 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, 2018, 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, 2018, there were 149 million shares of Class A common stock, net of treasury stock, and 68 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 11 million shares in March 2018. As of July 31, 2018, we had approximately 66 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. As of July 31, 2018, approximately 7 million shares of Class A common stock were available for issuance under the ESPP.

Restricted Stock Units

The Stock Plans provide for the issuance of restricted stock units ("RSUs") to employees and non-employees. RSUs generally vest over four years. A summary of information related to RSU activity during the six months ended July 31, 2018 is as follows:



	Number of Shares		Weighted-Average Grant Date Fair Value
Balance as of January 31, 2018	12,819,516		$	84.77
RSUs granted	5,287,486		125.67
RSUs vested	(3,449,505	)	83.16
RSUs forfeited	(460,192	)	93.29
Balance as of July 31, 2018	14,197,305		$	100.12

As of July 31, 2018, there was a total of $1.3 billion in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 3.0 years.

Performance-based Restricted Stock Units

During fiscal 2018, 0.4 million shares of performance-based restricted stock units ("PRSUs") were granted to all employees other than executive management that included both service conditions and performance conditions related to company-wide goals. These performance conditions were met and the PRSUs vested on March 15, 2018. During the six months ended July 31, 2018, we recognized $7 million in compensation cost related to these PRSUs.

Additionally, during the second quarter of fiscal 2019, 0.4 million shares of PRSUs were granted to all employees other than executive management that 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 2019. These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2019 and if the individual employee continues to provide service through the vesting date of March 15, 2019. During the three and six months ended July 31, 2018, we recognized $9 million

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in compensation cost related to these PRSUs, and there is a total of $45 million in unrecognized compensation cost which is expected to be recognized over a weighted-average period of approximately seven months.

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, 2018 is as follows (in millions, except share and per share data):



	Outstanding Stock Options		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Balance as of January 31, 2018	6,595,486		$	4.23	$	763
Stock options granted	—		—
Stock options exercised	(751,957	)	4.64
Stock options canceled	(12,000	)	0.40
Balance as of July 31, 2018	5,831,529		$	4.19	$	699
Vested as of July 31, 2018	5,831,529		$	4.19	$	699
Exercisable as of July 31, 2018	5,831,529		$	4.19	$	699

As of July 31, 2018, there was no unrecognized compensation cost related to unvested stock options.

Note 13. Unearned Revenue and Performance Obligations

$507 million and $398 million of subscription services revenue was recognized during the three months ended July 31, 2018 and 2017, respectively, that was included in the unearned revenue balances as of April 30, 2018 and 2017, respectively. $899 million and $673 million of subscription services revenue was recognized during the six months ended July 31, 2018 and 2017, respectively, that was included in the unearned revenue balances as of January 31, 2018 and 2017, respectively. 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, 2018, approximately $5.5 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, 2018 was not material.

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,
	2018			2017			2018			2017
Interest income	$	14,692		$	5,051		$	26,928		$	9,080
Interest expense ⁽¹⁾	(17,515		)	(6,840		)	(35,817		)	(13,826		)
Other income (expense)	4,436			2,727			6,654			4,021
Other income (expense), net	$	1,613		$	938		$	(2,235	)	$	(725	)


⁽¹⁾	Interest expense includes the contractual interest expense related to the 2018 Notes, 2020 Notes, and 2022 Notes and non-cash interest expense 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 adjusting for discrete tax items in the period. We reported an income tax benefit of $2 million and an income tax provision of $4 million for the six months ended July 31, 2018 and 2017, respectively. The income tax benefit for the six months ended July 31, 2018 was primarily attributable to the application of intra-period tax allocation rules related to gains

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from comprehensive income and excess tax benefits in certain foreign jurisdictions from share-based compensation. The income tax benefit was partially offset by state taxes and income tax expenses in profitable foreign jurisdictions. The income tax provision for the six months ended July 31, 2017 was primarily attributable to state taxes and income tax expenses in profitable foreign jurisdictions.

We are subject to income tax audits in the U.S. and foreign jurisdictions. We record liabilities related to uncertain tax positions 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, 2018, we continue to maintain a full valuation allowance on our deferred tax assets except in certain jurisdictions.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allows companies to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year of the enactment date. As of July 31, 2018, we did not have any significant adjustments to our initial assessment performed as of January 31, 2018. We will continue our analysis for all the tax effects of the Tax Act, which are still subject to change during the measurement period, and anticipate further guidance on accounting interpretations from the FASB and application of the Tax Act from the Department of the Treasury.

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, net of treasury stock. 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 period had been distributed. As the liquidation and dividend rights are identical, the net loss attributable to common stockholders is allocated on a proportionate basis.

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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,
	2018						2017						2018						2017
	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	$	(58,776	)	$	(27,380	)	$	(52,997	)	$	(29,535	)	$	(108,888	)	$	(51,678	)	$	(93,625	)	$	(52,951	)
Denominator:
Weighted-average common shares outstanding	147,310			68,622			132,940			74,088			145,475			69,042			131,232			74,221
Basic and diluted net loss per share	$	(0.40	)	$	(0.40	)	$	(0.40	)	$	(0.40	)	$	(0.75	)	$	(0.75	)	$	(0.71	)	$	(0.71	)

The anti-dilutive securities excluded from the weighted-average shares used to calculate the diluted net loss per common share were as follows (in thousands):



	As of July 31,
	2018	2017
Outstanding common stock options	5,832	7,502
Shares subject to repurchase	—	30
Unvested restricted stock awards, units, and PRSUs	14,629	14,414
Shares related to the convertible senior notes	15,079	7,261
Shares subject to warrants related to the issuance of convertible senior notes	15,079	7,261
Shares issuable pursuant to the ESPP	418	375
	51,037	36,843

Note 17. Related Party Transactions

We lease certain office space from an affiliate of our Chairman, Mr. Duffield, adjacent to our corporate headquarters in Pleasanton, California, under various lease agreements. The average term of the agreements is 9 years. The total rent expense under these agreements was $2 million for each of the three month periods ended July 31, 2018 and 2017, respectively, and $5 million and $4 million for the six months ended July 31, 2018 and 2017, respectively.

Note 18. Geographic Information

Disaggregation of Revenue

We sell our subscription contracts and related services in two primary geographical markets: to customers located in the United States, and to customers located outside of the United States. Revenue by geography is generally based on the address of the customer as specified in our master subscription agreement. The following table sets forth revenue by geographic area (in thousands):



	Three Months Ended July 31,				Six Months Ended July 31,
	2018		2017		2018		2017
United States	$	515,257	$	419,466	$	995,339	$	802,637
Other countries	156,463		105,854		295,024		202,544
Total	$	671,720	$	525,320	$	1,290,363	$	1,005,181

No single country other than the United States had revenues greater than 10% of total revenues for the three and six months ended July 31, 2018 and 2017. No customer individually accounted for more than 10% of our trade and other receivables, net as of July 31, 2018 or January 31, 2018.

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Long-Lived Assets

We attribute our long-lived assets, which primarily consist of property and equipment, to a country based on the physical location of the assets. The following table sets forth Property and equipment, net by geographic area (in thousands):



	July 31, 2018		January 31, 2018
United States	$	607,975	$	479,996
Ireland	55,973		52,904
Other countries	14,577		13,709
Total	$	678,525	$	546,609

Note 19. Subsequent Event

On August 1, 2018, we completed our previously announced acquisition of Adaptive Insights, Inc. ("Adaptive Insights"), a provider of cloud-based software for business planning. Upon acquisition, Adaptive Insights became our wholly-owned subsidiary. The preliminary total purchase consideration was approximately $1.5 billion, consisting principally of cash payments.

The purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values at the acquisition date. We are currently performing the procedures necessary to determine the purchase price allocation, and we will record our initial fair value estimates during the three months ending October 31, 2018.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "seek," "plan," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the "Risk Factors" section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report.

Overview

We were founded in 2005 to deliver cloud applications to global enterprises. Our applications are designed around the way people work today—in an environment that is global, collaborative, fast-paced, and mobile. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our 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 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 revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription services revenues from subscriptions to our HCM application. We market our applications through our direct sales force.

Our diverse customer base includes medium-sized and large, global companies. 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. 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 9,100 and approximately 7,400 employees as of July 31, 2018 and 2017, respectively.

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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 in Europe and Asia, 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 infrastructure as we plan for future growth. We are also investing in personnel to service our growing customer base. These investments will increase our costs on an absolute basis in the near-term. Many of these investments will occur in advance of experiencing any direct benefit from them and will make it difficult to determine if we are allocating our resources efficiently. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs and by utilizing more of the capacity of our data centers.

Since inception, we have invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. Additionally, we continue to expand our professional 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.

Components of Results of Operations

Revenues

We primarily derive our revenues from subscription services and professional services. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include related customer support. Professional services fees include deployment services, optimization services, and training.

Subscription services revenues accounted for 84% of our total revenues during the three and six months ended July 31, 2018 and represented 96% of our total unearned revenue as of July 31, 2018. Subscription services revenues are 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 revenues are recognized over time as they 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.

The majority of our consulting engagements are billed on a time and materials basis, and revenues are typically recognized over time as the services are 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 the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenues, we expect professional services revenues as a percentage of total revenues to decline over time.

Costs and Expenses

Costs of subscription services revenues. Costs of subscription services revenues consist primarily of employee-related expenses related to hosting our applications and providing customer support, the costs of data center capacity, and depreciation of computer equipment and software.

Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors, and travel.

Product development. Product development expenses consist primarily of employee-related costs. We continue to focus our product development efforts on adding new features and applications, increasing the functionality, and enhancing the ease of use of our cloud applications.

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Sales and marketing. Sales and marketing expenses consist primarily of employee-related costs, sales commissions, marketing programs, and travel. Marketing programs consist of advertising, events, corporate communications, brand building, and product marketing activities. 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.

Results of Operations

Revenues

Our total revenues for the three and six months ended July 31, 2018 and 2017 were as follows (in thousands, except percentages):



	Three Months Ended July 31,					Six Months Ended July 31,
	2018		2017		% Change	2018		2017		% Change
Revenues:
Subscription services	$	565,659	$	434,527	30%	$	1,087,808	$	834,263	30%
Professional services	106,061		90,793		17%	202,555		170,918		19%
Total revenues	$	671,720	$	525,320	28%	$	1,290,363	$	1,005,181	28%

Total revenues were $672 million for the three months ended July 31, 2018, compared to $525 million during the prior year period, an increase of $147 million, or 28%. Subscription services revenues were $566 million for the three months ended July 31, 2018, compared to $434 million for the prior year period, an increase of $132 million, or 30%. The increase in subscription services revenues was due primarily to an increased number of customer contracts as compared to the prior year period. Professional services revenues were $106 million for the three months ended July 31, 2018, compared to $91 million for the prior year period, an increase of $15 million, or 17%. The increase in professional services revenues was due primarily to Workday performing deployment and integration services for a greater number of customers than in the prior year period.

Total revenues were $1.3 billion for the six months ended July 31, 2018, compared to $1.0 billion during the prior year period, an increase of $0.3 billion, or 28%. Subscription services revenues were $1.1 billion for the six months ended July 31, 2018, compared to $834 million for the prior year period, an increase of $254 million, or 30%. The increase in subscription services revenues was due primarily to an increased number of customer contracts as compared to the prior year period. Professional services revenues were $203 million for the six months ended July 31, 2018, compared to $171 million for the prior year period, an increase of $32 million, or 19%. The increase in professional services revenues 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 $761 million for the three months ended July 31, 2018, compared to $607 million for the prior year period, an increase of $154 million, or 25%. The increase was primarily due to an increase of $120 million in employee-related costs driven by higher headcount, $8 million in depreciation and amortization expenses, $7 million in facility and IT-related expenses, $7 million in third-party costs for hardware maintenance and data center capacity, and $2 million in marketing expenses.

GAAP operating expenses were $1.4 billion for the six months ended July 31, 2018, compared to $1.1 billion for the prior year period, an increase of $0.3 billion, or 27%. The increase was primarily due to an increase of $0.2 billion in employee-related costs driven by higher headcount and $0.1 billion in expenses related to depreciation, amortization, third-party costs for hardware maintenance and data center capacity, facilities, IT, and marketing.

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 and the ability of operations to generate cash. 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, as they exclude expenses that are not reflective of ongoing operating results. 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.

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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 $604 million for the three months ended July 31, 2018, compared to $476 million for the prior year period, an increase of $128 million, or 27%. The increase was primarily due to an increase of $94 million in employee-related costs driven by higher headcount, $8 million in depreciation and amortization expenses, $7 million in facility and IT-related expenses, $7 million in third-party costs for hardware maintenance and data center capacity, and $2 million in marketing expenses.

Non-GAAP operating expenses were $1.1 billion for the six months ended July 31, 2018, compared to $895 million for the prior year period, an increase of $246 million, or 27%. The increase was primarily due to an increase of $178 million in employee-related costs driven by higher headcount, $15 million in depreciation and amortization expenses, $14 million in facility and IT-related expenses, $14 million in third-party costs for hardware maintenance and data center capacity, and $9 million in marketing expenses.

Reconciliations of our GAAP to non-GAAP operating expenses were as follows (in thousands):



	Three Months Ended July 31, 2018
	GAAP Operating Expenses		Share-Based Compensation Expenses ⁽¹⁾			Other Operating Expenses ⁽²⁾			Non-GAAP Operating Expenses ⁽³⁾
Costs of subscription services	$	87,523	$	(8,521	)	$	(3,787	)	$	75,215
Costs of professional services	112,707		(12,518		)	(519		)	99,670
Product development	292,840		(75,354		)	(3,960		)	213,526
Sales and marketing	202,464		(29,367		)	(1,039		)	172,058
General and administrative	65,168		(21,303		)	(731		)	43,134
Total costs and expenses	$	760,702	$	(147,063	)	$	(10,036	)	$	603,603



	Three Months Ended July 31, 2017
	GAAP Operating Expenses		Share-Based Compensation Expenses⁽¹⁾			Other Operating Expenses ⁽²⁾			Non-GAAP Operating Expenses ⁽³⁾
Costs of subscription services	$	65,931	$	(6,580	)	$	(208	)	$	59,143
Costs of professional services	92,264		(9,301		)	(379		)	82,584
Product development	221,103		(56,923		)	(6,602		)	157,578
Sales and marketing	171,952		(25,942		)	(1,126		)	144,884
General and administrative	55,699		(22,777		)	(754		)	32,168
Total costs and expenses	$	606,949	$	(121,523	)	$	(9,069	)	$	476,357



	Six Months Ended July 31, 2018
	GAAP Operating Expenses		Share-Based Compensation Expenses⁽¹⁾			Other Operating Expenses ⁽²⁾			Non-GAAP Operating Expenses ⁽³⁾
Costs of subscription services	$	167,768	$	(16,398	)	$	(8,239	)	$	143,131
Costs of professional services	210,433		(23,310		)	(2,220		)	184,903
Product development	556,424		(143,865		)	(12,757		)	399,802
Sales and marketing	395,235		(54,979		)	(3,619		)	336,637
General and administrative