EX-99.1 17 d385110dex991.htm CONFIDENTIAL SUBMISSION NO. 1 SUBMITTED TO THE SEC ON JUNE 28, 2012 Confidential Submission No. 1 submitted to the SEC on June 28, 2012

Exhibit 99.1

Confidential Draft Submitted on June 28, 2012

As filed with the Securities and Exchange Commission on                     , 2012

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Workday, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   20-2480422

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

Workday, Inc.

6230 Stoneridge Mall Road

Pleasanton, California 94588

(925) 951-9000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

David A. Duffield, Co-Founder and Co-Chief Executive Officer

Aneel Bhusri, Chairman, Co-Founder and Co-Chief Executive Officer

Mark S. Peek, Chief Financial Officer

Workday, Inc.

6230 Stoneridge Mall Road

Pleasanton, California 94588

(925) 951-9000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Please send copies of all communications to:

 

Gordon K. Davidson, Esq.

Jeffrey R. Vetter, Esq.

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

 

James P. Shaughnessy, Esq.
Melanie D. Vinson, Esq.

Sean O’Connell, Esq.

Workday, Inc.

6230 Stoneridge Mall Road

Pleasanton, California 94588

(925) 951-9000

 

Robert V. Gunderson, Jr., Esq.

David W. Van Horne, Jr., Esq.

Gunderson Dettmer Stough Villeneuve

Franklin & Hachigian, LLP

1200 Seaport Blvd.

Redwood City, California 94063

(650) 321-2400

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

Non-accelerated filer

 

x (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  

Proposed
Maximum
Aggregate

Offering Price(1)(2)

   Amount of
Registration Fee

Class A Common Stock, $0.001 par value

   $200,000,000    $22,920

 

 

(1)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2)

Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                 , 2012

             Shares

 

LOGO

CLASS A COMMON STOCK

 

 

Workday, Inc.                      is offering shares of its Class A common stock. This is our initial public offering of our Class A common stock and no public market currently exists for our shares of Class A common stock. We anticipate that the initial public offering price will be between $              and $             per share.

 

 

We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The holders of our outstanding Class B common stock will hold approximately         % of the voting power of our outstanding capital stock following this offering, and our co-founders and co-Chief Executive Officers, David Duffield and Aneel Bhusri, together with their affiliates, will hold approximately         % of the voting power of our outstanding capital stock following this offering.

 

 

We intend to apply to list our Class A common stock on                      under the symbol “            .”

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 10.

 

 

PRICE $             A SHARE

 

 

 

     Price to
Public
     Underwriting
Discounts and
Commissions
     Proceeds to
Workday
 

Per share

   $                    $                    $                

Total

   $         $        $    

We have granted the underwriters the right to purchase up to an additional              shares of Class A common stock to cover over-allotments.

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to purchasers on                     , 2012.

 

 

 

MORGAN STANLEY

  GOLDMAN, SACHS & CO.

ALLEN & COMPANY LLC

  J.P. MORGAN

                    , 2012

 


TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Special Note Regarding Forward-Looking Statements

     27   

Industry and Market Data

     28   

Use of Proceeds

     29   

Dividend Policy

     29   

Capitalization

     30   

Dilution

     32   

Selected Consolidated Financial Data

     34   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   

Business

     52   
     Page  

Management

     66   

Executive Compensation

     72   

Certain Relationships and Related Party Transactions

     77   

Principal Stockholders

     80   

Description of Capital Stock

     82   

Shares Eligible for Future Sale

     88   

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Class A Common Stock

     90   

Underwriting

     93   

Legal Matters

     98   

Experts

     98   

Where You Can Find Additional Information

     98   

Index to Consolidated Financial Statements

     F-1   

 

 

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

Until                      , 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our Class A common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock and the distribution of this prospectus outside of the United States.


PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Class A common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

WORKDAY, INC.

Workday is a leading provider of enterprise cloud-based applications for human capital management (HCM), payroll, financial management, procurement and employee expense management. 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.

Organizations today operate in environments that are highly complex and that are changing at an increasing rate. Managers and employees must quickly synthesize vast amounts of information and react to rapid changes in global business and regulatory environments. To be successful, they need highly functional and flexible software that enables informed decision-making about the enterprise-wide allocation of their resources. Additionally, given the increasing prominence of consumer-oriented Internet applications, managers and employees expect to interact with enterprise systems in an open, intuitive and collaborative way, including real-time access through a wide range of mobile and computing devices. We believe that legacy, on-premise enterprise systems make these interactions difficult, as their user interfaces are not intuitive and were not originally designed for mobility. Furthermore, legacy applications are often expensive to implement, maintain and upgrade. In the last few years, new technologies and approaches to deliver software have emerged to address these issues.

In response to these changes, Workday is leading the way in helping organizations to better manage their core enterprise resources, specifically their financial and human capital resources. We enable organizations to embrace changes in their operating environments through our rapid innovation cycle of frequent updates, which generally contain new functionality, support for new regulatory requirements, performance requirements and enhancements of the user experience. Our latest update is Workday 16, which provided more than 100 new features, and we currently provide a new update three times per year. By delivering our software as a cloud-based service, our customers operate on our latest version without the burden of large upgrade costs, while having the flexibility to configure our applications to meet their own requirements.

Our customers can operate with a more complete picture of their organization because our applications and embedded analytics capture the content and context of everyday business events, facilitating fast and informed decision-making from wherever they are working. Our applications are designed for the way people work today, in collaboration with each other from a wide variety of devices, empowering workers to make business decisions using real-time data. By providing an intuitive user experience, we enable effective management of resources by all members of an organization, minimizing reliance on specialist information technology (IT), human resources (HR) or finance employees. These professionals are therefore freed to focus on other strategic activities.

We deliver our cloud-based applications using an innovative technology foundation that leverages the most recent advances in cloud computing and data management. Our use of a multi-tenant architecture, object-oriented technology framework, in-memory data management and a mobile-centric approach allows us to deliver applications that are highly functional, flexible and fast. Our customers benefit from moving beyond the limitations associated with traditional on-premise software to highly configurable applications delivered over the Internet. This shift in approach substantially reduces the need for our customers to buy and support a broad range of IT infrastructure, and significantly reduces the cost and complexity relative to implementations and upgrades of on-premise software.

We have achieved significant growth and global scale in a relatively short period of time. We currently have more than 300 customers and we have authorized users worldwide. Our customers include large, global companies such as Aviva International Holdings Ltd., AIG, Inc., Flextronics International, Four Seasons Hotels, Georgetown University, Kimberly-Clark Corporation and Lenovo. Our largest deployment to date is to an organization with a workforce of over 200,000 people.

Our company was founded in 2005, and today we have more than 1,300 employees. We recently changed our fiscal year end from December 31 to January 31. For our fiscal years ended December 31, 2009, December 31, 2010 and January 31, 2012, our revenues were $25.2 million, $68.1 million, and $134.4 million, respectively, representing year-over-year growth in revenues of 170% and 98% for our two most recent fiscal years. We incurred net losses of $49.9 million, $56.2 million and $79.6 million for the fiscal years ended December 31, 2009, December 31, 2010 and January 31, 2012, respectively.

 

 

1


Industry Background

The Market for Enterprise Resource Management Software is Large and Highly Strategic

According to International Data Corporation (IDC),1 the global market for enterprise resource management (ERM) software applications totaled $39 billion in 2011. ERM software provides critical system-of-record data to enterprises and includes applications for financial accounting, HCM, procurement, financial performance management, order management, payroll accounting and enterprise asset management. The size and importance of this market is driven by the fact that financial accounting and HCM are central to the successful management of organizations, and HCM and financial management applications often constitute their most important software purchasing decisions.

Changes in the Business Environment, User Expectations and Technology are Driving a Disruptive Re-Platforming of the Enterprise Applications Market

Organizations operate in an increasingly fast-paced, complex and global environment and now require sophisticated, flexible and easy to use applications that can quickly adapt to their ever-changing requirements.

With the widespread adoption and use of consumer-oriented Internet applications such as Facebook, LinkedIn, and Amazon, and consumer-oriented mobile devices such as smartphones and tablets, today’s generation of workers expects their organizations to embrace more accessible, intuitive and collaborative business applications. By providing synchronized data and analytics through a variety of devices in real-time, enterprises can increase their workforce productivity by facilitating collaboration and decision-making closer to the operational problem being solved.

Fundamental advances in technology architectures have supported the rise of cloud computing that enables the delivery of software-as-a-service (SaaS). Today, mission critical applications can be delivered reliably, securely and cost-effectively to customers over the Internet without the need to purchase supporting hardware and software. As a result of the compelling economics, functionality and flexibility provided by SaaS applications, the annual growth rate of the SaaS market is expected to be significantly greater than the broader software market. IDC estimates that the SaaS market will grow at a compound annual growth rate of 26%, from $17 billion in 2010 to $54 billion in 20152

Legacy Enterprise Applications Provide Limited Business Context, and can be Inflexible and Expensive to Implement and Maintain

Many of the ERM applications deployed today are based on business processes and software architectures that were originally designed in the 1980s and 1990s. These legacy applications were not designed to capture the full range of contextual data related to transactions and business events that now exists in most enterprises. In addition, they historically require separate business intelligence solutions for reporting and analytics that are often based on outdated, unsynchronized information, add a new layer of IT cost and complexity, and require users to learn multiple systems.

The majority of legacy ERM software has been deployed on-premise, requiring substantial investments in IT infrastructure in order to implement, upgrade and maintain this software. Legacy ERM applications are typically based on rigid relational databases, with limited capacity to adapt to evolving business requirements. In addition, these legacy applications typically have user interfaces that pre-date the consumer Internet, involve lengthy upgrade processes, and require specialist knowledge and training to utilize the software’s full functionality.

We believe that historically, the average lifespan of a legacy ERM application has been approximately 10-15 years. The last major modernization cycle occurred more than a decade ago, before the “Year 2000” refresh of many enterprise applications. Over the next several years we anticipate the demand for new cloud-based ERM applications to increase substantially, particularly those that are highly functional, flexible, affordable and easy to use.

 

1 

See (1) in “Industry and Market Data.”

2 

See (4) in “Industry and Market Data.”

 

 

2


The Workday Solution

Our cloud-based applications for human capital management (including human resources, benefits and talent management), payroll, financial management, procurement, and employee expense management offer the following key benefits:

Embracing Change. Our suite of cloud-based applications is designed for leading global enterprises seeking highly flexible software that allows them to embrace changes in their operating and regulatory environments. Our rapid innovation cycle and regular deployment of the latest capabilities to our customers ensures that users are always able to use the latest version of our software, which we currently update three times per year. Our global, unified system of record allows individual customers to configure and adapt our applications to meet their specific requirements, without compromising our ability to upgrade them to the latest release. For example, our users can quickly and easily change the business processes that underlie their Workday applications and can also increase the number of users in response to the organic growth of their business, acquisitions or different operating conditions.

Operating with the Complete Picture. Our applications provide our customers with significant visibility into their operations and enable real-time operational and financial insights. Our applications are designed to capture both the content and context of everyday business events without the technical complexity and rigidity associated with traditional relational databases. We integrate this rich source of business information with real-time analytics into the core functionality of our applications to enable better and faster decision-making.

Consumer Internet Experience. Our applications enable user experiences that are similar to those of leading consumer Internet sites. Our focus on an intuitive and simple user experience enables adoption of our applications by even novice users with minimal training. Our applications are designed for use by the entire workforce, including senior managers and non-HR and finance employees. This focus enables our customers to generate higher productivity and better business results through broad access to better, timely and more reliable information.

Optimizing IT Resources. Our cloud-based model can result in significantly lower total costs when compared to legacy ERM software. With all of our customers operating on the same version of our software, our applications eliminate customized code and allow us to make regular updates to our software with minimal disruption. Our customers do not need to buy, install and maintain the complex IT infrastructure required to operate on-premise systems. Even though we deliver new features on a frequent basis, our customers control their rate of adoption of new features through configuration, without the need for significant investments in IT resources.

Our solutions are built on an innovative and highly adaptive foundation of modern technologies, including:

 

 

 

Multi-Tenant Architecture. Our multi-tenant architecture enables multiple customers to share the same version of our applications while securely partitioning their respective application data. Because customers utilize our IT resources and operational infrastructure, this framework significantly reduces the costs of implementation, upgrades, and support.

 

 

 

Object-Oriented Technology Framework. Our applications use objects to represent real-world entities such as employees, benefits, budgets, charts of accounts, and organizations. Using objects to model attributes and relationships increases our pace of innovation, enables sophisticated analytics that are part of our core transactional systems of record, and makes the system more easily adaptable to change.

 

 

 

In-Memory Data Management. Our use of in-memory processing brings data physically closer to the central processing units and into main memory, eliminating the need to run a disk-seek operation each time a data look-up is performed. This allows for rapid and efficient delivery of embedded business intelligence to facilitate actionable analytics and reporting.

 

 

 

Consumer User Interface (UI). We have built a flexible and modern UI platform that allows us to quickly embrace new UI technologies without needing to rewrite the underlying application logic. Currently, we support all major browsers, run natively on Apple’s iOS with applications specifically designed for the iPad and iPhone, and support other mobile platforms such as Android, Windows Mobile and Symbian through our HTML5 client.

 

 

 

Configurable Processes. We offer a broad set of tools for configuring, managing, monitoring, and optimizing the business processes that organizations rely on to manage their business. We include over 270 pre-defined business process definitions to help accelerate deployments and provide a starting point for additional configuration.

 

 

 

Web Services-based Integration Platform. By offering an enterprise-class, embedded web services integration platform and toolset at no additional cost, we relieve customers of many of the burdens associated with legacy systems integration and greatly reduce the risk of implementation failures or delays. In addition to open, standards-based web services application programming interfaces, we provide a growing portfolio of pre-built, packaged integrations and connectors called Integration Cloud Connect.

 

 

3


 

 

Security and Audit. We endeavor to adhere to the highest security standards. We voluntarily obtain third party examinations relating to security and data privacy. From the physical security of our data center operations, to network and application level-security, to safeguarding our customers’ sensitive data, we believe we provide best-in-class infrastructure, policies and procedures. We deliver configurable, user-level access control policies as well as a comprehensive, always-on auditing service that captures and documents changes to both data elements and business processes.

Our Strategy for Growth

Our strategy for growth reflects our mission to build the next generation of business enterprise software delivered as a service. Key elements of our strategy include:

Expand our Customer Base. We believe that there is a substantial opportunity for us to continue to increase the size of our enterprise customer base across a broad range of industries given the relatively high level of business process commonality for the applications we provide. Due to the age and inherent limitations of legacy software applications, as well as continuous changes in regulatory and compliance requirements, we expect there to be a wave of pending upgrade cycles of many legacy ERM applications over the next few years. We will continue to invest aggressively in our direct and indirect sales and marketing capabilities to continue to acquire new customers.

Maintain our Innovation Leadership by Strengthening and Extending our Current Suite of Cost-Effective Applications. Our customers’ ability to deploy new applications and new application functionality rapidly and cost-effectively has been central to the results we have achieved to date. Through continued investment, we intend to extend the range of our applications in the future. In addition, by collaborating with our customers and implementation partners, we plan to strengthen our current applications to increase their functionality and capabilities and to maintain rapid and cost-effective deployments.

Expand Internationally. We believe that there is a significant opportunity for our cloud-based applications outside of the United States. Given our modern, cloud-based architecture, our knowledge of global requirements, and the highly scalable nature of our applications, we believe our applications are particularly well suited to large, dynamic enterprises with complex, global operations. Our applications are also well suited to organizations with operations in emerging markets that have not previously been able to justify investments in ERM software. We plan to expand our sales capability internationally by expanding our direct sales force and by collaborating with strategic partners around the world.

Deepen our Relationship with our Existing Customer Base. We believe that our customers will increase their usage of existing applications and increase the number of applications they choose to buy if they are satisfied with our applications and services. As we extend and strengthen the functionality of our applications, we will continue to invest in initiatives to increase the depth of application adoption and maintain our high levels of customer satisfaction. We believe there is also a significant opportunity for us to extend the breadth of applications deployed by our existing customers, particularly our Financial Management application, which has been selected by approximately 10% of our customers to date.

Further Develop our Partner Ecosystem. We have established a strong set of relationships with other organizations in our ecosystem to deliver best-in-class applications to our customers. These technology and services partners enable us to increase the speed of deployment and functionality of our cloud-based applications and offer a wider range of integrated services to our customers. We intend to support our partners in the growth of their Workday practices, as well as increase the number of partners who work with our customers. We will also continue to invest in and support the growth of Workday’s integration platform that allows third parties and customers to integrate their Workday applications, technology partner applications, and their own custom applications.

Leverage our Unique Culture. We believe that building and maintaining a remarkable culture benefits our customers and employees, who together form the Workday Community. Engaged and loyal employees provide high levels of customer satisfaction, leading to greater adoption of our applications and recommendations to potential customers. We believe that this culture is the foundation for the successful execution of our strategy and, as a result, is a critical requirement for our growth agenda.

Selected Risks Associated With Our Business

Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

 

 

We have a history of cumulative losses and we do not expect to be profitable for the foreseeable future.

 

 

 

We have a limited operating history, which makes it difficult to predict our future operating results.

 

 

 

The markets in which we participate are intensely competitive, and if we do not compete effectively our operating results could be adversely affected.

 

 

4


 

 

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

 

 

 

If the market for enterprise cloud computing develops more slowly than we expect, our business could be adversely affected.

 

 

 

To date, we have derived a substantial majority of our subscription revenues from our HCM application. Our efforts to increase use of our HCM application and our other applications may not succeed, and may reduce our revenue growth rate.

 

 

 

If we are not able to provide successful enhancements, new features and modifications, our business could be adversely affected.

 

 

 

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our applications may be perceived as not being secure, customers may reduce the use of or stop using our applications and we may incur significant liabilities.

 

 

 

Large customers often demand more configuration and integration services, or customized features and functions that we do not offer, which could adversely affect our business and operating results.

 

 

 

Because we recognize subscription revenues over the term of the contract, downturns or upturns in new sales will not be immediately reflected in our operating results and may be difficult to discern.

Corporate Information

We were incorporated in March 2005 as North Tahoe Power Tools, Inc., a Nevada corporation. In July 2005, we changed our name to Workday, Inc. and in June 2012 we reincorporated in Delaware. Unless expressly indicated or the context requires otherwise, the terms “Workday,” “company,” “we,” “us,” and “our” in this prospectus refer to Workday, Inc., a Delaware corporation, and, where appropriate, its wholly-owned subsidiaries. Our principal executive offices are located at 6230 Stoneridge Mall Road, Pleasanton, California 94588, and our telephone number is (877) WORKDAY. Our website address is www.workday.com. The information on, or that can be accessed through, our website is not part of this prospectus. We recently changed the end of our fiscal year from December 31 to January 31 for financial reporting purposes. Workday is our registered trademark in the United States, the European Community and Canada, and the Workday logo, Workday Object Management Server and all of our product names are our trademarks. Other trademarks, service marks, or trade names appearing in this prospectus are the property of their respective owners.

 

 

5


THE OFFERING

 

Class A common stock offered by us

                     shares

 

Class A common stock to be outstanding after our initial public offering

                     shares

 

Class B common stock to be outstanding after our initial public offering

                     shares

 

Total Class A and Class B common stock to be outstanding after our initial public offering

                     shares

 

Over-allotment option of Class A common stock offered by us

                     shares

 

Use of proceeds

We estimate that our net proceeds from the sale of the Class A common stock that we are offering will be approximately $             million, assuming an initial public offering price of $                 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

The principal purpose of this offering is to create a public market for our Class A common stock. We intend to use the net proceeds to us from our initial public offering for working capital and other general corporate purposes. In addition, we may use a portion of the net proceeds from our initial public offering for acquisitions of complementary businesses, technologies, or other assets. However, we do not have agreements or commitments relating to any specific material acquisitions at this time. See “Use of Proceeds.”

 

Voting rights

Shares of Class A common stock are entitled to one vote per share.

 

 

Shares of Class B common stock are entitled to ten votes per share.

 

 

Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our certificate of incorporation. Mr. Duffield and Mr. Bhusri, our co-founders and co-CEOs, and their affiliates, who after our initial public offering will hold more than         % of the voting power of our outstanding capital stock, will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See “Principal Stockholders” and “Description of Capital Stock.”

 

Proposed symbol

“            ”

The number of shares of Class A and Class B common stock to be outstanding after our initial public offering gives effect to the issuance and sale of                      shares of Class A common stock in this offering and is based on no shares of our Class A common stock and 134,964,754 shares of our Class B common stock outstanding as of April 30, 2012, and excludes:

 

 

 

28,053,035 shares of Class B common stock issuable upon the exercise of options outstanding as of April 30, 2012, with a weighted-average exercise price of approximately $1.58 per share;

 

 

 

3,586,550 shares of Class B common stock issuable upon exercise of options granted between May 1, 2012 and June 15, 2012 with an exercise price of $7.05 per share;

 

 

 

1,150,000 shares of restricted Class B common stock granted between May 1, 2012 and June 15, 2012, all of which are subject to a lapsing forfeiture provision;

 

 

 

1,350,000 shares of Class B common stock issuable upon the exercise of warrants outstanding as of April 30, 2012, with a weighted average exercise price of $7.33 per share;

 

 

6


 

 

1,000,000 shares of Class B common stock that we intend to issue to the Workday Foundation; and

 

 

 

30,537,225 shares of our common stock which are reserved or we anticipate will be reserved for future issuance under our equity compensation plans, consisting of 25,000,000 shares of Class A common stock we anticipate will be reserved for issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering and 5,537,225 shares of Class B common stock reserved for issuance under our 2005 Stock Plan as of April 30, 2012. In addition, in May 2012, we authorized an additional 15,000,000 shares of Class B common stock reserved for issuance under the 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan. We anticipate that our 2012 Equity Incentive Plan will also provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

Unless expressly indicated or the context requires otherwise, all information in this prospectus assumes:

 

 

 

the conversion of all outstanding shares of our preferred stock into an aggregate of 97,976,089 shares of Class B common stock immediately prior to the closing of this offering;

 

 

 

no exercise by the underwriters of their right to purchase up to an additional                     shares of Class A common stock to cover over-allotments;

 

 

 

the amendment to our certificate of incorporation to redesignate our currently outstanding common stock as “Class B common stock” and to create a new class of Class A common stock to be offered and sold in this offering; and

 

 

 

the filing of our restated certificate of incorporation and the effectiveness of our restated bylaws in connection with our initial public offering.

The information in this preliminary prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the preliminary prospectus dated                     , 2012 is authorized by us to be used in connection with our proposed initial public offering. The preliminary prospectus will only be distributed by us and the underwriters named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

 

 

7


SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended December 31, 2009 and 2010, the one-month period ended January 31, 2011 and the year ended January 31, 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the unaudited consolidated statements of operations data for the three months ended April 30, 2011 and April 30, 2012 and the unaudited consolidated balance sheet data as of April 30, 2012 from our unaudited financial statements that are included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of our results in any future period. We changed the end of our fiscal year from December 31 to January 31, effective for our fiscal year ended January 31, 2012 and as a result, we also present certain summary consolidated financial information for the one month transition period ended January 31, 2011. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

                                                                                                                                                                                   
     Year Ended
December 31,
    One Month Ended
Jan. 31,

2011
    Year Ended
Jan. 31,

2012
    Three Months
Ended
April 30,
 
     2009     2010         2011     2012  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

            

Revenues

   $ 25,245      $ 68,055      $ 7,282      $ 134,427      $ 24,693      $ 56,818 (1) 

Costs and expenses(2):

            

Costs of revenues

     20,505        39,864        3,904        65,368        12,476        25,090   

Research and development

     30,045        39,175        3,962        62,014        12,483        20,786   

Sales and marketing

     20,875        36,524        3,771        70,356        12,791        24,838   

General and administrative

     5,215        8,553        1,077        15,133        2,761        6,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     76,640        124,116        12,714        212,871        40,511        76,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (51,395     (56,061     (5,432     (78,444     (15,818     (19,957

Other income (expense), net

     1,544        (57     (8     (1,018     72        (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (49,851     (56,118     (5,440     (79,462     (15,746     (19,992

Provision for income taxes

     91        97        10        167        35        63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (49,942     (56,215     (5,450     (79,629     (15,781     (20,055

Accretion of redeemable convertible preferred stock

     —          —          —          (342     (7     (201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (49,942   $ (56,215   $ (5,450   $ (79,971   $ (15,788   $ (20,256
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (2.28   $ (2.22   $ (0.20   $ (2.71   $ (0.56   $ (0.61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders(3)

     21,922        25,367        27,642        29,478        28,173        33,011   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(4)

         $ (0.65     $ (0.15
        

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders (unaudited)

           122,140          130,987   
        

 

 

     

 

 

 

 

(1)

Revenues for the three months ended April 30, 2012 includes $4.6 million in revenues related to the expiration of a delivery obligation for a 2009 customer arrangement.

(2)

Costs and expenses include share-based compensation expense as follows:

 

                                                                                                                                                                                   
     Year Ended
December 31,
     One Month Ended
Jan. 31,

2011
     Year Ended
Jan.  31,

2012
     Three Months Ended
April  30,
 
     2009      2010            2011      2012  
     (in thousands)  

Costs of revenues

   $ 79       $ 173       $ 16       $ 628       $ 90       $ 215   

Research and development

     272         556         47         1,124         190         375   

Sales and marketing

     187         310         28         839         125         368   

General and administrative

     358         663         102         1,591         313         487   

 

(3)

Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period, less the weighted average unvested common stock subject to repurchase. The effect of outstanding options and warrants is anti-dilutive. See note 12 of the notes to our consolidated financial statements.

(4)

Pro forma net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average shares outstanding assuming the conversion of all of the preferred stock to common stock as of their issuance date. The effect of outstanding options and warrants is anti-dilutive. See note 12 of the notes to our consolidated financial statements.

 

 

8


                                                                       
     As of April 30, 2012  
     Actual     Pro  Forma(1)     Pro Forma  As
Adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash, cash equivalents and marketable securities

   $ 120,248      $ 120,248      $     

Working capital

     28,272        28,272     

Property and equipment, net

     25,163        25,163     

Total assets

     244,671        244,671     

Total deferred revenue

     213,064        213,064     

Total liabilities

     267,153        267,153     

Redeemable convertible preferred stock

     171,107        —       

Additional paid-in capital

     108,666        279,743     

Accumulated deficit

     (302,378     (302,378  

Total stockholders’ (deficit) equity

     (193,589     (22,482  

 

(1)

The pro forma consolidated balance sheet data as of April 30, 2012 presents our consolidated balance sheet as though all of our convertible preferred stock outstanding had automatically converted into shares of Class B common stock in connection with our initial public offering.

(2)

The pro forma as adjusted consolidated balance sheet data reflects the items described in footnote (1) above and our receipt of estimated net proceeds from the sale of shares of Class A common stock that we are offering at an assumed initial public offering price of $                     per share, the midpoint of the price range on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $                     per share would increase (decrease) each of cash, cash equivalents and marketable securities, working capital, total assets, additional paid-in capital, and total stockholders’ equity (deficit) by $              million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

(3)

The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of our initial public offering determined at pricing.

 

 

9


RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our Class A common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have a history of cumulative losses and we do not expect to be profitable for the foreseeable future.

We have incurred significant losses in each period since our inception in 2005. We incurred net losses of $49.9 million in the year ended December 31, 2009, $56.2 million in the year ended December 31, 2010 and $79.6 million in the year ended January 31, 2012. As of April 30, 2012, we had an accumulated deficit of $302.4 million. These losses and accumulated deficit reflect the substantial investments we made to acquire new customers and develop our applications. We expect our operating expenses to increase in the future due to anticipated increases in sales and marketing expenses, research and development expenses, operations costs and general and administrative costs, and therefore we expect our losses to continue for the foreseeable future. Furthermore, to the extent we are successful in increasing our customer base, we will also incur increased losses because costs associated with acquiring customers are generally incurred up front, while subscription revenues are generally recognized ratably over the terms of the agreements, which typically range from three to five years. You should not consider our recent growth in revenues as indicative of our future performance. Accordingly, we cannot assure you that we will achieve profitability in the future, nor that, if we do become profitable, we will sustain profitability.

We have a limited operating history, which makes it difficult to predict our future operating results.

We were incorporated in 2005 and introduced our first application in 2006. As a result of our limited operating history, our ability to forecast our future operating results is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or change due to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.

The markets for HCM and financial management applications are highly competitive, with relatively low barriers to entry for some applications or services. Our primary competitors are Oracle Corporation (Oracle) and SAP AG (SAP), well-established providers of HCM and financial management applications, who have long-standing relationships with many customers. Some customers may be hesitant to adopt cloud-based applications such as ours and prefer to upgrade the more familiar applications offered by these vendors that are deployed on-premise. Oracle and SAP are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do. These vendors, as well as other competitors, could offer HCM and financial management applications on a standalone basis at a low price or bundled as part of a larger product sale. In order to take advantage of customer demand for cloud-based applications, legacy vendors are expanding their cloud-based applications through acquisitions and organic development. For example, Oracle recently acquired Taleo Corporation, and SAP acquired SuccessFactors and has entered into an agreement to acquire Ariba, Inc. Legacy vendors may also seek to partner with other leading cloud providers. We also face competition from custom-built software vendors and from vendors of specific applications. These vendors include, without limitation: Lawson Software, which was recently acquired by an affiliate of Infor Global Solutions, The Ultimate Software Group, Inc., and Automatic Data Processing. In addition, other companies that provide cloud-based applications in different target markets, such as Salesforce.com and NetSuite, may develop applications or acquire companies that operate in our target markets, and some potential customers may elect to develop their own internal applications. With the introduction of new technologies and market entrants, we expect this competition to intensify in the future.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition. In addition, many of our competitors have established marketing relationships, access to larger customer bases and major distribution agreements with consultants, system integrators and resellers. Our

 

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competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their product offerings or resources. If our competitors’ products, services or technologies become more accepted than our applications, if they are successful in bringing their products or services to market earlier than ours, or if their products or services are more technologically capable than ours, then our revenues could be adversely affected. In addition, some of our competitors may offer their products and services at a lower price. If we are unable to achieve our target pricing levels, our operating results would be negatively affected. Pricing pressures and increased competition could result in reduced sales, reduced margins, losses or a failure to maintain or improve our competitive market position, any of which could adversely affect our business.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We have recently experienced a period of rapid growth in our headcount and operations. In particular, we grew from 321 employees as of December 31, 2008 to 1,266 employees as of April 30, 2012, and have also significantly increased the size of our customer base. We anticipate that we will significantly expand our operations and headcount in the near term. This growth has placed, and future growth will place, a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage growth could result in difficulty or delays in deploying customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

If the market for enterprise cloud computing develops more slowly than we expect or declines, our business could be adversely affected.

The enterprise cloud computing market is not as mature as the market for on-premise enterprise software, and it is uncertain whether cloud computing will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption of cloud computing in general, and of HCM and financial management services in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to cloud computing. It is difficult to predict customer adoption rates and demand for our applications, the future growth rate and size of the cloud computing market or the entry of competitive applications. The expansion of the cloud computing market depends on a number of factors, including the cost, performance, and perceived value associated with cloud computing, as well as the ability of cloud computing companies to address security and privacy concerns. If other cloud computing providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud computing applications as a whole, including our applications, may be negatively affected. If cloud computing does not achieve widespread adoption, or there is a reduction in demand for cloud computing caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, it could result in decreased revenues and our business could be adversely affected.

To date, we have derived a substantial majority of our subscription revenues from our HCM application. Our efforts to increase use of our HCM application and our other applications may not succeed, and may reduce our revenue growth rate.

To date we have derived a substantial majority of our subscription revenues from our HCM application. Any factor adversely affecting sales of this application, including application release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could adversely affect our business and operating results. Our participation in the markets for our payroll, financial management, procurement and employee expense management applications is relatively new, and it is uncertain whether these areas will ever result in significant revenues for us. Further, the introduction of new applications beyond these markets may not be successful.

If we are not able to provide successful enhancements, new features and modifications, our business could be adversely affected.

If we are unable to provide enhancements and new features for our existing applications or new applications that achieve market acceptance or that keep pace with rapid technological developments, our business could be adversely affected. For example, we are focused on enhancing the features and functionality of our non-HCM applications to enhance their utility to larger customers with complex, dynamic and global operations. The success of enhancements, new features and applications depends on several factors, including the timely completion, introduction and market acceptance of the enhancements or new features or applications. Failure in this regard may significantly impair our revenue growth. In addition, because our applications are designed to operate on a variety of systems, we will need to continuously modify and enhance our applications to keep pace with changes in Internet-related hardware, iOS and other software, communication, browser and database technologies. We may not be successful in either developing these

 

11


modifications and enhancements or in bringing them to market in a timely fashion. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our applications to operate effectively with future network platforms and technologies could reduce the demand for our applications, result in customer dissatisfaction and adversely affect our business.

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our applications may be perceived as not being secure, customers may reduce the use of or stop using our applications and we may incur significant liabilities.

Our applications involve the storage and transmission of our customers’ proprietary information, including personal or identifying information regarding their employees, customers and suppliers, as well as their finance and payroll data. As a result, unauthorized access or security breaches could result in the loss of information, litigation, indemnity obligations and other liability. While we have security measures in place to protect customer information and prevent data loss and other security breaches, if these measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and someone obtains unauthorized access to our customers’ data, our reputation could be damaged, our business may suffer and we could incur significant liability. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect to not renew their subscriptions, result in reputational damage or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our operating results.

Large customers often demand more configuration and integration services, or customized features and functions that we do not offer, which could adversely affect our business and operating results.

Large customers may demand more configuration and integration services, which increase our upfront investment in sales and deployment efforts, with no guarantee that these customers will increase the scope of their subscription. As a result of these factors, we must devote a significant amount of sales support and professional services resources to individual customers, increasing the cost and time required to complete sales. Additionally, our applications do not currently permit customers to add new data fields and functions or to modify our code. If prospective customers require customized features or functions that we do not offer, and that would be difficult for them to deploy themselves, then the market for our applications will be more limited and our business could suffer.

Because we recognize subscription revenues over the term of the contract, downturns or upturns in new sales will not be immediately reflected in our operating results and may be difficult to discern.

We generally recognize subscription revenues from customers ratably over the terms of their contracts, which typically range from three to five years. As a result, most of the subscription revenues we report in each quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter will likely have only a small impact on our revenue results for that quarter. However, such a decline will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our applications, and potential changes in our pricing policies or rate of renewals, may not be fully reflected in our results of operations until future periods. We may be unable to adjust our cost structure to reflect the changes in revenues. In addition, a significant majority of our costs are expensed as incurred, while revenues are recognized over the life of the customer agreement. As a result, increased growth in the number of our customers could result in our recognition of more costs than revenues in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new customers must be recognized over the applicable subscription term.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our revenues, gross margin, profitability, cash flow and deferred revenue, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation, those listed below:

 

 

 

our ability to attract new customers;

 

 

 

the addition or loss of large customers, including through acquisitions or consolidations;

 

12


 

 

the timing of recognition of revenues;

 

 

 

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

 

 

 

network outages or security breaches;

 

 

 

general economic, industry and market conditions;

 

 

 

customer renewal rates;

 

 

 

increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;

 

 

 

changes in our pricing policies or those of our competitors;

 

 

 

the mix of applications sold during a period;

 

 

 

seasonal variations in sales of our applications, which has historically been highest in the fourth quarter of a calendar year;

 

 

 

the timing and success of new application and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; and

 

 

 

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies.

We depend on data centers operated by third parties and any disruption in the operation of these facilities could adversely affect our business.

We host our applications and serve all of our customers from data centers located in Ashburn, Virginia; Lithia Springs, Georgia; Portland, Oregon; Dublin, Ireland; and Amsterdam, the Netherlands. While we control and have access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.

Problems faced by our third-party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our third-party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our applications could adversely affect our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might reduce our revenues, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability, or adversely affect our renewal rates.

Furthermore, our financial management application is essential to our customers’ financial projections, reporting and compliance programs. Any interruption in our service may affect the availability, accuracy or timeliness of these programs and could damage our reputation, cause our customers to terminate their use of our application, require us to indemnify our customers against certain losses and prevent us from gaining additional business from current or future customers.

Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our applications and adversely affect our business.

Our customers can use our applications to collect, use and store personal or identifying information regarding their employees, customers and suppliers. Federal, state and foreign government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage and disclosure of personal information obtained from consumers and individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our applications and reduce overall demand, or lead to significant fines,

 

13


penalties or liabilities for any noncompliance with such privacy laws. Furthermore, privacy concerns may cause our customers’ workers to resist providing the personal data necessary to allow our customers to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries.

All of these domestic and international legislative and regulatory initiatives may adversely affect our customers’ ability to process, handle, store, use and transmit demographic and personal information from their employees, customers and suppliers, which could reduce demand for our applications. The European Union and many countries in Europe have stringent privacy laws and regulations, which may impact our ability to profitably operate in certain European countries.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the processing of personal information were to be curtailed in this manner, our software applications would be less effective, which may reduce demand for our applications and adversely affect our business.

Because we sell sophisticated applications to manage complex operating environments of large customers, we encounter long sales cycles, which could adversely affect our operating results in a given period.

Our ability to increase revenues and maintain profitability depends, in large part, on widespread acceptance of our applications by medium-sized and large businesses and other organizations. As we target our sales efforts at these customers, we face greater costs, longer sales cycles and less predictability in completing some of our sales. In the large enterprise market, the customer’s decision to use our applications may be an enterprise-wide decision and, therefore, these types of sales require us to provide greater levels of education regarding the use and benefits of our applications. In addition, because we are a relatively new company with a limited operating history, our target customers may prefer to purchase applications that are critical to their business from one of our larger, more established competitors. Our typical sales cycles are six to nine months, and we expect that this lengthy sales cycle may continue or increase as customers adopt our applications beyond HCM. Longer sales cycles could cause our operating and financial results to suffer in a given period.

It takes approximately three to nine months for typical deployments of our applications, depending on the number and type of applications, the complexity and scale of the customers’ business, the configuration requirements and other factors, many of which are beyond our control. Although our contracts are generally noncancellable by the customer, at any given time, a significant percentage of our customers may be still in the process of deploying our applications, particularly during periods of rapid growth.

Our business could be adversely affected if our customers are not satisfied with the deployment services provided by us or our partners.

Our business depends on our ability to satisfy our customers, both with respect to our application offerings and the professional services that are performed to help our customers use features and functions that address their business needs. Professional services may be performed by our own staff, by a third party, or by a combination of the two. Our strategy is to work with third parties to increase the breadth of capability and depth of capacity for delivery of these services to our customers, and third parties provide a majority of our deployment services. If a customer is not satisfied with the quality of work performed by us or a third party or with the type of professional services or applications delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customer’s dissatisfaction with our services could damage our ability to expand the number of applications subscribed to by that customer. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers.

We do not have an adequate history with our subscription or pricing models to accurately predict the long-term rate of customer subscription renewals or adoption, or the impact these renewals and adoption will have on our revenues or operating results.

We have limited experience with respect to determining the optimal prices for our applications. As the markets for our applications mature, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically. Moreover, large customers, which are the focus of our sales efforts, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could adversely affect our revenues, gross margin, profitability, financial position and cash flow.

In addition, our customers have no obligation to renew their subscriptions for our applications after the expiration of the initial subscription period. Our customers may renew for fewer elements of our applications or on different pricing terms. We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our pricing or our applications and their ability to continue their operations and spending levels. If our customers do not renew their subscriptions for

 

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our applications on similar pricing terms, our revenues may decline and our business could suffer. In addition, over time the average term of our contracts could change based on renewal rates or for other reasons.

Our future success also depends in part on our ability to sell additional features or enhanced elements of our applications to our current customers. This may require increasingly sophisticated and costly sales efforts that are targeted at senior management. If these efforts are not successful, our business may suffer.

The loss of one or more of our key customers, or a failure to renew our subscription agreements with one or more of our key customers, could negatively affect our ability to market our applications.

We rely on our reputation and recommendations from key customers in order to promote subscriptions to our applications. The loss of any of our key customers, or a failure of some of them to renew, could have a significant impact on our revenues, reputation and our ability to obtain new customers. In addition, acquisitions of our customers could lead to cancellation of our contracts with those customers or by the acquiring companies, thereby reducing the number of our existing and potential customers. Acquisitions of our partners could also result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications.

We typically provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our revenues.

Our customer agreements typically provide service level commitments on a monthly basis. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our applications, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, or we could face contract terminations. Our revenues could be significantly affected if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. Any extended service outages could adversely affect our reputation, revenues and operating results.

Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and our financial results.

Once our applications are deployed, our customers depend on our support organization to resolve technical issues relating to our applications. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by our competitors. Increased customer demand for these services, without corresponding revenues, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on our applications and business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our applications to existing and prospective customers, and our business, operating results and financial position.

Sales to customers outside the United States or with international operations expose us to risks inherent in international sales.

A key element of our growth strategy is to expand our international operations and develop a worldwide customer base. To date, we have not realized a substantial portion of our revenues from customers headquartered outside the United States. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our limited experience with international operations, our international expansion efforts may not be successful in creating demand for our applications outside of the United States or in effectively selling subscriptions to our applications in all of the international markets we enter. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

 

 

 

the need to localize and adapt our application for specific countries, including translation into foreign languages and associated expenses;

 

 

 

data privacy laws which require that customer data be stored and processed in a designated territory;

 

 

 

difficulties in staffing and managing foreign operations;

 

 

 

different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;

 

 

 

new and different sources of competition;

 

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weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;

 

 

 

laws and business practices favoring local competitors;

 

 

 

compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

 

 

 

increased financial accounting and reporting burdens and complexities;

 

 

 

restrictions on the transfer of funds;

 

 

 

adverse tax consequences; and

 

 

 

unstable regional and economic political conditions.

Today, our international contracts are only occasionally denominated in local currencies. However, the majority of our local costs are denominated in local currencies. We anticipate that over time, an increasing portion of our international contracts may be denominated in local currencies. Therefore, fluctuations in the value of the U.S. dollar and foreign currencies may impact our operating results when translated into U.S. dollars. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

If we fail to manage our technical operations infrastructure, our existing customers may experience service outages and our new customers may experience delays in the deployment of our applications.

We have experienced significant growth in the number of users, transactions and data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters and the evolution of our applications. However, the provision of new hosting infrastructure requires significant lead time. We have experienced, and may in the future experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and customer losses. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could adversely affect our reputation and adversely affect our revenues.

Failure to adequately expand our direct sales force will impede our growth.

We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand our direct sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them in the use of our software requires significant time, expense and attention. It can take six months or longer before our sales representatives are fully-trained and productive. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenues. In particular, if we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenues.

If we fail to develop widespread brand awareness cost-effectively, our business may suffer.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our applications and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenues, and even if they do, any increase in revenues may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our applications.

 

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Our growth depends in part on the success of our strategic relationships with third parties.

In order to grow our business, we anticipate that we will continue to depend on relationships with third parties, such as deployment partners, third-party sales channel partners and technology and content providers. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our services. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications by potential customers.

If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our applications or increased revenues.

If our applications fail to perform properly, our reputation could be adversely affected, our market share could decline and we could be subject to liability claims.

Our applications are inherently complex and may contain material defects or errors. Any defects in functionality or that cause interruptions in the availability of our applications could result in:

 

 

 

loss or delayed market acceptance and sales;

 

 

 

breach of warranty claims;

 

 

 

sales credits or refunds for prepaid amounts related to unused subscription services;

 

 

 

loss of customers;

 

 

 

diversion of development and customer service resources; and

 

 

 

injury to our reputation.

The costs incurred in correcting any material defects or errors might be substantial and could adversely affect our operating results.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, the availability or performance of our applications could be adversely affected by a number of factors, including customers’ inability to access the Internet, the failure of our network or software systems, security breaches or variability in user traffic for our services. We may be required to issue credits or refunds for prepaid amounts related to unused services or otherwise be liable to our customers for damages they may incur resulting from certain of these events. For example, our customers access our applications through their Internet service providers. If a service provider fails to provide sufficient capacity to support our applications or otherwise experiences service outages, such failure could interrupt our customers’ access to our applications, adversely affect their perception of our applications’ reliability and reduce our revenues. In addition to potential liability, if we experience interruptions in the availability of our applications, our reputation could be adversely affected and we could lose customers.

Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.

We depend on our senior management team and the loss of one or more key employees or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our key executive officers. We also rely on our leadership team in the areas of research and development, marketing, sales, services and general and administrative functions, and on mission-critical individual contributors in research and development. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers or key employees could have a serious adverse effect on our business.

 

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To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and Internet-related services and senior sales executives. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or Workday have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees in the San Francisco Bay Area often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.

We may in the future seek to acquire or invest in businesses, applications or technologies that we believe could complement or expand our applications, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

 

 

inability to integrate or benefit from acquired technologies or services in a profitable manner;

 

 

 

unanticipated costs or liabilities associated with the acquisition;

 

 

 

incurrence of acquisition-related costs;

 

 

 

difficulty integrating the accounting systems, operations and personnel of the acquired business;

 

 

 

difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

 

 

 

difficulty converting the customers of the acquired business onto our applications and contract terms, including disparities in the revenues, licensing, support or professional services model of the acquired company;

 

 

 

diversion of management’s attention from other business concerns;

 

 

 

adverse effects to our existing business relationships with business partners and customers as a result of the acquisition;

 

 

 

the potential loss of key employees;

 

 

 

use of resources that are needed in other parts of our business; and

 

 

 

use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial position may suffer.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

We have funded our operations since inception primarily through equity financings, capital lease arrangements, and prepayments by customers. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions, a decline in the level of customer

 

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prepayments or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons, and we may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

Adverse economic conditions may negatively impact our business.

Our business depends on the overall demand for enterprise software and on the economic health of our current and prospective customers. The recent financial recession resulted in a significant weakening of the economy in the United States and Europe and of the global economy, more limited availability of credit, a reduction in business confidence and activity, and other difficulties that may affect one or more of the industries to which we sell our applications. In addition, the economies of countries in Europe have been experiencing weakness associated with high sovereign debt levels, weakness in the banking sector and uncertainty over the future of the Euro zone. We have operations in Ireland and current and potential new customers in Europe. If economic conditions in Europe and other key markets for our applications continue to remain uncertain or deteriorate further, many customers may delay or reduce their information technology spending. This could result in reductions in sales of our applications, longer sales cycles, reductions in subscription duration and value, slower adoption of new technologies and increased price competition. In addition, there has been pressure to reduce government spending in the United States, and it is possible that negotiations over the U.S. budget could result in reduced government spending, which might reduce demand for our applications from organizations that receive funding from the U.S. government and could negatively affect the U.S. economy, which could further reduce demand for our applications. Any of these events would likely have an adverse effect on our business, operating results and financial position. In addition, there can be no assurance that enterprise software spending levels will increase following any recovery.

Our customers may fail to pay us in accordance with the terms of their agreements, necessitating action by us to compel payment.

We typically enter into multiple year, non-cancelable arrangements with customers of our services. If customers fail to pay us under the terms of our agreements, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts, including litigation. The risk of such negative effects increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position and cash flow.

Catastrophic events may disrupt our business.

Our corporate headquarters are located in Pleasanton, California and our data centers are located in Ashburn, Virginia; Lithia Springs, Georgia; Sacramento, California; Portland, Oregon; Dublin, Ireland; and Amsterdam, the Netherlands. The west coast of the United States contains active earthquake zones and the southeast is subject to seasonal hurricanes. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational support, hosted services and sales activities. In the event of a major earthquake, hurricane or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have an adverse effect on our future operating results.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We currently have four issued patents. We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our

 

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intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, others may claim that our applications and underlying technology infringe or violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Some of our applications utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Some of our applications include software covered by open source licenses, which may include, by way of example, GNU General Public License and the Apache License. The terms of various open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our applications. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and services. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated, and could negatively affect our business.

We employ third-party licensed software for use in or with our applications, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.

Our applications incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our applications with new third-party software may require significant work and require substantial investment of our time and resources. Also, to the extent that our applications depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our applications, delay new application introductions, result in a failure of our applications and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties.

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our applications, and could have a negative impact on our business.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in reductions in the demand for Internet-based applications such as ours.

 

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In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer.

The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. The forecasts in this prospectus relating to the expected growth in the enterprise software applications, enterprise resource management software and SaaS markets may prove to be inaccurate. Even if these markets experience the forecasted growth described in this prospectus, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our annual report for fiscal year 2014, provide a management report on the internal controls over financial reporting, which must be attested to by our independent registered public accounting firm to the extent we are no longer an “emerging growth company,” as defined by The Jumpstart Our Businesses Act of 2012 (the JOBS Act). If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal controls over financial reporting required to comply with this obligation, which process will be time consuming, costly, and complicated. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and the             , our stock exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance on the terms that we would like. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

 

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We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of July 31, (ii) the end of the fiscal year in which we have total annual gross revenues of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) five years from the date of this prospectus.

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our profitability.

As of January 31, 2012, we had federal and state net operating loss carryforwards due to prior period losses, which if not utilized will begin to expire in 2025 and 2015 for federal and state purposes, respectively. We also have federal research tax credit carryforwards, which if not utilized will begin to expire in 2025. These net operating loss and research tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. This offering or future issuances of our stock could cause an “ownership change.” It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.

Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our customers, which could increase the costs of our services and adversely impact our business.

The application of federal, state, local and international tax laws to services provided electronically is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the Internet. These enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately result in a negative impact on our operating results and cash flows.

In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties and interest for past amounts. If we are unsuccessful in collecting such taxes from our customers, we could be held liable for such costs, thereby adversely impacting our operating results and cash flows.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

 

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Risks Related to Our Initial Public Offering and Ownership of Our Class A Common Stock

There has been no prior public market for our Class A common stock, the stock price of our Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our Class A common stock prior to our initial public offering. The initial public offering price for our Class A common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our Class A common stock following our initial public offering. If you purchase shares of our Class A common stock in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our Class A common stock may not develop upon closing of our initial public offering or, if it does develop, it may not be sustainable. The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

 

 

overall performance of the equity markets;

 

 

 

our operating performance and the performance of other similar companies;

 

 

 

changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our Class A common stock;

 

 

 

announcements of technological innovations, new applications or enhancements to services, acquisitions, strategic alliances or significant agreements by us or by our competitors;

 

 

 

disruptions in our services due to computer hardware, software or network problems;

 

 

 

announcements of customer additions and customer cancellations or delays in customer purchases;

 

 

 

recruitment or departure of key personnel;

 

 

 

the economy as a whole, market conditions in our industry, and the industries of our customers;

 

 

 

trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock;

 

 

 

the expiration of market standoff or contractual lock-up agreements;

 

 

 

the size of our market float; and

 

 

 

any other factors discussed in this prospectus.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

Substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end. If there are substantial sales of shares of our common stock, the price of our Class A common stock could decline.

The price of our Class A common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers, and significant stockholders, or if there is a large number of shares of our common stock available for sale. After this offering, we will have outstanding                 shares of our Class A common stock and                 shares of our Class B common stock, based on the number of shares outstanding as of April 30, 2012. All of the shares of Class A common stock sold in this offering will be available for sale in the public market. All of our outstanding shares of Class B common stock are currently restricted from resale as a result of market standoff and “lock-up” agreements, as more fully described in “Shares Eligible for Future Sale.” These shares will become available to be sold 181 days after the date of this prospectus, subject to extension in some circumstances. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

 

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After our initial public offering, certain of our stockholders will have rights, subject to some conditions, to require us to file registration statements covering their shares to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale until 181 days after the date of this prospectus. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standoff or lock-up agreements.

Morgan Stanley & Co. LLC and Goldman, Sachs & Co. may, in their discretion, permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements.

The market price of the shares of our Class A common stock could decline as a result of the sale of a substantial number of our shares of Class A common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

In making your investment decision, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this prospectus in determining whether to purchase our shares.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees. We cannot confirm the accuracy of such coverage. You should rely only on the information contained in this prospectus in determining whether to purchase our shares of Class A common stock.

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from our initial public offering. We will have broad discretion in the application of the net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

Our co-founders and co-CEOs have control over key decision making as a result of their control of a majority of our voting stock.

Our co-founder and co-CEO David Duffield, together with his affiliates, will hold voting rights with respect to an aggregate of 75,529,791 shares of Class B common stock. Our co-founder and co-CEO Aneel Bhusri, together with his affiliates, will hold voting rights with respect to an aggregate of 27,375,578 shares of Class B common stock. Collectively, these shares will represent a substantial majority of the voting power of our outstanding capital stock following our initial public offering. As a result, they have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, they have the ability to control the management and affairs of our company as a result of their positions as our co-CEOs and their ability to control the election of our directors. In addition, Messrs. Duffield and Bhusri intend to enter into a voting agreement under which each will grant a voting proxy with respect to the Class B common stock beneficially owned by him effective upon his death or incapacity. Messrs. Duffield and Bhusri have each initially designated the other as their respective proxies. Accordingly, upon the death or incapacity of either Mr. Duffield or Mr. Bhusri, the other would individually continue to control a substantial majority of the voting power of our outstanding capital stock. As board members and officers, they owe a fiduciary duty to our stockholders and must act in good faith in a manner they reasonably believe to be in the best interests of our stockholders. As stockholders, even as controlling stockholders, Mr. Duffield and Mr. Bhusri are entitled to vote their shares in their own interests, which may not always be in the interests of our stockholders generally. See “Principal Stockholders” and “Description of Capital Stock.”

The dual class structure of our common stock has the effect of concentrating voting control with our co-CEOs, and also with employees and directors and their affiliates; this will limit or preclude your ability to influence corporate matters.

Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock we are offering in our initial public offering, has one vote per share. Stockholders who hold shares of Class B common stock, including our executive officers, employees, and directors and their affiliates, will together hold approximately         % of the voting power of our outstanding capital stock following our initial public offering. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until 20 years from the date of this prospectus or such earlier time as the shares of Class B common stock represent less than 9% of all outstanding shares of our Class A and Class B common stock, at any time if agreed by the holders of the majority of the Class B common stock or nine months

 

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following the death of both Mr. Duffield and Mr. Bhusri. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, our co-CEOs retain a significant portion of their holdings of Class B common stock for an extended period of time, they could, in the future, continue to control a majority of the combined voting power of our Class A common stock and Class B common stock. For a description of the dual class structure, see “Description of Capital Stock.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our Class A common stock would be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.

If you purchase shares of our Class A common stock in our initial public offering, you will experience substantial and immediate dilution.

If you purchase shares of our Class A common stock in our initial public offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share of $                     per share as of April 30, 2012, based on an assumed initial public offering price of our Class A common stock of $                     per share, the midpoint of the price range on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the Class A common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans, upon vesting of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans, or if we otherwise issue additional shares of our Class A common stock.

We do not intend to pay dividends for the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Delaware law and provisions in our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our Class A common stock.

Following the closing of our initial public offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering will contain provisions that may make the acquisition of our company more difficult, including the following:

 

 

 

any transaction that would result in a change in control of our company will require the approval of a majority of our outstanding Class B common stock voting as a separate class;

 

 

 

we have a dual class common stock structure, which provides our co-CEOs with the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A and Class B common stock;

 

25


 

 

our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

 

 

 

when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock:

 

 

 

certain amendments to our restated certificate of incorporation or restated bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;

 

 

 

our stockholders will only be able to take action at a meeting of stockholders and not by written consent;

 

 

 

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

 

 

 

only our chairman of the board, our chief executive officer, our president, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

 

 

certain litigation against us can only be brought in Delaware;

 

 

 

we will have two classes of common stock until the date that is the first to occur of (i) 20 years after the date of this prospectus, (ii) such time as the shares of Class B common stock represent less than 9% of the outstanding Class A and Class B common stock, (iii) nine months following the death of both Mr. Duffield and Mr. Bhusri, or (iv) the date on which the holders of a majority of the shares of Class B common stock elect to convert all shares of Class A common stock and Class B common stock into a single class of common stock;

 

 

 

our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and

 

 

 

advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

For information regarding these and other provisions, see “Description of Capital Stock.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” 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 prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size is based on information from various sources, including independent industry publications by International Data Corporation (IDC) and Forrester Research, Inc. (Forrester). In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and in our experience to date in, the markets for our applications. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the market position, market opportunity and market size information included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Certain information in the text of the prospectus is contained in independent industry publications. This information is identified with a superscript number. The source of, and selected additional information contained in, these independent industry publications are provided below:

(1) IDC, Worldwide Semiannual Enterprise Resource Management (ERM) Applications Tracker, June 2012. According to IDC, the global market for enterprise resource management (ERM) software applications totaled $39 billion in 2011.

(2) IDC, Worldwide Enterprise Applications 2011–2015 Forecast: The New Normal Feels More Precarious, and It Is, July 2011. IDC projected that the global market for enterprise software applications, which includes ERM applications, was $103 billion in 2011.

(3) IDC, IDC’s Software Taxonomy, June 2012. IDC defines ERM as Enterprise Resource Management. The relevant functional application segments cited by IDC within ERM are Financial Accounting Applications, Human Capital Management, Procurement, Project and Portfolio Management, Financial Performance, Strategy Management and GRC Applications, Order Management, Payroll Accounting and Enterprise Asset Management.

The enterprise software applications market, as cited by IDC, is made up of the Enterprise Resource Management Applications, Operations and Manufacturing Applications, Customer Relationship Management Applications, Engineering Applications, and Supply Chain Management Applications markets.

(4) IDC, Worldwide Software as a Service 2011-2015 Forecast and 2010 Vendor Shares, August 2011.

(5) Forrester Research, Inc., The Forrester Wave: Human Resource Management Systems, Q1 2012, January 2012.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the Class A common stock that we are offering will be approximately $             million, or approximately $             million if the underwriters exercise in full their right to purchase additional shares to cover over-allotments, assuming an initial public offering price of $             per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from our initial public offering by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions.

The primary purpose of this offering is to create a public market for our Class A common stock. We intend to use the net proceeds to us from our initial public offering for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds planned. Additionally, we may choose to expand our current business through acquisitions of or investments in other complementary businesses, technologies, or other assets, using cash or shares of our Class A common stock. However, we currently have no agreements or commitments with respect to any such acquisitions or investments at this time.

Pending other uses, we intend to invest the proceeds in interest-bearing, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or hold as cash. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from our initial public offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and marketable securities and capitalization as of April 30, 2012:

 

 

 

on an actual basis;

 

 

 

on a pro forma basis to give effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into Class B common stock and (ii) the amendment and restatement of our certificate of incorporation in connection with our initial public offering; and

 

 

 

on a pro forma as adjusted basis to give effect to the issuance and sale by us of              shares of Class A common stock in our initial public offering, and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of the Class A common stock of $             per share, the midpoint of the price range on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The unaudited pro forma and pro forma as adjusted information below is illustrative only, and cash, cash equivalents and marketable securities, total stockholders’ equity (deficit) and total capitalization following the completion of our initial public offering will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing. You should read this table in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

                                                                                
     As of April 30, 2012  
     Actual     Pro Forma     Pro Forma
As  Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash, cash equivalents and marketable securities

   $ 120,248      $ 120,248      $                
  

 

 

   

 

 

   

 

 

 

Redeemable convertible preferred stock, $0.001 par value, 30,504,545 shares authorized, 30,389,694 shares issued and outstanding actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

   $ 171,107      $ —        $ —     

Stockholders’ equity (deficit):

      

Convertible preferred stock, $0.001 par value; 67,586,395 shares authorized, issued and outstanding actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     68        —          —     

Preferred stock, $0.001 par value; no shares authorized, issued and outstanding, actual; shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —          —          —     

Common stock, $0.001 par value; 200,000,000 shares authorized, 36,988,665 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     34        —       

Class A common stock, $0.001 par value; no shares authorized, issued and outstanding, actual;                  shares authorized, no shares issued and outstanding, pro forma;                  shares authorized,                  shares issued and outstanding, pro forma as adjusted

     —         

Class B common stock, $0.001 par value; no shares authorized, issued and outstanding, actual; 200,000,000 shares authorized, 134,964,754 shares issued and outstanding pro forma and pro forma as adjusted

     —          132     

Additional paid-in capital

     108,666        279,743     

Accumulated other comprehensive income

     21        21     

Accumulated deficit

     (302,378     (302,378  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (193,589     (22,482  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (22,482   $ (22,482   $     
  

 

 

   

 

 

   

 

 

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) each of cash, cash equivalents and marketable securities, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. If the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, the pro forma as adjusted amount of each of cash, cash equivalents and marketable securities, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization would increase by approximately $             million, after deducting estimated underwriting discounts and commissions, and we would have                  shares of our Class A common stock issued and outstanding, pro forma as adjusted.

 

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The table above excludes the following shares:

 

 

 

28,053,035 shares of Class B common stock issuable upon the exercise of options outstanding as of April 30, 2012, with a weighted-average exercise price of approximately $1.58 per share;

 

 

 

3,586,550 shares of Class B common stock issuable upon exercise of options, granted between May 1, 2012 and June 15, 2012, with an exercise price of $7.05 per share;

 

 

 

1,150,000 shares of restricted Class B common stock granted between May 1, 2012 and June 15, 2012, all of which are subject to a lapsing forfeiture provision;

 

 

 

1,350,000 shares of Class B common stock issuable upon the exercise of warrants outstanding as of April 30, 2012, with a weighted average exercise price of $7.33 per share;

 

 

 

1,000,000 shares of Class B common stock that we intend to issue to the Workday Foundation; and

 

 

 

30,537,225 shares of our common stock which are reserved or we anticipate will be reserved for future issuance under our equity compensation plans, consisting of 25,000,000 shares of Class A common stock we anticipate will be reserved for issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering and 5,537,225 shares of Class B common stock reserved for issuance under our 2005 Stock Plan as of April 30, 2012. In addition, in May 2012, we authorized an additional 15,000,000 shares of Class B common stock reserved for issuance under the 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan. We anticipate that our 2012 Equity Incentive Plan will also provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after our initial public offering.

Our pro forma net tangible book value as of April 30, 2012 was $(31.0) million, or $(0.23) per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of April 30, 2012, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into Class B common stock in connection with our initial public offering.

After giving effect to our sale in our initial public offering of                  shares of Class A common stock at an assumed initial public offering price of the Class A common stock of $                 per share, the midpoint of the price range on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of April 30, 2012 would have been approximately $             million, or $                 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $                 per share to our existing stockholders and an immediate dilution of $                 per share to investors purchasing shares in our initial public offering.

The following table illustrates this per share dilution.

 

Assumed initial offering price per share

     $                

Pro forma net tangible book value per share as of April 30, 2012

   $ (0.23  

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in our initial public offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after our initial public offering

    
    

 

 

 

Dilution in pro forma net tangible book value per share to investors in this offering

     $     
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) our pro forma as adjusted net tangible book value per share after our initial public offering by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share after giving effect to our initial public offering would be approximately $             per share, and the dilution in pro forma net tangible book value per share to investors in our initial public offering would be approximately $             per share.

The following table summarizes, as of April 30, 2012, the differences between the number of shares of our common stock purchased from us, after giving effect to the conversion of our convertible preferred stock into Class B common stock, the total cash consideration paid and the average price per share paid by our existing stockholders and by our new investors purchasing shares in our initial public offering at the assumed initial public offering price of the Class A common stock of $             per share, the midpoint of the price range on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     134,964,754         $ 277,649,073         $ 2.06   

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $           100  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) total consideration paid by new investors by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

 

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If the underwriters exercise their over-allotment option in full, our existing stockholders would own         % and our new investors would own         % of the total number of shares of our common stock outstanding after our initial public offering.

The above table and discussions are based on no shares of our Class A common stock and 134,964,754 shares of our Class B common stock (including preferred stock on an as converted basis) outstanding as of April 30, 2012, and exclude the following shares:

 

 

 

28,053,035 shares of Class B common stock issuable upon the exercise of options outstanding as of April 30, 2012, with a weighted-average exercise price of approximately $1.58 per share;

 

 

 

3,586,550 shares of Class B common stock issuable upon exercise of options, granted between May 1, 2012 and June 15, 2012, with an exercise price of $7.05 per share;

 

 

 

1,150,000 shares of restricted Class B common stock granted between May 1, 2012 and June 15, 2012, all of which are subject to a lapsing forfeiture provision;

 

 

 

1,350,000 shares of Class B common stock issuable upon the exercise of warrants outstanding as of April 30, 2012, with a weighted average exercise price of $7.33 per share;

 

 

 

1,000,000 shares of Class B common stock that we intend to issue to the Workday Foundation; and

 

 

 

30,537,225 shares of our common stock which are reserved or we anticipate will be reserved for future issuance under our equity compensation plans, consisting of 25,000,000 shares of Class A common stock we anticipate will be reserved for issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering and 5,537,225 shares of Class B common stock reserved for issuance under our 2005 Stock Plan as of April 30, 2012. In addition, in May 2012, we authorized an additional 15,000,000 shares of Class B common stock reserved for issuance under the 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan. We anticipate that our 2012 Equity Incentive Plan will also provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

To the extent that any outstanding options or warrants are exercised, new investors will experience further dilution.

 

33


SELECTED CONSOLIDATED FINANCIAL DATA

We changed the end of our fiscal year from December 31 to January 31, effective for our fiscal year ended January 31, 2012. The consolidated statements of operations data for each of the years ended December 31, 2009 and 2010, the one month period ended January 31, 2011, and the year ended January 31, 2012, and the consolidated balance sheets data as of December 31, 2010, and January 31, 2012 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2007 and 2008 and the consolidated balance sheets data as of December 31, 2007, 2008, and 2009 are derived from audited consolidated financial statements that are not included in this prospectus. We have derived the unaudited consolidated statements of operations data for the three months ended April 30, 2011 and April 30, 2012 and the unaudited consolidated balance sheet data as of April 30, 2012 from our unaudited financial statements that are included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of our results in any future period.

You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

                                                                                                                                                       
    Year Ended December 31,     One  Month
Ended
Jan. 31,
2011
    Year Ended
Jan. 31,

2012
    Three Months
Ended
April 30,
 
    2007     2008     2009     2010         2011     2012  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

               

Revenues

  $ 455      $ 6,398      $ 25,245      $ 68,055      $ 7,282      $ 134,427      $ 24,693      $ 56,818 (1) 

Costs and expenses(2):

               

Costs of revenues

    4,721        11,309        20,505        39,864        3,904        65,368        12,476        25,090   

Research and development

    11,380        25,823        30,045        39,175        3,962        62,014        12,483        20,786   

Sales and marketing

    8,049        16,569        20,875        36,524        3,771        70,356        12,791        24,838   

General and administrative

    1,577        4,150        5,215        8,553        1,077        15,133        2,761        6,061   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    25,727        57,851        76,640        124,116        12,714        212,871        40,511        76,775   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (25,272     (51,453     (51,395     (56,061     (5,432     (78,444     (15,818     (19,957

Other income (expense), net

    491        (2     1,544        (57     (8     (1,018     72        (35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (24,781     (51,455     (49,851     (56,118     (5,440     (79,462     (15,746     (19,992

Provision for income taxes

    —          32        91        97        10        167        35        63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (24,781     (51,487     (49,942     (56,215     (5,450     (79,629     (15,781     (20,055

Accretion of redeemable convertible preferred stock

    —          —          —          —          —          (342     (7     (201
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (24,781   $ (51,487   $ (49,942   $ (56,215   $ (5,450   $ (79,971   $ (15,788   $ (20,256
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (1.47   $ (2.63   $ (2.28   $ (2.22   $ (0.20   $ (2.71   $ (0.56   $ (0.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders(3)

    16,834        19,552        21,922        25,367        27,642        29,478        28,173        33,011   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(4)

            $ (0.65     $ (0.15
           

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders (unaudited)

              122,140          130,987   
           

 

 

     

 

 

 

 

(1)

Revenues for the three months ended April 30, 2012 includes $4.6 million in revenues related to the expiration of a delivery obligation for a 2009 customer arrangement.

(2)

Costs and expenses include share-based compensation expense as follows:

 

                                                                                                                                                       
     Year Ended December 31,      One  Month
Ended
Jan. 31,

2011
     Year Ended
Jan. 31,

2012
     Three
Months
Ended
April 30,
 
     2007      2008      2009      2010            2011      2012  
     (in thousands)  

Costs of revenues

   $ 41       $ 92       $ 79       $ 173       $ 16       $ 628       $ 90       $ 215   

Research and development

     109         226         272         556         47         1,124         190         375   

Sales and marketing

     46         88         187         310         28         839         125         368   

General and administrative

     17         114         358         663         102         1,591         313         487   

 

34


(3)

Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period, less the weighted average unvested common stock subject to repurchase. The effect of outstanding stock options and warrants are anti-dilutive. See note 12 of the notes to our consolidated financial statements.

(4)

Pro forma net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average shares outstanding assuming the conversion of all of the preferred stock to common stock as of their issuance date. The effect of outstanding stock options and warrants are anti-dilutive. See note 12 of the notes to our consolidated financial statements.

 

                                                                                                                             
     As of December 31,     As of
January 31,
    As of
April 30,
 
     2007      2008     2009     2010     2012     2012  
            (in thousands)        

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

   $ 21,541       $ 2,327      $ 34,372      $ 30,887      $ 57,529      $ 29,541   

Marketable securities

     32         8,928        20,557        4,498        53,634        90,707   

Working capital (deficit)

     22,205         (988     36,222        (4,065     37,934        28,272   

Property and equipment, net

     2,478         5,631        8,821        12,896        25,861        25,163   

Total assets

     33,289         42,765        97,829        100,605        232,638        244,671   

Total deferred revenue

     7,506         29,318        53,633        97,404        188,097        213,064   

Total liabilities

     11,347         38,567        66,447        122,689        237,293        267,153   

Redeemable convertible preferred stock

     —           —          75,555        75,555        170,906        171,107   

Total stockholders’ equity (deficit)

     21,942         4,198        (44,173     (97,639     (175,561     (193,589

 

35


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 consolidated financial statements and notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

Workday is a leading provider of enterprise cloud-based applications for human capital management (HCM), payroll, financial management, procurement and employee expense management. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources.

We were founded in 2005 to deliver cloud-based 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, which we currently provide three times per year, has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our Human Capital Management (HCM) application in 2006. Since then we have continued to invest in innovation and have consistently introduced new services to our customers, including our Financial Management application in 2007, our Procurement and Employee Expense Management applications in 2008, our Workday Payroll and mobile applications in 2009, our Talent Management application in 2010, and our native iPad application and Workday integration platform in 2011.

We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with three to five year terms and with subscription fees 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 revenues from subscriptions to our Workday HCM application. We market our applications to enterprise customers primarily through our direct sales force.

We have achieved significant growth in a relatively short period of time. Our diverse customer base includes large, global companies and our direct sales force targets organizations with more than 1,000 workers. We currently have more than 300 customers and we have authorized users worldwide. A substantial majority of our growth comes from entering into contracts with new customers. Our current financial focus is on growing our revenues and deferred revenue. 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. As of April 30, 2012, we had 1,266 employees.

We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our application development efforts to deliver additional compelling applications and to address customers’ evolving needs. In addition, we plan to continue to expand our sales and marketing organizations to sell our applications globally. We expect to continue to make significant upfront investments in our data center infrastructure and personnel to service our growth in customers. The level of these upfront infrastructure investments will vary based on the rate at which new customers are added and the scale of such deployments. 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. As a result of these investments, we do not expect to be profitable in the near future. Over time, as we grow our revenues and gain economies of scale, we expect our gross and operating margins will improve.

Since inception, we have invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. More recently, we have expanded our professional services partner ecosystem to further support our customers. We believe our investment in professional services, including partners building their practices around Workday, will drive additional customer subscriptions and continued growth in revenues. In addition, over time we expect professional services revenues and the costs of professional services as a percentage of total revenues to decline as we increasingly rely on third parties to deploy our applications and as the number of our existing customers continues to grow.

To date, our investments in the development of our applications, direct sales force and infrastructure has resulted in significant revenue growth for our company. For the years ended December 31, 2009, December 31, 2010 and January 31, 2012, our revenues were $25.2 million, $68.1 million, and $134.4 million, respectively, representing year-over-year revenue growth of 170% and 98% for our two most recent fiscal years. We currently derive a substantial majority of our revenues from subscriptions to our Workday HCM application. The percentage of our revenues derived from professional services was 34% in the year ended January 31, 2012 and 35% in the quarter ended April 30, 2012. For the years ended December 31, 2009, December 31, 2010 and January 31, 2012, our net loss was $49.9 million, $56.2 million, and $79.6 million, respectively.

 

36


Fiscal Year End

We recently changed our fiscal year end from December 31 to January 31. For the year-over-year discussions below, the year ended January 31, 2012 is compared to the year ended December 31, 2010, and the year ended December 31, 2010 is compared to the year ended December 31, 2009.

Components of Results of Operations

Revenues

We offer subscriptions to our cloud-based applications, including HCM, Payroll, Financial Management, Procurement and Employee Expense Management. We primarily derive our revenues from subscription fees and professional services fees. Subscription revenues primarily consist of fees that give our customers access to our cloud-based applications, which include routine customer support at no additional cost. Professional service fees include deployment services, systems integration, data conversion, and training.

Subscription revenues accounted for approximately 66% of our revenues during the year ended January 31, 2012 and represented approximately 90% of our total deferred revenue as of January 31, 2012. Subscription revenues are driven primarily by the number of customers, the number of workers at each customer, the number of applications subscribed to by each customer, the price of our applications, and to a lesser extent, renewal rates. The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Compared to our other offerings, our HCM application has been available for a longer period of time, is more established in the marketplace and has benefited from continued enhancements of the functionality over a longer period of time, all of which help us to improve our pricing for that application. However, new products or services offerings by competitors in the future could impact the mix and pricing of our offerings.

Subscription fees are recognized ratably as revenues over the contract term beginning on the date the application is made available to the customer, which is generally within two weeks of contract signing. Our subscription contracts are non-cancelable, and typically have a term of three to five years. We generally invoice our customers in advance, in annual installments. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably over the subscription period. Amounts that have not been invoiced are not reflected in our consolidated financial statements.

Our consulting and deployment engagements are typically billed on a time and materials basis, and revenues are typically recognized as the services are rendered. We offer a number of training options intended to support our customers in configuring, using and administering our services. Our typical professional services and training payment terms provide that our customers pay us within 30 days of invoice. As the Workday practices of our partner firms continue to develop, we expect them to increasingly contract directly with our subscription customers. As a result of this trend, and as our subscription revenues increase, we expect professional services revenues as a percentage of total revenues to decline over time.

Approximately 14% of our revenues for the year ended January 31, 2012 were derived from multiple-deliverable arrangements that were accounted for as a single unit of accounting, because some of our professional services offerings did not have standalone value when the related contracts were executed. In these situations, these revenues are recognized ratably over the term of the contracts. Additionally, in these situations, we defer the direct costs of the related professional services contract and the direct costs are amortized over the same period as the professional services revenues are recognized. As of January 31, 2012, 21% of our total deferred revenue balance represented multiple-deliverable arrangements accounted for as a single unit of accounting. For contracts executed during the three months ended April 30, 2012, there was standalone value for all deliverables.

Costs and Expenses

Costs of Revenues. Costs of subscription revenues primarily consist of employee-related expenses (including salaries, benefits and stock-based compensation) related to hosting our applications and providing support, the costs of data center capacity, and depreciation of owned and leased computer equipment and software.

Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. We are intensely focused on our customers’ success and have invested in our professional services ecosystem in order to promote seamless deployments and robust customer adoption. The percentage of revenues derived from professional services was 34% in the year ended January 31, 2012. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscriptions.

 

37


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

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs and travel related expenses. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities. Commissions earned by our sales force that can be associated specifically with a noncancelable subscription contract are deferred and amortized over the same period that revenues are recognized for the related noncancelable contract.

General and Administrative. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees and other corporate expenses.

Results of Operations

The following tables set forth selected consolidated statement of operations data and such data as a percentage of total revenues for each of the periods indicated:

 

     Year Ended     Three Months Ended  
     December 31,
2009
    December 31,
2010
    January 31,
2012
    April 30,
2011
    April 30,
2012
 
     (in thousands)  

Revenues:

  

Subscription services

   $ 13,746      $ 36,594      $ 88,634      $ 16,076      $ 36,922   

Professional services

     11,499        31,461        45,793        8,617        19,896   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     25,245        68,055        134,427        24,693        56,818   

Costs and expenses:

          

Costs of revenues:

          

Costs of subscription services

     6,623        11,419        22,342        4,423        7,594   

Costs of professional services

     13,882        28,445        43,026        8,053        17,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of revenues

     20,505        39,864        65,368        12,476        25,090   

Research and development

     30,045        39,175        62,014        12,483        20,786   

Sales and marketing

     20,875        36,524        70,356        12,791        24,838   

General and administrative

     5,215        8,553        15,133        2,761        6,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     76,640        124,116        212,871        40,511        76,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (51,395 )     (56,061 )     (78,444 )     (15,818     (19,957

Other income (expense), net

     1,544        (57 )     (1,018     72        (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (49,851 )     (56,118 )     (79,462 )     (15,746     (19,992

Provision for income taxes

     91        97        167        35        63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (49,942 )   $ (56,215 )   $ (79,629 )   $ (15,781   $ (20,055
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


     Year Ended     Three Months Ended  
     December 31,
2009
    December 31,
2010
    January 31,
2012
    April 30,
2011
    April 30,
2012
 

Revenues:

  

Subscription services

     54.5     53.8     65.9     65.1     65.0

Professional services

     45.5        46.2        34.1        34.9        35.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0        100.0        100.0   

Costs and expenses:

          

Costs of revenues:

          

Costs of subscription services

     26.2        16.8        16.6        17.9        13.4   

Costs of professional services

     55.0        41.8        32.0        32.6        30.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of revenues

     81.2        58.6        48.6        50.5        44.2   

Research and development

     119.0        57.6        46.1        50.6        36.6   

Sales and marketing

     82.7        53.7        52.3        51.8        43.7   

General and administrative

     20.7        12.6        11.3        11.2        10.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     303.6        182.4        158.4        164.1        135.1   

Operating loss

     (203.6     (82.4     (58.4     (64.1     (35.1

Other income (expense), net

     6.1        (0.1     (0.8     0.3        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (197.5     (82.5     (59.1     (63.8     (35.2

Provision for income taxes

     0.4        0.1        0.1        0.1        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (197.8 )%      (82.6 )%      (59.2 )%      (63.9 )%      (35.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended April 30, 2011 and April 30, 2012

Revenues

 

     Three Months Ended April 30,      2011 to 2012
% Change
 
         2011              2012         
     (in thousands)         

Subscription services

   $ 16,076       $ 36,922         130

Professional services

     8,617         19,896         131   
  

 

 

    

 

 

    

Total revenues

   $ 24,693       $ 56,818         130   
  

 

 

    

 

 

    

Total revenues were $56.8 million for the three months ended April 30, 2012, compared to $24.7 million during the prior year period, an increase of $32.1 million, or 130%. Subscription services revenues were $36.9 million, or 65% of total revenues, for the three months ended April 30, 2012, compared to $16.1 million, or 65% of total revenues, for the prior year period. The increase in subscription revenues was due primarily to the addition of new customers as compared to the prior year period, as the number of customers increased from 178 as of April 30, 2011 to 297 as of April 30, 2012. Professional services revenues were $19.9 million, or 35% of total revenues, for the three months ended April 30, 2012, compared to $8.6 million, or 35% of total revenues, for the prior year period. The increase in professional services revenues was due primarily to new and larger customers requesting deployment and integration services. In addition, we recognized $2.6 million in subscription revenues and $2.0 million in professional services revenues related to the expiration of a delivery obligation for a 2009 customer arrangement.

Costs and Expenses

Costs of Revenues

 

     Three Months Ended
April 30,
     2011 to 2012
% Change
 
         2011              2012         
     (in thousands)         

Subscription services

   $ 4,423       $ 7,594         72

Professional services

     8,053         17,496         117   
  

 

 

    

 

 

    

Total costs of revenues

   $ 12,476       $ 25,090         101   
  

 

 

    

 

 

    

Costs of revenues were $25.1 million for the three months ended April 30, 2012, compared to $12.5 million for the prior year period, an increase of $12.6 million or 101%. The $3.2 million increase in costs of subscription services was primarily due to an increase of $1.1 million in employee compensation costs related to higher headcount, an increase of $0.9 million in depreciation and amortization expenses, and an increase of $0.5 million in service delivery costs, primarily due to our efforts to increase data center capacity. We expect costs of subscription revenues to decline as a percentage of subscription revenues as we achieve economies of scale.

 

39


The costs of professional services were $17.5 million for the three months ended April 30, 2012 and $8.1 million for the three months ended April 30, 2011, a $9.4 million increase. This increase was primarily due to $4.2 million higher employee compensation costs due to higher headcount and $3.5 million in additional subcontractor fees. Due to the large increase in demand for our professional services, we have increased the usage of third party consultants to supplement our professional services staff. We believe that higher utilization of these third party resources, in addition to our own staff, resulted in significantly higher revenues and improved gross profit from professional services. We expect costs of professional services as a percentage of total revenues to decline and gross margins to increase as we increasingly rely on third parties to deploy our applications and as the number of our existing customers continues to grow.

Research and Development

 

     Three Months Ended April 30,      2011 to 2012
% Change
 
         2011              2012         
     (in thousands)         

Research and development

   $ 12,483       $ 20,786         67

Research and development expenses were $20.8 million, or 37% of total revenues, for the quarter ended April 30, 2012, compared to $12.5 million, or 51% of total revenues, for the prior year period, an increase of $8.3 million. The increase was primarily due to an increase of $6.4 million in employee compensation costs due to higher headcount. The decrease in the percentage of revenues spent on research and development during the current year quarter versus the prior year period is primarily a function of increased revenues rather than a curtailment of research and development spending. We expect that in the future, research and development expenses will increase in absolute dollars as we improve and extend our applications and develop new technologies.

Sales and Marketing

 

     Three Months Ended April 30,      2011 to 2012
% Change
 
         2011              2012         
     (in thousands)         

Sales and marketing

   $ 12,791       $ 24,838         94

Sales and marketing expenses were $24.8 million, or 44% of total revenues, for the three months ended April 30, 2012, compared to $12.8 million, or 52% of total revenues, for the prior year period, an increase of $12.0 million. The increase was primarily due to increases of $8.1 million in employee compensation costs due to higher headcount, and $1.3 million in advertising, marketing and event costs. We expect that sales and marketing expenses will increase in absolute dollars in the future as we continue to invest in sales and marketing by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events.

General and Administrative

 

     Three Months Ended April 30,      2011 to 2012
% Change
 
         2011              2012         
     (in thousands)         

General and administrative

   $ 2, 761       $ 6,061         120

General and administrative expenses were $6.1 million, or 11% of total revenues, for the three months ended April 30, 2012, compared to $2.8 million, or 11% of total revenues, for the prior year period, an increase of $3.3 million. The increase was primarily due to increases of $1.3 million in professional and outside services and $1.3 million in employee compensation costs due to higher headcount. The growth in general and administrative expenses during the three months ended April 30, 2012 was to support the overall growth of the company. We expect that the general and administrative expenses will increase throughout the year ended January 31, 2013 to support the general growth of our company and as we develop and staff processes related to our transition to a public company. In addition, we expect that after we become a public company, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion.

Years Ended December 31, 2009, December 31, 2010 and January 31, 2012

Revenues

 

     Year Ended      2009 to 2010
% Change
    2010 to 2012
% Change
 
     December 31,
2009
     December 31,
2010
     January 31,
2012
      
     (dollars in thousands)               

Subscription services

   $ 13,746       $ 36,594       $ 88,634         166     142

Professional services

     11,499         31,461         45,793         174        46   
  

 

 

    

 

 

    

 

 

      

Total revenues

   $ 25,245       $ 68,055       $ 134,427         170        98   
  

 

 

    

 

 

    

 

 

      

 

40


Year ended January 31, 2012 compared to Year ended December 31, 2010. Total revenues were $134.4 million for the year ended January 31, 2012, compared to $68.1 million for the year ended December 31, 2010, an increase of $66.3 million, or 98%. Subscription services revenues were $88.6 million, or 66% of total revenues, for the year ended January 31, 2012, compared to $36.6 million, or 54% of total revenues, for the year ended December 31, 2010. The increase in subscription revenues was due primarily to the addition of new and larger customers as compared to the prior year, as the number of customers increased from 160 as of December 31, 2010 to 259 as of January 31, 2012. Professional services revenues were $45.8 million, or 34% of total revenues, for the year ended January 31, 2012, compared to $31.5 million, or 46% of total revenues, for the year ended December 31, 2010. The increase in professional services revenues was due primarily to a larger customer base requesting deployment and integration services.

Year ended December 31, 2010 compared to Year ended December 31, 2009. Revenues were $68.1 million for the year ended December 31, 2010, compared to $25.2 million for the year ended December 31, 2009, an increase of $42.9 million, or 170%. Subscription and support revenues were $36.6 million, or 54% of total revenues, for the year ended December 31, 2010, compared to $13.7 million, or 54% of total revenues, for the year ended December 31, 2009. The increase in subscription revenues was due primarily to the addition of new and larger customers as compared to the prior year, as the number of customers increased from 114 as of December 31, 2009 to 160 as of December 31, 2010. Professional services revenues were $31.5 million, or 46% of revenues, for the year ended December 31, 2010, compared to $11.5 million, or 46% of revenues, for the year ended December 31, 2009. The increase in professional services revenues was due primarily to a larger customer base requesting deployment and integration services.

Costs and Expenses

Costs of Revenues

 

     Year Ended      2009 to 2010
% Change
    2010 to 2012
% Change
 
     December 31,
2009
     December 31,
2010
     January 31,
2012
      
     (in thousands)               

Subscription services

   $ 6,623       $ 11,419       $ 22,342         72     96

Professional services

     13,882         28,445         43,026         105        51   
  

 

 

    

 

 

    

 

 

      

Total costs of revenues

   $ 20,505       $ 39,864       $ 65,368         94        64   
  

 

 

    

 

 

    

 

 

      

Year ended January 31, 2012 compared to Year ended December 31, 2010. Costs of revenues were $65.4 million for the year ended January 31, 2012, compared to $39.9 million for the year ended December 31, 2010, an increase of $25.5 million or 64%. The increase in costs of subscription services was primarily due to an increase of $4.7 million in employee compensation costs related to higher headcount, an increase of $2.5 million in depreciation and amortization expenses and an increase of $2.4 million in service delivery costs, primarily due to our efforts to increase data center capacity. The increase in the cost of professional services revenues for the year ended January 31, 2012 as compared to the year ended December 31, 2010 was primarily due to an $11.2 million increase in higher employee compensation-related costs due to higher headcount. Gross margin for professional services in the year ended January 31, 2012 was consistent with the level achieved for the year ended December 31, 2010.

Year ended December 31, 2010 compared to Year ended December 31, 2009. Costs of revenues were $39.9 million for the year ended December 31, 2010 compared to $20.5 million for the year ended December 31, 2009, an increase of $19.4 million. The increase in costs of subscription services was primarily due to an increase of $2.0 million in employee compensation costs related to higher headcount, an increase of $1.2 million in depreciation and amortization expenses and an increase of $0.9 million in service delivery costs, primarily due to our efforts to increase data center capacity. The increase in the cost of professional services revenues for the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to recognizing $8.6 million in higher direct costs, including subcontractors, and a $4.4 million increase in employee compensation costs due to higher headcount. Gross margin for professional services in the year ended December 31, 2010 was consistent with the level achieved for the year ended December 31, 2009.

Research and Development

 

     Year Ended      2009 to 2010
% Change
    2010 to 2012
% Change
 
     December 31,
2009
     December 31,
2010
     January 31,
2012
      
     (in thousands)               

Research and development

   $ 30,045       $ 39,175       $ 62,014         30     58

Year ended January 31, 2012 compared to Year ended December 31, 2010. Research and development expenses were $62.0 million, or 46% of total revenues, for the year ended January 31, 2012, compared to $39.2 million, or 58% of total revenues, for the year ended December 31, 2010, an increase of $22.8 million. The increase was primarily due to an increase of $18.0 million in employee compensation costs due to higher headcount and an increase of $1.4 million in contract labor expenses.

Year ended December 31, 2010 compared to Year ended December 31, 2009. Research and development expenses were $39.2

 

41


million, or 58% of total revenues, for the year ended December 31, 2010, compared to $30.0 million, or 119% of total revenues, for the year ended December 31, 2009, an increase of $9.1 million. The increase was primarily due to an increase of $7.6 million in employee compensation costs.

Sales and Marketing

 

     Year Ended      2009 to 2010
% Change
    2010 to 2012
% Change
 
     December 31,
2009
     December 31,
2010
     January 31,
2012
      
     (in thousands)               

Sales and marketing

   $ 20,875       $ 36,524       $ 70,356         75     93

Year ended January 31, 2012 compared to Year ended December 31, 2010. Sales and marketing expenses were $70.4 million, or 52% of total revenues, for the year ended January 31, 2012, compared to $36.5 million, or 54% of total revenues, for the year ended December 31, 2010, an increase of $33.9 million. The increase was primarily due to increases of $24.7 million in employee compensation costs due to increased headcount, a $3.6 million increase in advertising, marketing and event costs, and a $2.5 million increase in travel-related costs.

Year ended December 31, 2010 compared to Year ended December 31, 2009. Sales and marketing expenses were $36.5 million, or 54% of total revenues, for the year ended December 31, 2010, compared to $20.9 million, or 83% of total revenues, for the year ended December 31, 2009, an increase of $15.6 million. The increase was primarily due to increases of $10.9 million in employee compensation costs due to higher headcount and $0.9 million in higher travel related costs.

General and Administrative

 

     Year Ended      2009 to 2010
% Change
    2010 to 2012
% Change
 
     December 31,
2009
     December 31,
2010
     January 31,
2012
      
     (in thousands)               

General and administrative

   $ 5,215       $ 8,553       $ 15,133         64     77

Year ended January 31, 2012 compared to Year ended December 31, 2010. General and administrative expenses were $15.1 million, or 11% of total revenues, for the year ended January 31, 2012, compared to $8.6 million, or 13% of total revenues, for the year ended December 31, 2010, an increase of $6.6 million. The increase was primarily due to increases of $2.5 million in employee compensation costs due to higher headcount, $2.2 million in professional and outside service costs and $0.4 million in recruiting and relocation fees. The growth in general and administrative expenses during the year ended January 31, 2012 was to support the overall growth of our company.

Year ended December 31, 2010 compared to Year ended December 31, 2009. General and administrative expenses were $8.6 million, or 13% of total revenues, for the year ended December 31, 2010, compared to $5.2 million, or 21% of total revenues, for the year ended December 31, 2009, an increase of $3.4 million. The increase was primarily due to increases of $1.7 million in employee compensation costs due to higher headcount and a $1.3 million increase in professional and outside service costs. The growth in general and administrative expenses during the year ended December 31, 2010 was to support the overall growth of our company.

Quarterly Results of Operations

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the five quarters in the period ended April 30, 2012. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles in the United States. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

 

     Three Months Ended  
     Apr. 30,
2011
     Jul. 31,
2011
     Oct. 31,
2011
     Jan. 31,
2012
     Apr. 30,
2012
 
     (in thousands)  

Consolidated Statements of Operations Data:

  

Revenues:

              

Subscription services

   $ 16,076       $ 19,659       $ 23,868       $ 29,032       $ 36,922   

Professional services

     8,617         10,467         12,582         14,126         19,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     24,693         30,126         36,450         43,158         56,818   

Costs and expenses:

              

 

42


     Three Months Ended  
     Apr. 30,
2011
    Jul. 31,
2011
    Oct. 31,
2011
    Jan. 31,
2012
    Apr. 30,
2012
 
     (in thousands)  

Costs of revenues:

          

Costs of subscription services

     4,423        5,168        6,040        6,711        7,594   

Costs of professional services

     8,053        9,715        11,639        13,619        17,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of revenues

     12,476        14,883        17,679        20,330        25,090   

Research and development

     12,483        14,840        16,404        18,287        20,786   

Sales and marketing

     12,791        16,768        18,215        22,582        24,838   

General and administrative

     2,761        3,728        3,594        5,050        6,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     40,511        50,219        55,892        66,249        76,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (15,818     (20,093     (19,442     (23,091     (19,957

Other income (expense), net

     72        (403     (243     (444     (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (15,746     (20,496     (19,685     (23,535     (19,992

Provision for income taxes

     35        35        46        51        63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (15,781   $ (20,531   $ (19,731   $ (23,586   $ (20,055
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenues Trends

Our quarterly revenues increased sequentially for all periods presented due primarily to increases in the number of new customers. Our fourth quarter has historically been our strongest quarter for contracting activity as a result of large enterprise buying patterns. The quarter ended April 30, 2012 also benefited from the recognition of $2.6 million in subscription revenues and $2.0 million in professional services revenues related to the expiration of a delivery obligation for a 2009 customer arrangement. We do not expect to have a similar occurrence in the near term and thus believe our future quarterly revenues growth rates might be less than the rate achieved in the quarter ended April 30, 2012.

Quarterly Costs and Expenses Trends

Total costs and expenses increased sequentially for all periods presented, primarily due to the addition of personnel in connection with the expansion of our business. Sales and marketing expenses generally grew sequentially over the periods. General and administrative costs increased over the periods presented due to higher facilities costs, including expensed equipment and software, and, in recent quarters, higher professional service fees for preparing to be a public company.

Our quarterly operating results may fluctuate due to various factors affecting our performance. As noted above, we recognize revenues from subscription fees ratably over the term of the contract. Therefore, changes in our contracting activity in the near term may not be apparent as a change to our reported revenues until future periods. Most of our expenses are recorded as period costs and thus factors affecting our cost structure may be reflected in our financial results sooner than changes to our contracting activity.

Liquidity and Capital Resources

As of April 30, 2012, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $120.2 million, which were held for working capital purposes. Our cash, cash equivalents and marketable securities are comprised primarily of U.S. agency obligations, commercial paper, municipal securities, corporate securities, certificates of deposit and money market funds.

Since our inception, we financed our operations primarily through private sales of equity securities, customer prepayments, and more recently, capital lease obligations. We believe our existing cash, cash equivalents and marketable securities and cash provided by this offering will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, subscription renewal activity, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, and the continuing market acceptance of our services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

Operating Activities

For the three months ended April 30, 2012, cash flows provided by operating activities was $12.7 million. The positive cash flows resulted primarily from a $25.0 million increase in deferred revenue, partially offset by our net loss. We expect that we will experience a net usage of cash from operations for the quarter ended July 31, 2012.

 

43


For the three months ended April 30, 2011, cash flows used in operating activities was $7.0 million. The cash used primarily related to our net loss and a $3.7 million increase in accounts receivable, partially offset by a $10.0 million increase in deferred revenue.

For the year ended January 31, 2012, cash flows used in operating activities was $13.8 million. The cash used primarily related to our net loss and a $39.0 million increase in accounts receivable due to an increase in billing activity, partially offset by an $89.7 million increase in deferred revenue.

For the year ended December 31, 2010, cash flows used in operating activities was $15.3 million. The cash used primarily related to our net loss, a $14.5 million increase in accounts receivable and a $5.8 million increase in deferred costs, partially offset by a $44.0 million increase in deferred revenue.

For the year ended December 31, 2009, cash flows used in operating activities was $30.1 million. The cash used was primarily the result of our net loss and an $11.1 million increase in deferred costs, partially offset by a $24.3 million increase in deferred revenue.

Investing Activities

Cash (used in) or provided by investing activities for the three months ended April 30, 2012 and 2011, and for the years ended January 31, 2012, December 31, 2010 and December 31, 2009 was $(39.6) million, $(1.6) million, $(56.2) million, $12.2 million, and $(14.5) million, respectively, and was primarily the result of the timing of purchases and maturities of marketable securities and of capital expenditures of $2.2 million, $0.3 million, $5.0 million, $3.7 million, and $4.2 million, respectively. We expect capital expenditures, some of which will be financed through capital leases, will be approximately $35 million to $40 million for the year ended January 31, 2013.

Financing Activities

For the three months ended April 30, 2012, financing activities used $1.1 million due to $1.8 million in principal payments on our outstanding capital leases, partially offset by $0.7 million in proceeds from stock option exercises. For the three months ended April 30, 2011, financing activities provided $0.1 million in cash as a result of $0.9 million in proceeds from the exercises of stock options partially offset by $0.8 million principal payments on our outstanding capital leases.

For the year ended January 31, 2012, financing activities provided $97.0 million primarily as a result of $95.0 million net proceeds from issuance of the Series F redeemable convertible preferred stock and $6.3 million in proceeds from the exercise of stock options, partially offset by $4.3 million in principal payments on our capital lease obligations.

For the year ended December 31, 2010, financing activities used $0.3 million primarily as a result $1.0 million in principal payments on our capital lease obligations partially offset by $0.6 million in proceeds from the exercise of stock options.

For the year ended December 31, 2009, financing activities provided $76.7 million primarily as a result of $75.6 million net proceeds from issuance of the Series E redeemable convertible preferred stock and $1.1 million in proceeds from the exercise of stock options.

Backlog

We have generally signed multiple year subscription contracts for our applications. The timing of our invoices to the customer is a negotiated term and thus varies among our subscription contracts. For multiple-year agreements, it is common to invoice an initial amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue or elsewhere in our consolidated financial statements, and are considered by us to be backlog. The amount of subscription contract backlog was approximately $240 million as of January 31, 2012. In some cases, as part of negotiating customer contracts, we sought to have a significant amount of the total contract value paid at the time of contract execution to help fund our operations. Following this offering, we may reduce incentives for cash payments from customers for more than one year of subscription fees, which may increase the amount of backlog over time while reducing the amount of noncurrent deferred revenue. Multiple-year payments are recorded as deferred revenue until recognized as revenues ratably.

We expect that the amount of backlog relative to the total value of our contracts will change from year to year for several reasons, including the amount of cash collected early in the contract term, the specific timing and duration of large customer subscription agreements, varying invoicing cycles of subscription agreements, the specific timing of customer renewal, changes in customer financial circumstances and foreign currency fluctuations.

Backlog may also vary based on changes in the average non-cancellable term of our subscription agreements. In recent years, most of our non-cancellable contract terms have averaged four years. The change in backlog that results from changes in the average non-cancellable term of our subscription arrangements may not be an indicator of the likelihood of renewal or expected future revenues. Accordingly, we believe that fluctuations in backlog are not a reliable indicator of future revenues and we do not utilize

 

44


backlog as a key management metric internally.

Commitments

As of January 31, 2012, we had a total of $4.0 million in letters of credit outstanding in favor of certain landlords for office space. These letters of credit were collateralized by trust assets of Mr. Duffield. To date, no amounts have been drawn against the letters of credit, which renew annually and mature at various dates through October 2012. We had $15.7 million in capital lease obligations as of January 31, 2012, of which $5.6 million were to a related party.

Our principal commitments primarily consist of obligations under leases for office space and co-location facilities for data center capacity and our development and test data center, and computer equipment and furniture and fixtures. As of January 31, 2012, the future non-cancelable minimum payments under these commitments were as follows:

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 
     (in millions)  

Capital lease obligations

   $ 10,155       $ 3,561       $ 6,594         —           —     

Capital lease obligations—related party

     5,561         3,514         2,047         —           —     

Operating lease obligations:

              

Facilities space

     19,671         5,427         11,303         2,786         155   

Contractual commitments

     842         686         156         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,229       $ 13,188       $ 20,100       $ 2,786       $ 155   

We anticipate leasing additional office space near our headquarters during the year ending January 31, 2013 to support our growth. In addition, our existing lease agreements provide us with the option to renew. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised these options.

Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Off-Balance Sheet Arrangements

Through January 31, 2012, 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 consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in note 2 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

We derive our revenues primarily from subscription fees and from professional services fees, including training. We sell subscriptions to our cloud-based applications through contracts that are generally between three and five years in length. Our arrangements do not contain general rights of return.

Our subscription contracts do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts.

We commence revenue recognition for our cloud-based applications and professional services when all of the following criteria are met:

 

 

 

There is persuasive evidence of an arrangement;

 

45


 

 

The service has been or is being provided to the customer;

 

 

 

Collection of the fees is reasonably assured; and

 

 

 

The amount of fees to be paid by the customer is fixed or determinable.

Subscription and Support Revenues

Subscriptions and support revenues are recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that our service is made available to the customer, provided revenue recognized does not exceed amounts that are invoiced and currently due. Amounts that have been invoiced and that are due are recorded in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.

Professional Services Revenues

Professional services revenues are generally recognized as the services are rendered for time and material contracts, or when any milestones are achieved and accepted by the customer for fixed price contracts. The majority of our professional services contracts are on a time and materials basis. Training revenues are recognized as the services are performed.

Multiple Deliverable Arrangements

For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting.

Subscription contracts have standalone value as we sell the subscriptions separately. In determining whether professional services can be accounted for separately from subscription services, we consider the availability of the professional services from other vendors and the nature of our professional services. As of January 31, 2012, not all of our professional services offerings had standalone value. In the three months ended April 30, 2012, we determined that we had established standalone value on all of our professional services offerings, and thus will account for them separately from subscription services on a prospective basis.

When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangement accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (VSOE) of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (TPE) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently exist for any of our deliverables. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on our best estimate of selling price. The amount of arrangement fee allocated is limited by contingent revenues, if any.

We determine our best estimate of selling price for our deliverables based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors. We begin the evaluation of our best estimate of selling price by reviewing historical data related to sales of our deliverables, including comparing the percentages of our contract prices to our list prices. We also consider several other data points in our evaluation, including the size of our arrangements, the cloud applications sold, customer demographics and the numbers and types of users within our arrangements.

Deferred Costs

Deferred costs include commissions earned by our sales force that can be associated specifically with a noncancelable cloud-based application services contract and direct costs related to professional services contracts accounted for together with a related cloud-based application services contract as a single unit of accounting.

Sales commissions are deferred when earned and amortized over the same period that revenues are recognized for the related noncancelable cloud-based application services contract. The commission payments are paid in full after the customer has paid for its first year of service. Direct professional services costs are deferred up until the commencement of revenue recognition of the single unit and then recognized when the related professional services revenues are recognized.

Amortization of deferred commissions and deferred professional services costs are included in sales and marketing and costs of professional services, respectively, in the accompanying consolidated statements of operations.

During the year ended January 31, 2012, we deferred $10.1 million of commission expenditures and we amortized $3.2 million to

 

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sales and marketing expense. During the year ended December 31, 2010, we deferred $4.4 million of commission expenditures and we amortized $1.5 million to sales and marketing expense. Deferred commissions on our consolidated balance sheets totaled $14.4 million as of April 30, 2012, $13.6 million as of January 31, 2012, and $6.9 million as of December 31, 2010.

Share-Based Compensation

Compensation expense related to share-based transactions, including employee, consultant, and non-employee director stock option awards, is measured and recognized in the financial statements based on fair value. The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model. The share-based compensation expense, net of forfeitures, is recognized using a straight-line basis over the requisite service periods of the awards, which is generally five years.

Our option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future.

These assumptions are estimated as follows:

 

 

 

Fair Value of Common Stock. Because our common stock is not publicly traded, we must estimate the fair value of common stock, as discussed in “Common Stock Valuations” below.

 

 

 

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term of the options for each option group.

 

 

 

Expected Term. The expected term represents the period that our share-based awards are expected to be outstanding. We determined the expected term assumption based on the vesting terms, exercise terms and contractual terms of the options.

 

 

 

Volatility. We determine the price volatility factor based on the historical volatilities of our peer group as we do not have a sufficient trading history for our common stock. Industry peers consist of several public companies in the technology industry that are similar to us in size, stage of life cycle, and financial leverage. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

 

 

Dividend Yield. We have not paid and do not expect to pay dividends.

The following table summarizes the assumptions relating to our stock options as follows:

 

     Year Ended    Three Months Ended
     December 31,
2009
   December 31,
2010
   January 31,
2012
   April 30,
2011
   April 30,
2012

Volatility

   64.0% – 64.6%    60.6% – 61.2%    58.1% – 59.1%    58.1% – 59.1%    55.3%

Expected life (in years)

   5 – 6.4    5 – 6.4    5 – 6.4    5 – 6.4    5

Risk-free interest rate

   1.9% – 3.0%    1.0% – 2.9%    0.9% – 2.7%    2.3% – 2.7%    0.8%

Dividend yield

   0%    0%    0%    0%    0%

Weighted-average fair value per share

   $0.36    $0.61    $1.78    $1.29    $2.32

In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation for our option awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the assumptions related to our share-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future share-based compensation expense.

 

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Common Stock Valuations

We are required to estimate the fair value of the common stock underlying our share-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair values of the common stock underlying our share-based awards were determined by our board of directors, with input from management and contemporaneous third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. As described below, the exercise price of our share-based awards was determined by our board of directors based on the most recent contemporaneous third-party valuation as of the grant date. If awards were granted a short period of time preceding the date of a valuation report, we assessed the fair value used for financial reporting purposes after considering the fair value reflected in the subsequent valuation report and other facts and circumstances on the date of grant as discussed below. In such instances, the fair value that we used for financial reporting purposes generally exceeded the exercise price for those awards.

Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

 

 

 

contemporaneous valuations performed by unrelated third-party specialists;

 

 

 

the prices, rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

 

 

lack of marketability of our common stock;

 

 

 

our actual operating and financial performance;

 

 

 

current business conditions and projections;

 

 

 

hiring of key personnel and the experience of our management;

 

 

 

the history of the company and the introduction of new services;

 

 

 

our stage of development;

 

 

 

likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;

 

 

 

illiquidity of share-based awards involving securities in a private company;

 

 

 

the market performance of comparable publicly traded companies; and

 

 

 

the U.S. and global capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business generally using the income approach and the market comparable approach valuation methods. When applicable due to a recent preferred stock offering, the prior sale of company stock method was also utilized. The income approach estimates value based on the expectation of future cash flows that a company will generate—such as cash earnings, cost savings, tax deductions, and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. In addition, we also considered an appropriate discount adjustment to recognize the lack of marketability due to being a closely held entity.

The market comparable approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined which is applied to the subject company’s operating results to estimate the value of the subject company. The estimated value is then discounted by a non-marketability factor due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies which impacts liquidity.

The prior sale of company stock method estimates value by considering any prior arm’s length sales of the subject company’s equity. When considering prior sales of the company’s equity, the valuation considers the size of the equity sale, the relationship of the parties involved in the transaction, the timing of the equity sale, and the financial condition of the company at the time of the sale.

Once we determined an equity value, we utilized the option pricing method, or OPM, to allocate the equity value to each of our classes of stock. OPM values each equity class by creating a series of call options on our equity value, with exercise prices based on

 

48


the liquidation preferences, participation rights, and strike prices of derivatives. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent.

We granted stock options with the following exercise prices between January 1, 2011 and the date of this prospectus:

 

Option Grant Date

   Number of Shares
Underlying
Options
     Exercise
Price Per
Share
     Common Stock
Fair Value Per
Share
 

February 2011

     4,256,650       $ 2.30       $ 2.30   

June 2011

     793,250         3.20         3.44   

June 2011

     1,941,855         3.20         3.53   

July 2011

     239,250         3.20         3.59   

August 2011

     477,450         3.70         3.70   

November 2011

     794,500         4.25         4.25   

December 2011

     1,095,000         4.25         4.78   

January 2012

     1,069,450         4.90         4.90   

February 2012

     2,800         4.90         4.90   

May 2012

     3,586,550         7.05         7.05   

The aggregate intrinsic value of vested and unvested stock options as of April 30, 2012, based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover of this prospectus, was $             million and $             million, respectively.

The following discussion relates primarily to our determination of the fair value per share of our common stock for purposes of calculating share-based compensation costs since February 2011. No single event caused the valuation of our common stock to increase or decrease through May 2012. Instead, a combination of the factors described below in each period led to the changes in the fair value of our common stock. Notwithstanding the fair value reassessments described below, we believe we applied a reasonable valuation method to determine the stock option exercise prices on the respective stock option grant dates.

February 2011

Our revenues for the three months ended December 31, 2010 increased as compared to our revenues for the three month period ended September 30, 2010. Based on this growth and our assessment of future growth potential, we revised our financial forecasts for each of the three years ended December 31, 2013, and a valuation of the fair value of our common stock was performed in December 2010 using our updated forecast. The valuation also took into account that in the fourth quarter of 2010, the U.S. economy continued its recovery and economists believed that the year would end with growth in the gross domestic product, ending a two year decline. The results of the valuation indicated the fair value of our common stock to be $2.30 per share as of December 31, 2010. The valuation used an equal weighting of the market comparable method and the income approach. The discount rate applied to our cash flows was 42.5% and our enterprise value reflected a non-marketability discount of 11%. A marketability discount was applied to reflect the fact that private company common stock is not directly comparable to the value of publicly traded shares due to the fact that stockholders of private company common stock do not have access to the same type of trading markets that stockholders of publicly traded companies possess. Based on the factors noted above and the valuation, the board of directors determined that the fair value of our common stock was $2.30 per share on that date and, we granted option awards in February 2011 with an exercise price of $2.30 per share and similarly, for financial reporting purposes, determined the fair value of our common stock for option awards granted in February 2011 to be at $2.30 per share.

June 2011

Our revenues for the three months ended March 31, 2011 increased as compared to our revenues for the three month period ended December 31, 2010. A valuation of the fair value of our common stock was performed in March 2011 using our updated forecasts. In addition to our updated forecasts, the valuation considered that the U.S. economy continued to recover and improve in early 2011. The valuation used an equal weighting of the market comparable method and the income approach. The discount rate applied to our cash flows was 40% and our enterprise value reflected a non-marketability discount of 12%. The valuation determined the fair value of our common stock to be $3.20 per share as of March 31, 2011.

During the spring and early summer of 2011, we were anticipating raising capital through the issuance of preferred stock, however because there was a significant amount of volatility in the U.S. economy and financial markets we did not proceed with an equity financing. This economic uncertainty also affected our ability to project future revenues and therefore we delayed obtaining a third-party valuation for several months. We granted option awards on June 3, 2011, and on June 28, 2011 with an exercise price of $3.20 per share based on the March 31, 2011 valuation.

For financial reporting purposes, we applied a straight-line calculation using the valuations of $3.20 per share as of March 31, 2011 and $3.70 per share as of August 12, 2011, the date at which our next valuation was performed, to determine the fair value of our

 

49


common stock for option awards granted on June 3, 2011 and on June 28, 2011. We determined that the straight-line calculation would provide the most reasonable conclusion for the value of our common stock at these interim dates between valuations because there was no single event that occurred during this interim period that resulted in the increase in fair value but rather a series of events related to the company’s continued growth. Based on the straight line calculation, we assessed the fair value of our common stock for option awards granted on June 3, 2011 and on June 28, 2011 to be $3.44 and $3.53, respectively.

July 2011

In July 2011, we granted option awards with an exercise price of $3.20 per share.

For financial reporting purposes, we applied a straight-line calculation using the valuations of $3.20 per share as of March 31, 2011 and $3.70 per share as of August 12, 2011 to determine the fair value of our common stock for option awards granted in July 2011. In July 2011, we were in the process of updating our financial forecasts and there was no single event identified during the interim period that resulted in the increase in fair value but rather a series of events related to our continued growth. Therefore, we determined that the straight-line calculation would provide the most reasonable conclusion for the value of our common stock at the July 2011 grant date.

August 2011

Despite the concerns about the U.S. economy noted above, our revenues grew 22% for the three months ended July 31, 2011 as compared to the three months ended April 30, 2011 to $30.1 million. Based on this growth and our assessment of future growth potential, we increased our forecasted revenues for each of the three years ended December 31, 2013. In light of this performance and the fact that we had a large number of new hire stock option grants, we performed a valuation to assist our board of directors in its determination of the fair value of our common stock as of August 12, 2011. The valuation reflected an equal weighting of the market comparable method and the income approach. The discount rate applied to our cash flows was 37.5% and our enterprise value reflected a non-marketability discount of 10%. Based on the factors noted above and the valuation, the board of directors determined that the fair value of our common stock was $3.70 per share on that date and we granted option awards in August 2011 with an exercise price of $3.70 per share and similarly, for financial reporting purposes, determined the fair value of our common stock for option awards granted in August 2011 to be $3.70 per share.

November 2011

In October 2011 we sold Series F preferred stock to a group of new investors. In view of this transaction, a valuation of our common stock was performed in October 2011 based on revised financial forecasts for each of the years ended December 31, 2013. The valuation used an equal one third weighting of the prior sale of company stock method, market comparable method and the income approach. The prior sale of company stock method valuation considered the terms and rights of the Series F redeemable convertible preferred shares we issued in October 2011 at an issuance price of $13.26 along with earlier issuances of our preferred stock. The discount rate applied to our cash flows was 37.5% and our enterprise value reflected a non-marketability discount of 10%. Based on the factors noted above and the valuation, the board of directors determined that the fair value of our common stock was $4.25 per share on that date and we granted option awards in November 2011 with an exercise price of $4.25 per share and similarly, for financial reporting purposes, determined the fair value of our common stock for option awards granted in those months to be $4.25 per share.

December 2011

In December 2011, we granted option awards with an exercise price of $4.25 per share.

For financial reporting purposes, we applied a straight-line calculation using the valuations of $4.25 per share as of October 31, 2011 and $4.90 per share as of December 31, 2011, the date at which our next valuation was performed, to determine the fair value of our common stock for option awards granted in December 2011. In December 2011 we were in the process of updating our financial forecasts and there was no single event identified during the interim period that resulted in the increase in fair value but rather a series of events related to our continued growth. Therefore, we determined that the straight-line calculation would provide the most reasonable conclusion for the value of our common stock at the December 2011 grant date.

January 2012

Revenues in the three months ended January 31, 2012 were $43.2 million, which was 18% higher than the revenues in the prior three months ended October 31, 2011 of $36.5 million. Based on this growth and our assessment of future growth potential, we increased our forecasted revenues for the next two years and a valuation was performed. The valuation used an equal one third weighting of the prior sale of company stock method, market comparable method and the income approach. The discount rate applied to our cash flows was 35% and our enterprise value reflected a non-marketability discount of 10%. The prior sale of company stock method valuation considered the terms and rights of the Series F redeemable convertible preferred shares we issued in October and December of 2011 at an issuance price of $13.26 along with earlier issuances of our preferred stock. Based on the factors noted above and the valuation, the board of directors determined that the fair value of our common stock was $4.90 per share on that date and we

 

50


granted option awards in January 2012 with an exercise price of $4.90 per share and similarly, for financial reporting purposes, determined the fair value of our common stock for option awards granted in January 2012 to be $4.90 per share.

February 2012

In February 2012, we granted option awards with an exercise price of $4.90 per share.

At the time of the grant, we did not have any updated operating results or forecasts as compared to the information utilized in the December 31, 2011 valuation of $4.90 per share. Therefore, we granted option awards in February 2012 with an exercise price of $4.90 per share and similarly, for financial reporting purposes, determined the fair value of our common stock for option awards granted in February 2012 to be $4.90 per share.

May 2012

Revenues in the three months ended April 30, 2012 were $56.8 million, which was 31% higher than the revenues in the prior three months ended January 31, 2012 of $43.2 million. Based on this growth and our assessment of future growth potential, we increased our forecasted revenues for the current year and did not change our forecasted revenues for the next year. Using this and other information, a valuation was performed. The valuation used an equal weighting of the market comparable method and the income approach. The discount rate applied to our cash flows was 32.5% and our enterprise value reflected a non-marketability discount of 10%. Based on the factors noted above and the valuation, the board of directors determined that the fair value of our common stock was $7.05 per share on that date and we granted option awards in May 2012 with an exercise price of $7.05 per share and similarly, for financial reporting purposes, determined the fair value of our common stock for option awards granted in May 2012 to be $7.05 per share.

Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and British Pound Sterling. Due to the relative size of our international operations to date, our foreign currency exposure has been fairly limited and thus we have not instituted a hedging program. We expect our international operations to continue to grow in the near term and we are continually monitoring the foreign currency exposure to determine when we should begin a hedging program. The substantial majority of our agreements have been and we expect will continue to be denominated in U.S. dollars.

Interest rate sensitivity

We had cash, cash equivalents and marketable securities totaling $120.2 million as of April 30, 2012. This amount was invested primarily in U.S. agency obligations, commercial paper, municipal securities, corporate securities, certificates of deposit and money market funds. The cash, cash equivalents and short-term marketable securities are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.

Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However because we classify our debt securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.

We do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Comprehensive Income. The standard requires entities to have more detailed reporting of comprehensive income. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The guidance should be applied retrospectively. We adopted this new guidance on February 1, 2012.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement. The standard requires entities to change certain measurements and disclosures about fair value measurements. The amendments are effective during interim and annual periods beginning after December 15, 2011. We adopted this new guidance on February 1, 2012.

 

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BUSINESS

Overview

Workday is a leading provider of enterprise cloud-based applications for human capital management (HCM), payroll, financial management, procurement and employee expense management. 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.

Organizations today operate in environments that are highly complex and that are changing at an increasing rate. Managers and employees must quickly synthesize vast amounts of information and react to rapid changes in global business and regulatory environments. To be successful, they need highly functional and flexible software that enables informed decision-making about the enterprise-wide allocation of their resources. Additionally, given the increasing prominence of consumer-oriented Internet applications, managers and employees expect to interact with enterprise systems in an open, intuitive and collaborative way, including real-time access through a wide range of mobile and computing devices. We believe that legacy, on-premise enterprise systems make these interactions difficult, as their user interfaces are not intuitive and were not originally designed for mobility. Furthermore, legacy applications are often expensive to implement, maintain and upgrade. In the last few years, new technologies and approaches to deliver software have emerged to address these issues.

In response to these changes, Workday is leading the way in helping organizations to better manage their core enterprise resources, specifically their financial and human capital resources. We enable organizations to embrace changes in their operating environments through our rapid innovation cycle of frequent updates, which generally contain new functionality, support for new regulatory requirements, performance requirements and enhancement of the user experience. Our latest update is Workday 16, which provided more than 100 new features, and we currently provide a new update three times per year. By delivering our software as a cloud-based service, our customers operate on our latest version without the burden of large upgrade costs, while having the flexibility to configure our applications to meet their own requirements.

Our customers can operate with a more complete picture of their organization because our applications and embedded analytics capture the content and context of everyday business events, facilitating fast and informed decision-making from wherever they are working. Our applications are designed for the way people work today, in collaboration with each other from a wide variety of devices, empowering workers to make business decisions using real-time data. By providing an intuitive user experience, we enable effective management of resources by all members of an organization, minimizing reliance on specialist information technology (IT), human resources (HR) or finance employees. These professionals are therefore freed to focus on other strategic activities.

We deliver our cloud-based applications using an innovative technology foundation that leverages the most recent advances in cloud computing and data management. Our use of a multi-tenant architecture, object-oriented technology framework, in-memory data management and a mobile-centric approach allows us to deliver applications that are highly functional, flexible and fast. Our customers benefit from moving beyond the limitations associated with traditional on-premise software to highly configurable applications delivered over the Internet. This shift in approach substantially reduces the need for our customers to buy and support a broad range of IT infrastructure, and significantly reduces the cost and complexity relative to implementations and upgrades of on-premise software.

We have achieved significant growth and global scale in a relatively short period of time. We currently have more than 300 customers and we have authorized users worldwide. Our customers include large, global companies such as Aviva International Holdings Ltd., AIG, Inc., Flextronics International, Four Seasons Hotels, Georgetown University, Kimberly-Clark Corporation and Lenovo. Our largest deployment to date is to an organization with a workforce of over 200,000 people.

Our company was founded in 2005, and today we have more than 1,300 employees. We recently changed our fiscal year end from December 31 to January 31. For our fiscal years ended December 31, 2009, December 31, 2010 and January 31, 2012, our revenues were $25.2 million, $68.1 million, and $134.4 million, respectively, representing year-over-year growth in revenues of 170% and 98% for our two most recent fiscal years. We incurred net losses of $49.9 million, $56.2 million and $79.6 million for the fiscal years ended December 31, 2009, December 31, 2010 and January 31, 2012, respectively.

Industry Background

The Market for Enterprise Resource Management Software is Large and Highly Strategic

According to International Data Corporation (IDC), the global market for enterprise resource management (ERM) software applications totaled $39 billion in 2011.3 ERM software provides critical system-of-record data to enterprises and includes applications for financial accounting, HCM, procurement, financial performance management, order management, payroll accounting

 

3 

See (1) in “Industry and Market Data.”

 

52


and enterprise asset management. The size and importance of this market is driven by the fact that financial accounting and human capital management are central to the successful management of organizations, and HCM and financial management applications often constitute their most important software purchasing decisions. Further, enterprises have deployed software, such as sales, marketing, customer support and supply chain applications that integrate with, and leverage data captured by ERM solutions. In aggregate, IDC projected that the global market for enterprise software applications which was $103 billion in 2011.4

Changes in the Business Environment, User Expectations and Technology are Driving a Disruptive Re-Platforming of the Enterprise Applications Market

Organizations operate in an increasingly fast-paced, complex and global environment. Managers and employees are expected to quickly synthesize, analyze and act on large amounts of information to enable their organizations to compete effectively in the global marketplace. Providing the tools that enable fast and accurate decision-making through real-time and reliable business information is critical to the long-term success of most organizations. Additionally, the number of regulatory and compliance environments worldwide, and the frequency with which rules and regulations change, further complicate today’s competitive environment. As a result, enterprises now require sophisticated, flexible and intuitive applications that can quickly adapt to their evolving requirements.

With the widespread adoption and use of consumer-oriented Internet applications such as Facebook, LinkedIn and Amazon, and consumer-oriented mobile devices such as smartphones and tablets, today’s generation of workers expects their organizations to embrace more accessible, intuitive and collaborative business applications. Using a wide range of devices, users expect immediate and secure access to their enterprises’ critical business information. By providing synchronized data and embedded analytics through a variety of devices in real-time, enterprises can improve their workforce productivity by facilitating collaboration and decision-making closer to the operational problem being solved.

Fundamental advances in technology architectures are enabling a new and disruptive generation of software to be delivered to enterprises. Significant and rapid improvements in the performance, affordability and reliability of network bandwidth, computing power and data storage capabilities have supported the rise of cloud computing that enables the delivery of software-as-a-service (SaaS). Today, mission critical applications can be delivered reliably, securely and cost-effectively to customers over the Internet without the need to purchase supporting hardware and software. As a result of the compelling economics, functionality and flexibility provided by SaaS applications, the annual growth rate of the SaaS market is expected to be significantly greater than the broader software market. IDC estimates that the SaaS market will grow at a compound annual growth rate of 26%, from $17 billion in 2010 to $54 billion in 2015.5

Legacy Enterprise Applications Provide Limited Business Context, and can be Inflexible and Expensive to Implement and Maintain

Many of the ERM applications deployed today are based on business processes and software architectures that were originally designed in the 1980s and 1990s. More specifically, these legacy ERM applications were built primarily to automate and manage business processes focused on the basic requirements of HR, accounting and inventory management. These legacy applications were not designed to capture the full range of contextual data related to transactions and business events that now exists in most enterprises.

Enterprises have historically deployed separate business intelligence software for reporting and analytics to achieve business insights. Transferring data from applications to standalone business intelligence software is expensive and time-consuming, and causes data to become outdated and unsynchronized with the core system of record that captured the transactions. Because this software is separate from the applications that capture the underlying data, users must learn multiple systems with different user experiences. This decreases the ability of users to learn and use the tools that are intended to help them manage more effectively.

Legacy ERM applications are typically based on rigid relational databases with limited capacity to adapt to evolving business requirements. Upgrade cycles of three to five years are not uncommon, making it difficult for enterprises to respond quickly to changes in their competitive and regulatory environments, and often result in outdated versions of applications running across different departments or geographies within organizations. In addition, these legacy applications typically have user interfaces that pre-date the consumer Internet, involve lengthy upgrade processes, and require specialist knowledge and training to utilize the software’s full functionality.

The majority of legacy software has been deployed on-premise, requiring substantial investments in IT infrastructure in order to implement, upgrade and maintain this software. Enterprises often choose not to deploy software or delay upgrades to newer versions due to concerns relating to the substantial costs, lengthy implementation and customization cycles, potential business disruptions and lack of compelling business value.

 

4 

See (2) in “Industry and Market Data.”

5 

See (4) in “Industry and Market Data.”

 

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We believe that historically, the average lifespan of a legacy ERM application has been approximately 10-15 years. The last major modernization cycle occurred more than a decade ago, before the “Year 2000” refresh of many enterprise applications. Over the next several years we anticipate the demand for new cloud-based ERM applications to increase substantially, particularly those that are highly functional, flexible, affordable and easy to use.

The Workday Solution

We offer cloud-based applications for HCM (including human resources, benefits and talent management), payroll, financial management, procurement and employee expense management. Our applications deliver the core functions required to effectively manage both the human capital and financial resources of an organization, where a reliable global system of record is critical. We have designed our applications for the way people work today, enabling workers to interact, collaborate and make business decisions using accurate data from a wide variety of devices, in real-time and on a global basis. Our innovative technology foundation enables our customers to embrace the rapid pace of change in their business, operate with a more complete picture of their business and provide a modern and intuitive user experience, while substantially reducing the cost of their IT operations. We also bring to our customers substantial domain expertise in the areas of global human resources, payroll and financial accounting that are reflected in our unified, global architecture.

The following graphic depicts our unified, global cloud-based solution and our adaptive technology foundation:

 

LOGO

Substantial Business Benefits

Embracing Change. Our suite of cloud-based applications is designed for leading global enterprises seeking highly flexible software that allows them to embrace changes in their operating and regulatory environments. Our rapid innovation cycle and regular deployment of the latest capabilities to our customers ensures that users are always able to use the latest version of our software, which we currently update three times per year. This allows our customers to benefit from our global domain expertise in providing applications that facilitate HR, payroll and financial compliance. As a result, our applications provide our customers with flexible solutions that can free them from the lengthy and costly upgrades associated with legacy, on-premise ERM systems.

Our global, unified system of record allows individual customers to configure and adapt our applications to meet their specific requirements, without compromising our ability to upgrade them to the latest release. For example, our users can quickly and easily change the business processes that underlie their Workday applications, and can also increase the number of users in response to the organic growth of their business, acquisitions or different operating conditions.

Operating with the Complete Picture. Our applications provide our customers with significant visibility into their operations and enable real-time operational and financial insights. While, our applications provide requisite administrative and compliance capabilities, our applications are also designed to capture both the content and context of everyday business events without the technical complexity and rigidity associated with traditional relational databases. We integrate this rich source of business information with real-time analytics into the core functionality of our applications to enable better and faster decision-making. Our customers do not need to install separate, third-party analytics software to generate reports or gain insights. They are instead able to rely on our native analytics, increasing the speed and agility with which they can manage their operations.

Consumer Internet Experience. Our applications enable user experiences similar to those of leading consumer Internet sites. We design the user interface to follow business users’ actions and align our applications with the way users naturally think and act. Our

 

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focus on an intuitive and simple user experience enables the adoption of our applications by even novice users with minimal training. Our applications are designed for use by the entire workforce, including senior managers and non-HR and finance employees. This focus enables our customers to generate higher productivity and better business results through broad access to better, timely and more reliable information.

With the proliferation of smart mobile devices, many users now seek to access enterprise systems in a variety of different work environments, which we refer to as natural workspaces. Our applications are accessible through all connected mobile devices, as well as natively on iOS-based devices. User security policies applied to desktop access also apply to mobile access, enabling a high degree of security regardless of device.

Optimizing IT Resources. Our cloud-based model can result in significantly lower total costs when compared to legacy ERM software. With all of our customers operating on the same version of our software, our applications eliminate customized code and allow us to make regular updates with minimal disruption. Additionally, users only require an Internet connection to access our applications; we provide the underlying IT infrastructure. As a result, our customers do not need to buy, install and maintain the complex IT infrastructure required to operate on-premise systems. Even though we deliver new features on a frequent basis, our customers control their rate of adoption of new features through configuration, without the need for significant investments in IT resources. By replacing their legacy on-premise systems with our cloud-based applications, our customers can re-allocate IT resources to other strategic activities. This shift in the delivery model significantly reduces costs for our customers while allowing them to take advantage of the speed of innovation.

Innovative, Highly Adaptive Technology Foundation

In order to provide our customers with these substantial business benefits, our applications are purpose-built from the ground up on an innovative and highly adaptive foundation of modern technologies. We have built a unified suite of applications to enable our customers to manage their most critical human capital and financial resources. All of our customers are on the same version of our software. When we make an improvement to our applications to help a customer, all other customers can benefit from that change as well. We call this the Power of One. Although our applications are configurable to meet the individual business needs of an organization or even a department, every customer has the same basic foundation. Since all users share a common system, innovations can be proliferated quickly. Our most recent version is Workday 16, which provided more than 100 new features, and we currently provide updates three times per year. This update cycle places our customers on a different cost and innovation curve compared to legacy ERM systems.

Our foundational technologies include:

Multi-Tenant Architecture. Our multi-tenant architecture enables multiple customers to be on the same version of our applications while securely partitioning their respective application data. Because a single version of our applications is developed, supported and deployed across all customers (unlike off-site hosting models), as updates occur, all customers move to the updated version. Further, customers utilize our IT resources and operational infrastructure, significantly reducing the costs of implementation, upgrades and support. Because multi-tenancy ensures that all of our customers are on the same version, we can focus on ongoing innovation rather than maintaining multiple versions of our applications and a broad matrix of supporting infrastructure.

Object-Oriented Technology Framework. Our applications use objects to represent real-world entities such as employees, benefits, budgets, charts of accounts, and organizations. Our applications combine business logic and data in one place, compared to legacy systems which separate business logic from data that is mapped to a rigid and complex relational database structure. Using objects to model attributes and relationships increases our pace of innovation, creates sophisticated analytics that are a part of our core transactional systems of record, and makes the system more easily adaptable to change

In-Memory Data Management. Our use of in-memory processing brings data physically closer to the central processing units and into main memory, eliminating the need to run a disk-seek operation each time a data look-up is performed. This allows for rapid and efficient delivery of embedded business intelligence to facilitate actionable analytics and reporting. By contrast, relational databases are more difficult to decipher, complex to manage, inflexible in the face of business change and expensive to operate.

Consumer User Interface (UI). One of the founding principles of Workday was to deliver a consumer Internet-style user experience to our customers. We strive to build applications that are elegant and simple, taking cues from the best consumer mobile and web applications, in contrast to typical business applications. We made an early architectural decision to separate the application logic from the user interface. Our flexible and modern UI platform that allows us to quickly embrace new UI technologies without needing to rewrite the underlying application logic. Currently, we support all major browsers, run natively on Apple iOS with applications specifically designed for the iPad and iPhone, and support other mobile platforms such as Android, Windows Mobile and Symbian through our HTML5 client.

 

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Configurable Processes. We offer a broad set of tools for configuring, managing, monitoring, and optimizing the business processes that organizations rely on to manage their business. These tools enable our customers to configure their applications while keeping them on the same version as all other customers. We include over 270 pre-defined business process definitions to help accelerate deployments and provide a starting point for additional configuration. In addition, we plan to develop the capability for customers to add new data fields and functions. As with our configurability tools, we intend to design these extensibility features in a manner that will not compromise our ability to keep all customers on the same version.

Web Services-based Integration Platform. Integration with other enterprise applications is a fundamental design criterion for our applications. By offering an enterprise-class integration platform and toolset at no additional cost, we relieve customers of many of the burdens associated with legacy systems integration and greatly reduce the risk of implementation failures or delays. In addition to open, standards-based web services application programming interfaces (web service APIs), we build, support and maintain a growing portfolio of pre-built, packaged integrations and connectors called Integration Cloud Connect.

Security and Audit. We endeavor to adhere to the highest security standards. We voluntarily obtain third party examinations relating to security and data privacy. From the physical security of our data center operations, to network and application level-security, to safeguarding our customers’ sensitive data, we believe we provide best-in-class infrastructure, policies and procedures. We deliver configurable, user-level access control policies as well as a comprehensive, always-on auditing service that captures and documents changes to both data elements and business processes.

Our Strategy for Growth

Our strategy for growth reflects our mission to build the next generation of business enterprise software delivered as a service. Key elements of our strategy include:

Expand our Customer Base. We believe that our application suite and enterprise cloud business model can provide significant value to tens of thousands of enterprises globally. We also believe that there is a substantial opportunity for us to continue to increase the size of our enterprise customer base across a broad range of industries, given the relatively high level of business process commonality for the applications we provide. Due to the age and inherent limitations of legacy software applications, as well as continuous changes in regulatory and compliance requirements, we expect there to be a wave of pending upgrade cycles of legacy HCM, payroll, financial management, procurement, and employee expense management applications over the next few years. In addition, we believe that we have an opportunity to expand in the small- to medium-sized business (SMB) market, primarily through adding resellers focused on this market. We will continue to invest aggressively in our direct and indirect sales and marketing capabilities to continue to acquire new customers.

Maintain our Innovation Leadership by Strengthening and Extending our Current Suite of Cost-Effective Applications. Our customers’ ability to deploy new applications and new application functionality rapidly and cost-effectively has been central to the results we have achieved to date. Through continued investment, we intend to extend the range of our applications in the future. In addition, by collaborating with our customers and implementation partners, we plan to strengthen our current applications to increase their functionality and capabilities and to maintain rapid and cost-effective deployments.

Expand Internationally. We believe that there is a significant opportunity for our cloud-based applications outside of the United States. Given our modern cloud-based architecture, our knowledge of global requirements, and the highly scalable nature of our applications, we believe our applications are particularly well suited to large, dynamic enterprises with complex, global operations. Given the cost-effectiveness of our applications, they are also well suited to organizations with operations in emerging markets that have not previously been able to justify significant investments in ERM software. We currently have a direct sales presence in seven countries outside the United States, despite having authorized users worldwide. We plan to expand our sales capability internationally by expanding our direct sales force and by collaborating with strategic partners around the world. We have recently opened sales offices in London and Hong Kong, and intend to focus our international efforts on Northern Europe and South Asia in the near term.

Deepen our Relationship with our Existing Customer Base. Our focus on customer success is an integral part of our core values. Very simply, we believe that our customers will increase their usage of existing applications and increase the number of applications they choose to buy if they are satisfied with our applications and services. Our commitment to maintaining high customer satisfaction is reflected in our investment in the Workday Community, our online community for users, and the fact that customer satisfaction is an element of our executive and employee compensation models. As we extend and strengthen the functionality of our applications, we will continue to invest in initiatives to increase the depth of application adoption and maintain our high levels of customer satisfaction. We believe there is also a significant opportunity for us to extend the breadth of applications deployed by our existing customers, particularly our Financial Management application, which has been selected by approximately 10% of our customers to date.

 

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Further Develop our Partner Ecosystem. We have established a strong set of relationships with other organizations in our partner ecosystem to deliver best-in-class applications to our customers. These technology and services partners enable us to increase the speed of deployment and functionality of our cloud-based applications and offer a wider range of integrated services to our customers. We intend to support our partners in the growth of their Workday practices, as well as increase the number of partners who work with our customers. We have established long-term, global partnerships with systems integrators such as Deloitte Consulting Services and Accenture, and with technology vendors such as Salesforce.com and Cornerstone OnDemand. We will also continue to invest in and support the growth of Workday’s integration platform that allows third parties and customers to integrate their Workday applications, technology partner applications and their own custom applications.

Leverage our Unique Culture. We believe that building and maintaining a remarkable culture benefits our customers and employees, who together form the Workday Community. Engaged and loyal employees provide high levels of customer satisfaction, leading to greater adoption of our applications and recommendations to potential customers. We believe that culture is the foundation for the successful execution of our strategy and, as a result, is a critical requirement for our growth agenda. Since 2008, more than 95% of customers that responded to our surveys have given us favorable ratings. Moreover, we have been named the best large company at which to work in the Bay Area by two major news organizations in the past two years. We believe that these honors demonstrate the loyalty of our customers and employees and that our culture is driving the behaviors that will help fuel our future growth.

The Workday Application Suite

Workday is a leading provider of enterprise cloud-based applications for human capital management, payroll, financial management, and procurement and employee expense management, as described below.

Workday HCM

Workday Human Capital Management (Workday HCM) is a leading enterprise-ready, unified human resources (HR) and talent management application, designed to help organize, staff, compensate and develop a globally distributed workforce. Workday HCM provides insight and analytics into workforce capabilities, capacities, cost and performance. In its 2012 Forrester Wave6 research report, Forrester Research, Inc., or Forrester, evaluated solutions from nine human resources management system (HRMS) vendors across 69 criteria grouped into three high-level categories of current offering, strategy and market presence. Workday received the highest scores of the group in both the current offering and strategy categories.7

Workday HR Management functionality includes:

 

 

 

Workday Lifecycle Management enables customers to strategically establish hiring, staffing, performance and compensation plans as well as manage their entire workforce (contingent/temporary and full-time) in one place.

 

 

 

Workday Organization Management enables customers to analyze and model organizational structures, assign employees to multiple organizational types, and restructure organizations and reporting relationships as business needs evolve.

 

 

 

Workday Compensation Management enables customers to design, manage and administer compensation programs to meet complex global rewards objectives and make better compensation decisions with contextual decision support.

 

 

 

Workday Absence Management enables customers to create and manage both accrued time off and leave-of-absence plans.

 

 

 

Workday Benefits Administration gives customers the tools to define, manage and adjust benefits plans, costs, benefit eligibility rules, elections through open enrollment and concurrent changes in life events to meet their unique business requirements.

 

 

 

Cloud Connect for Benefits provides a catalog of pre-built integrations that connect to third party benefits providers so that HR organizations can evaluate, select, and offer the most appropriate plans for their workforces.

Workday Talent Management functionality includes:

 

 

 

Workday Onboarding enables customers to welcome new and pre-hires, increase first day productivity and streamline administration process by eliminating paperwork to collect worker information.

 

 

 

Workday Goal Management enables customers to establish goals for teams and individuals, cascade company goals and assess and track goal completion and performance.

 

6 

See (5) in “Industry and Market Data.”

7 

See (5) in “Industry and Market Data.”

 

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Workday Performance Management enables customers to gain insight into the performance, skills, and development needs of their workforce. Customers can also configure the performance process by role or talent pool, identify and develop top talent, assess and act on development needs, engage multiple reviewers in the review process and solicit and provide feedback.

 

 

 

Workday Succession Planning enables customers to anticipate and avoid gaps in the leadership pipeline, identify, compare and develop qualified successors across teams, organizations and borders, and monitor successor readiness and flight risk and the overall health of the succession pipeline.

 

 

 

Workday Career and Development Planning equips employees with engaging tools to build their talent profile and collaboratively create competency-based development plans with their managers. Managers can access tools to ensure that high-potential employees are meeting their development plans, initiate corrective actions and request feedback on employees.

Workday Project and Work Management, which is commonly integrated within Workday HCM, allows customers to plan work, staff work, track work, monitor costs and progress, and analyze work results. Utilizing the same core worker and talent profile data, users can model work areas such as application development, projects, campaigns and client service delivery, establish budgets, track progress using phases, tasks and milestones, and roll up multiple work areas under larger initiatives. Users can also search for talent based on specific criteria, view and compare worker experience and qualifications, and leverage worker profile data from Workday HCM to effectively staff projects. Workday’s application integrates with Microsoft Project, as well as other external project management tools.

Workday Payroll

Workday Payroll is a modern payroll application designed to address the full spectrum of enterprise payroll needs, and includes the control, accuracy and flexibility to support the unique needs of organizations. Workday Payroll allows customers to group employees, manage calculation rules and pay employees according to their organizational, policy and reporting needs. Workday Payroll is unified with Workday’s other applications using the same business process framework and core worker data including benefits, compensation, absences and other employee records. In this unified self-service application, employees can request time off, check online pay slips and make payment elections from the same system, using the same user interface.

Workday Payroll’s flexible and intuitive configuration capabilities permit users to define earning and deductions using compensation elements and benefit plan costs captured by Workday HCM, create identifying eligibility criteria, secure worker data, and group employees into pay groups based on organizational needs and configure accumulations, balance periods and balances. Workday Payroll also includes built-in analytics to run reports and audits on payroll data.

In addition to Workday Payroll, Workday provides Cloud Connect for Third Party Payroll to enable customers to integrate Workday HCM to an existing third party payroll provider more easily.

Workday Financial Management

Workday Financial Management is a comprehensive, unified application built on a single, global core with a full range of financial capabilities, relevant analytics and metrics, and fully auditable process management built to help manage financial processes for global organizations. Workday Financial Management was introduced in 2008 and is designed to meet the demands of the rapidly changing business and regulatory landscape.

Workday’s accounting tools provide the core accounting functions of general ledger, accounts payable, and accounts receivable, along with tools to help organizations address their global accounting and reporting needs. It also provides management reporting and analysis in real time without the use of complex and expensive bolt-on data warehouses and business intelligence systems.

In addition, Workday Financial Management provides embedded Governance, Risk, and Compliance (GRC) capabilities that include controls at the transaction level to ensure proper security and controls, separation of duties, transparent business processes, and comprehensive auditing throughout the system. The application also includes accounting and management tools such as Workday Cash Management to help streamline inbound and outbound payment and receipt processes, while giving businesses greater control and visibility into their cash flow.

Workday Revenue Management helps organizations manage the entire contract-to-cash process, with automated and configurable processes for contract management, billing processes, revenue recognition and the ability to integrate with external Customer Relationship Management systems (including Salesforce.com), enabling a cross-functional view of customers. Workday Business Assets combines the traditionally separate domains of fixed assets and inventory with the ability to track and account for high-value, low-cost items that businesses now rely on such as laptops, mobile phones and security badges.

 

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Workday Procurement

Workday Procurement allows users to configure procurement business processes, effectively collaborate with suppliers, create, submit and approve purchase requisitions and gain real-time visibility into spending with multi-dimensional reporting and analytics. From the requisition process all the way through to payment, Workday Procurement supports and manages the information, policies and processes relating to the acquisition of goods, services and contingent labor for global organizations. In conjunction with Workday Employee Expense Management, Workday Procurement enables customers to gain unified workforce visibility including full-time and contingent workers, track costs by job profile, ensure alignment between the contingent workforce and strategic initiatives, and optimize tradeoffs between full-time and contingent workers globally.

Workday Employee Expense Management

Workday Employee Expense Management is a unified expense management system that automates configurable expense management business processes and leverages workers, roles, organizations and security policies from Workday HCM. With Workday Employee Expense Management, customers can ensure proper spend controls and gain real-time visibility into employee spend with multi-dimensional reporting and analytics.

Customers

We currently have more than 300 customers and we have authorized users worldwide. We provide applications to customers of varying sizes, with a focus on larger organizations. We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large corporation, that has entered into a master subscription agreement with us to access our services, including customers that have not yet deployed our applications. While a single customer may have multiple organizations, operating segments or locations, we only include the customer once for this metric. We exclude from our customer count SMB customers who have contracted for our subscription services through our reseller partner.

Our current customer base spans numerous industry categories, including technology, financial services, business services, healthcare and life sciences, manufacturing and consumer and retail. No individual customer represented more than 5% of our revenues in the year ended January 31, 2012.

The following table shows a representative list of our largest customers by industry category:

 

Technology:

Applied Materials, Inc.

CAE, Inc.

Lenovo

Symantec Corporation

VMware, Inc.

  

Financial Services:

Aviva International Holdings Ltd.

AIG, Inc.

Direct Line Insurance Group plc

Manulife Financial

  

Business Services:

AAA Northern California, Nevada & Utah

Bristow Group Inc.

Kuoni Group

Ramboll Group A/S

Rentokil Initial 1927 plc.

Healthcare and Life Sciences:

Cardinal Health, Inc. (OH)

CareFusion Corporation

DaVita, Inc.

Kinetic Concepts, Inc.

Watson Pharmaceuticals, Inc.

  

Manufacturing:

Flextronics International*

Huntsman Corporation

Mohawk Industries, Inc.

Tyco International Ltd.

Valspar Corporation

  

Consumer and Retail:

Chiquita Brands International, Inc.

Four Seasons Hotels

Kimberly-Clark Corporation

Life Time Fitness, Inc.

Shoppers Drug Mart, Inc.

In addition, we have recently expanded our sales and marketing efforts to engage with customers in the education and government category. We have signed contracts and deployed or are in the process of deploying our applications to the following customers in this category:

Education and Government:

Academy of Art University

Brown University

Cornell University

 

*

The Chief Executive Officer of Flextronics is a member of our board of directors. See “Management” and “Certain Relationships and Related Party Transactions.”

 

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Georgetown University

New York University

State of Nebraska

University of Southern California

Customer Case Studies

The following are examples of how some of our customers have benefited from the deployment of our applications:

Chiquita Brands

Situation: As operations expanded for Chiquita, a leading global marketer, producer and distributor of perishable food products, their three existing HR systems could no longer support their diverse, global enterprise. Chiquita had developed modern, flexible organizational structures to compete in different regions and markets around the world, but its aging systems could not accurately reflect those structures or HR processes. Access to HR and business information had become so challenging that the IT team was regularly on call to run basic reports and the HR organization had to use paper-based processes to work around system limitations. The IT organization also had to dedicate significant resources just to keep the three systems up and running.

Solution and benefits: Chiquita selected Workday HCM, Payroll and Procurement and Employee Expense Management to support its worldwide growth and reduce the burden on its IT department. Chiquita has deployed HCM and Payroll for 23,000 workers and is currently in the process of deploying Procurement and Employee Expense Management. Chiquita reported the following benefits:

 

 

 

An estimated 30% savings over five years compared with a traditional on-premise HR system and savings of $1-2 million a year in recruiting fees

 

 

 

Ability to re-allocate capital and re-deploy IT resources to other strategic projects

 

 

 

Elimination of dozens of manual, paper-based processes, transforming the HR organization into a strategic partner to the business and supporting corporate sustainability goals

 

 

 

A better understanding of labor costs, helping support strategic decisions on where to cost-effectively locate production and workers, saving hundreds of thousands of dollars per decision

Flextronics International

Situation: Flextronics, one of the world’s largest contract manufacturers, needed to efficiently manage and allocate its resources appropriately to better meet the demands of its fast-moving technology customers. After a 10-year cycle of acquisitions, the company was left with 80 different HR systems dispersed around the world. These disparate systems became costly to maintain, fragmented from an operations perspective, and were not scalable to meet the company’s changing business needs. Most importantly, the company did not have consistency or visibility into how it managed its workforce and culture.

Solution and benefits: Flextronics deployed Workday Human Capital Management for 200,000 workers as a single, global system of record that replaced its 80 disparate systems, aligned its worldwide HR organization and the company now has a more cohesive, strategic way to manage its large global workforce. Flextronics described the following benefits:

 

 

 

30% reduction in total cost of ownership compared to an on-premise solution

 

 

 

Deployment of the system one year ahead of schedule and below budget

 

 

 

Ability to provide global reporting that used to take weeks or months, in minutes or hours to support more informed decision making

 

 

 

Workday data that the company can leverage to understand average labor rates and analyze cost structures, aiding critical decisions on global investment and workforce deployment across geographies

Netflix, Inc.

Situation: Netflix, the world’s leading Internet subscription service for movies and TV programs, needed to update their HR and financial management infrastructure to support their growing employee base and provide relevant data for executive decision-making. Due to its rapid growth, the company’s internally built systems and manual processes could no longer support the needs of a diversifying, public company.

Solution and benefits: Netflix selected Workday HCM, and then expanded the scope of services to include Employee Expense Management and ultimately Financial Management and Procurement based on usability, architecture, integration ability, and their

 

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belief in Workday as a partner. Workday is viewed as a solution to replace multiple on-premise applications rather than face complex and costly upgrades. Netflix described the following benefits:

 

 

 

A unified and intuitive system that employees love using

 

 

 

Financial processes that will be handled in a single system to increase efficiencies, provide better controls, and avoid the cost of additional staff that would have otherwise been required

 

 

 

Configurability of business processes to fit with the company’s culture rather than having to force users through rigid processes with limited business value

 

 

 

Access to enterprise-class integration capabilities

Customer Service

We have built a company culture centered around our customers’ success and satisfaction. We have developed several programs designed to provide customers with service options to enhance their experience with our applications. These services include support, training, consulting, Customer Success Management, and an online community.

Support

We offer support from our offices in Pleasanton, California and Dublin, Ireland to enable customers to maximize the return on their investment in Workday applications. We also provide 24x7 support around the world through our online case management system. The support team regularly reviews issues with our quality assurance organization and development teams in order to continuously improve our applications. Our support team also works closely with our updates team to create the best possible experience for customers as they move from one version of our applications to the next version. Customer support is included within a standard subscription.

Training

We provide several options for customers to increase their level of knowledge about our applications through our training organization, which offers classroom training, virtual classroom training and on-demand training. Classroom training offers customers the opportunity to visit one of our training facilities for one or more days of hands-on, instructor-led courses. Virtual classroom training is also delivered by an instructor, but students attend the training on-line from a remote location rather than being present at a Workday training facility. On-demand training offers customers the opportunity to learn about Workday via pre-recorded training segments which they can view at any time online. Most Workday training courses are fee-based and most customers choose to enroll in classes.

Consulting

We have developed a team of consultants to assist customers in the deployment of our applications. In order to provide additional options to our customers, we have a network of third party professional services organizations. We refer to this network as our professional services ecosystem. The ecosystem consists of our Workday consulting teams, boutique professional services firms, and large system integrators. Resources within this ecosystem are trained on our applications and are encouraged to follow our methodologies. Typical professional service engagements vary in length from a few weeks to several months depending on the size and scope of the engagement and are fee-based. As our subscriptions have grown, the proportion of professional services provided by third parties has increased. Many of our ecosystem partners offer services beyond Workday deployments such as the development of shared service centers or substantial organizational change management. Our professional services consulting teams routinely collaborate with our ecosystem partners.

Customer Success Management

We have created a Customer Success Management group to assist customers throughout the deployment and production lifecycle. The Customer Success Management organization provides programs available to all customers as part of their standard Workday subscription as well as other service offerings. We endeavor to maintain relationships with individuals throughout our customers’ organizations. In addition to executive advisory council meetings, we hold an annual conference, Workday Rising, bringing our customers, partners, and employees together to learn, collaborate, and celebrate our collective accomplishments. It is our largest educational event of the year, and features a variety of prominent keynote and customer speakers, panelists and presentations. Attendees also gain insight into our recent application releases and enhancements and participate in interactive sessions that give them the opportunity to express opinions on new features and functionality.

 

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Workday Community

As a complement to our people-based services, we have created an online community available to all of our customers, simply called the Workday Community. The primary function of the Workday Community is to facilitate collaboration between all customers and the Workday application development teams. As a result of our multi-tenant cloud model, all customers are on the same version of Workday so these enterprises can choose to share information with each other to an extent not seen with legacy ERP applications. By actively supporting and soliciting input from the Workday Community, we have created a valuable feedback loop through which our application development teams gain insights about new features and functions that guide our future application development efforts. In addition, through our established user groups, our customers can gain deeper insight into our application roadmap. We also actively support the sharing of best practices and information across our community by providing collaboration and communication tools such as a shared library of development tools and templates, discussion forums and blogs written by our application and customer service experts. With all of the community’s resources and conversations focused on a single version of our software, any enhancements developed will benefit the entire community.

Employees and Culture

A focus on employees is one of our core values, and our strong and valued company culture has evolved from a mix of planned programs and grassroots efforts that foster a fun and satisfying workplace. Regular and candid communications are a vital element in building a cohesive employee community, so the company receives a weekly executive update e-mail. Our employees are also empowered to suggest and coordinate culture-building activities including our Development “Geekfests.” In addition, we have dedicated an Employee Programs team to organize company events.

Our culture promotes an environment where our employees trust one another, make business decisions with integrity and humility in mind, communicate openly and honestly, embrace teamwork and collaboration, strive for balance, and enjoy their days at work. In 2012, Workday was named the “#1 Top Workplace in the Bay Area” and the “#1 Best Place to Work in the Bay Area” for large companies in two different media surveys.

As of April 30, 2012, Workday employed 1,266 people. We also engage temporary employees and consultants. None of our employees is represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be very good. Our future success will depend upon our ability to attract and retain qualified personnel. However, competition for qualified personnel remains intense, so we may not be successful in retaining our key employees or attracting skilled personnel.

Workday Foundation

In June 2012, we established the Workday Foundation as a non-profit organization and we plan to issue 1,000,000 shares of our Class B common stock to fund its future operations. Proposed programs of the Workday Foundation include grants, humanitarian relief, employee matching contributions, volunteerism, and social development projects. We believe that the Workday Foundation fosters employee morale, strengthens our community presence and provides increased brand visibility.

Sales and Marketing

We sell our software applications through our direct sales organization and an indirect sales partner. Our direct sales team is comprised of inside sales and field sales personnel who are organized by geography, account size, and application type.

We generate customer leads, accelerate sales opportunities and build brand awareness through our marketing programs and through our strategic relationships. Our marketing programs target finance and HR executives, technology professionals and senior business leaders. Our principal marketing programs include:

 

 

 

use of our website to provide application and company information, as well as learning opportunities for potential customers;

 

 

 

field marketing events for customers and prospects;

 

 

 

territory development representatives who respond to incoming leads to convert them into new sales opportunities;

 

 

 

participation in, and sponsorship of, user conferences, executive events, trade shows and industry events;

 

 

 

customer programs, including regional user group meetings and our online customer community;

 

 

 

integrated marketing campaigns, including direct email, online web advertising, blogs and webinars;

 

 

 

public relations, analyst relations and social media initiatives;

 

 

 

cooperative marketing efforts with partners, including joint press announcements, joint trade show activities, channel marketing campaigns and joint seminars;

 

 

 

our annual conference, Workday Rising; and

 

 

 

sponsorships and participation in marketing programs.

 

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Strategic Relationships

As a core part of our strategy, we have developed an ecosystem of partners to both broaden and complement our application offerings and to provide a broad array of services that lie outside of Workday’s areas of focus. These relationships include software and technology partners, consulting and implementation services providers, and business process outsourcing (BPO) partners, and enable Workday to address a broader set of problems for our customers while maintaining focus on executing against our strategy.

Salesforce.com. We believe that human capital management, financial management, and customer relationship management (CRM), represent the three major, global platforms pervasive across large organizations. In August 2011, we announced a strategic partnership with Salesforce.com and we began to deliver packaged integrations between Workday’s HCM and Financial Management applications and Salesforce.com’s CRM, Force.com and Chatter offerings.

Software and Technology Partners. To extend and enhance our applications and to take advantage of innovations in complementary markets, we work with leading and emerging technology vendors. Our strategy is to work closely with leaders in their respective spaces and innovative companies driving new value for customers. These alliances enable us and the third parties to create integrations between applications and technologies, delivering a higher level of value to customers. Our software and technology partners include Zuora, Tidemark and Cornerstone OnDemand.

Consulting and Implementation Partners. In order to offer the full breadth of implementation services, change management, and strategic consulting services to our customers, we work with leading global and boutique consulting firms. Our strategy is to enable the majority of our projects to be initiated by partners with additional application support from us. We work closely with global leaders such as Deloitte, Accenture, PWC, Towers Watson and WiPro, as well as with boutique service providers that focus primarily on delivering implementation services for our applications, like Appirio, DayNine, Omnipoint, and Collaborative Solutions.

Outsourcing and Service Bureau Providers. We work closely with providers of human resources, payroll, benefits administration, and overall business process outsourcing to integrate their services with our technology. Partners include Accenture, Aon Hewitt, Ceridian, Northgate Arinso, OneSource VHR and Safeguard International. Onesource VHR also serves as our only application reseller.

Technology Infrastructure and Operations

As an enterprise cloud company, we provide hardware and middleware, installation and maintenance, and ensure uptime for our customers. We host our applications and serve all of our customers from data centers located in Ashburn, Virginia; Lithia Springs, Georgia; Portland, Oregon; Dublin, Ireland; and Amsterdam, the Netherlands. Our data centers are designed to host mission-critical computer systems with fully redundant subsystems and compartmentalized security zones. While we procure and operate all infrastructure equipment delivering our applications, the data centers that we use are operated by third parties. We maintain a formal and comprehensive security program designed to ensure the security and integrity of customer data, protect against security threats or data breaches, and prevent unauthorized access to the data of our customers. We strictly regulate and limit all access to on-demand servers and networks at our production and remote backup facilities.

We apply a wide variety of strategies to achieve better than 99% uptime, excluding scheduled maintenance. We achieved 99.97% uptime over the last 12 months. All servers are diskless and boot from network storage, so we can quickly configure a new server to take any role. Systems are continually monitored for any signs of problems, and preemptive action is taken when necessary. Encrypted backup files are transmitted over secure connections to a redundant server storage device in a secondary data center. Our data center facilities employ advanced measures to ensure physical integrity, including redundant power and cooling systems, and advanced fire and flood prevention.

Our technology is based on a multi-tenant operating model that applies common, consistent management practices for all customers using the service. We utilize the Workday Object Management Server™ (OMS) to enable multiple customer tenants to share one version of our system while isolating each customer’s application data. We built our OMS on an open-source technology stack, using service-oriented architecture (SOA) principles. The technologies include the Linux operating system, MySQL database, Java and Apache Tomcat for the application server. We utilize commercially available hardware for its data center servers.

All users are authenticated, authorized and validated before they can access our system. Users must have a valid user ID and associated password to log on to our business services. Our configurable security model allows different groups of users to have different levels of access to the system. Security groups and policies are delivered or can be created based on a company’s unique access requirements. For Web services, we use WS-Security, an industry standard that addresses security when data is exchanged as part of a Web service. We require Secure Socket Layer version 3 (SSL 3) or Transport Layer Security (TLS), the successor to SSL, between the user’s browser and our servers to protect data during transfer.

Our applications are able to encrypt every attribute value of customer data before it is stored in the database, and each customer has a distinct encryption key. Data encryption is accomplished with a Data Encryption Key (DEK), which is itself encrypted. Because

 

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our applications are built on an object model, there are only a handful of tables and only one security model to maintain. All of the supporting database artifacts (the physical file on disk, transaction logs and backups) have only encrypted values in them. We rely on the Advanced Encryption Standard (AES) algorithm with a key size of 256 bits. The U.S. National Security Agency has authorized the use of AES with at least 192 bits for U.S. Government top secret information. An ancillary benefit to our approach is that data backups are automatically encrypted as well.

Compliance and Certifications

We voluntarily obtain third party security examinations relating to security and data privacy. Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization, replaced SAS-70 Type II examinations as the authoritative standard for reporting on service organizations. Our SSAE examination is conducted every six months by an independent third party auditor, and addresses, among other areas, our physical and environmental safeguards for production data centers, data availability and integrity procedures, change management procedures and logical security procedures.

In September 2010, we obtained an examination based on ISO 27001 criteria, a security standard for Information Security Management Systems published by the International Organization for Standardization (ISO), covering our production, sandbox and implementation environments. This independent assessment of our conformity to the ISO 27001 standard includes assessing security risks, designing and implementing comprehensive security controls and adopting an information security management process to meet security needs on an ongoing basis. The certification is valid for three years, with surveillance audits taking place annually.

As a response to concerns about the adequacy of data privacy laws in the United States, the U.S. Department of Commerce, in consultation with the European Commission, developed a “Safe Harbor” framework. The European Commission has agreed to consider that a self-certifying company provides “adequate” data privacy protection, as required by the European Data Protection Directive. We self-certify to the Safe Harbor framework on an annual basis, making it easier for our customers based in Europe or with offices or employees in Europe to store their data with us.

Research and Development

Our ability to compete depends in large part on our continuous commitment to research and development and our ability to rapidly introduce new applications, technologies, features and functionality. Our research and development organization is responsible for the design, development, testing and certification of our applications. We focus our efforts on developing new applications and core technologies and further enhancing the usability, functionality, reliability, performance and flexibility of existing applications.

Research and development expenses were $30.0 million, $39.2 million, $62.0 million and $20.8 million for the years ended December 31, 2009, December 31, 2010, January 31, 2012 and the three months ended April 30, 2012, respectively.

Competition

The overall market for enterprise application software is rapidly evolving and highly competitive, and subject to changing technology, shifting customer needs and frequent introductions of new applications. We currently compete with large, well-established, enterprise application software vendors, such as Oracle Corporation and SAP AG. These two companies are expanding their traditional on-premise enterprise applications with cloud-based applications, either through acquisition or in-house development. Oracle Corporation and SAP AG are established enterprise software companies that have greater name recognition, larger customer bases, much longer operating histories and significantly greater financial, technical, sales, marketing and other resources than we have and are able to provide comprehensive business applications that are broader in scope than our current suite of applications. We also face competition from other enterprise software vendors and from vendors of specific applications, including Lawson, which was recently acquired by an affiliate of Infor, The Ultimate Software Group, Inc. and Automated Data Processing. Other cloud companies that provide services in different markets may develop solutions in our target markets, and some potential customers may elect to develop their own internal solutions. However, the domain expertise that is required for a successful solution in the areas of HCM, payroll and financial management may inhibit new entrants that are unable to invest the necessary capital to accurately reflect global requirements and regulations. We expect continued consolidation in our industry that could lead to significantly increased competition.

We believe the principal competitive factors in our market include the following:

 

 

 

level of customer satisfaction;

 

 

 

ease of deployment and use of applications;

 

 

 

breadth and depth of application functionality;

 

 

 

total cost of ownership;

 

 

 

brand awareness and reputation;

 

 

 

modern and adaptive technology platform;

 

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capability for customization, configurability, integration, security, scalability and reliability of applications;

 

 

 

ability to innovate and respond to customer needs rapidly;

 

 

 

domain expertise on HR, payroll and financial regulations;

 

 

 

size of customer base and level of user adoption; and

 

 

 

ability to integrate with legacy enterprise infrastructures and third-party applications.

We believe that we compete favorably on the basis of these factors. Our ability to remain competitive will largely depend on our ongoing performance in the areas of application development and customer support.

Intellectual Property

We rely on a combination of trade secrets, patents, copyrights and trademarks, as well as contractual protections, to establish and protect our intellectual property rights. As of April 30, 2012, we had four patents and 22 patent applications. We also have a number of registered and unregistered trademarks. We require our employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements and control access to software, documentation and other proprietary information. Although we rely on intellectual property rights, including trade secrets, patents, copyrights and trademarks, as well as contractual protections to establish and protect our proprietary rights, we believe that factors such as the technological and creative skills of our personnel, creation of new modules, features and functionality, and frequent enhancements to our applications are more essential to establishing and maintaining our technology leadership position.

Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy or obtain and use our technology to develop applications with the same functionality as our application. Policing unauthorized use of our technology and intellectual property rights is difficult.

We expect that software and other applications in our industry may be subject to third-party infringement claims as the number of competitors grows and the functionality of applications in different industry segments overlaps. Any of these third parties might make a claim of infringement against us at any time.

Legal Proceedings

From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.

Facilities

Our corporate headquarters, which includes our operations and research and development facilities, is located in Pleasanton, California, and consists of approximately 180,000 square feet of space under a lease that expires in 2015. We have an option to extend the lease for five years.

We also lease offices in Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; Minneapolis, Minnesota; New York, New York; Philadelphia, Pennsylvania; Portland, Oregon; San Francisco, California; London, England; and Dublin, Ireland. We expect to expand our facilities capacity, including at our corporate headquarters and in certain field locations during the year ended January 31, 2013. We may further expand our facilities capacity beyond January 31, 2013 as our employee base grows. We believe that we will be able to obtain additional space on commercially reasonable terms.

 

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MANAGEMENT

Executive Officers, Other Executive Management and Directors

The following table provides information regarding our executive officers, other executive management and directors as of June 15, 2012:

 

Name

   Age     

Position(s)

Executive Officers

     

David A. Duffield

     71      

Co-founder, co-Chief Executive Officer and Director

Aneel Bhusri

     46      

Chairman, co-founder and co-Chief Executive Officer

Mark S. Peek

     54      

Chief Financial Officer

Michael A. Stankey

     53      

President and Chief Operating Officer

James P. Shaughnessy

     57      

Vice President and General Counsel

Other Executive Management

     

James J. Bozzini

     45      

Senior Vice President of Operations

Petros Dermetzis

     50      

Vice President of Development

Michael Frandsen

     50      

Vice President of Application Development

Debi Hirshlag

     46      

Vice President of Human Resources

Stan Swete

     52      

Vice President of Strategy and Chief Technology Officer

Non-Employee Directors

     

A. George Battle(1)

     68      

Director

Michael M. McNamara

     55      

Director

Scott D. Sandell(2)

     47      

Director

George J. Still, Jr.(2)

     54      

Director

 

(1)

Member of the Audit Committee.

(2)

Member of the Compensation Committee.

Executive Officers

David A. Duffield co-founded Workday in 2005 and is our co-Chief Executive Officer and a Director. In addition, Mr. Duffield has served as our Chairman from 2005 to January 2012, as our President from 2006 to January 2007, as our Chief Executive Officer from 2005 to September 2009, and as our co-Chief Executive Officer from September 2009 to the present. Prior to Workday, Mr. Duffield founded PeopleSoft, Inc. (PeopleSoft), a global enterprise software company, and served as the Chairman from its inception in 1987 until 2004, as Chief Executive Officer from 1987 to 1999 and in 2004, and as President from 1987 to 1999. Prior to PeopleSoft, Mr. Duffield was a founder, Chief Executive Officer and Chairman of Integral Systems, Inc., co-founded Information Associates, and worked at International Business Machines Corporation. Mr. Duffield received a B.S. in Electrical Engineering and an M.B.A. from Cornell University. Mr. Duffield brings to our board of directors decades of experience founding and leading high growth technology companies focused on human resources and financial applications, and his experience and familiarity with our business as a co-founder and co-Chief Executive Officer.

Aneel Bhusri co-founded Workday in 2005 and is our co-Chief Executive Officer and Chairman. Mr. Bhusri has served as a Director of Workday from 2005 to the present, as President from January 2007 to September 2009, as Co-Chief Executive Officer from September 2009 to the present, and as Chairman from January 2012 to the present. From 1993 to 2004, Mr. Bhusri held a

 

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number of senior management positions with PeopleSoft, including Senior Vice President, Product Strategy, Marketing and Business Development. From 1999 to 2004, Mr. Bhusri served as Vice Chairman of the board of directors at PeopleSoft. Mr. Bhusri has been a Partner at Greylock Partners, a Silicon Valley venture capital firm, since April 1999, and prior to that time, worked at Norwest Venture Partners and at Morgan Stanley. From 2002 to July 2009, Mr. Bhusri was a director of Data Domain, Inc., a storage solution and networking company where he held the position of Chairman from March 2007 to July 2009. He also serves as a director of various private companies. Mr. Bhusri received a B.S. in Electrical Engineering and a B.A. in Economics from Brown University and an M.B.A. from Stanford University. Mr. Bhusri brings to our board of directors extensive executive leadership and operational experience, including service as chairman of a public technology company and his experience and familiarity with our business as a co-founder and co-Chief Executive Officer.

Mark S. Peek has served as our Chief Financial Officer since June 2012, and served as a Director from December 2011 to June 2012. From January 2011 to May 2012, Mr. Peek served as the Chief Financial Officer and Co-President, Business Operations of VMware, Inc., a provider of business infrastructure virtualization solutions. From April 2007 to January 2011, Mr. Peek served as Chief Financial Officer of VMware. From 2000 to 2007, Mr. Peek was Senior Vice President and Chief Accounting Officer at Amazon.com, Inc., an online retail company. Prior to joining Amazon.com, Mr. Peek spent 19 years at Deloitte & Touche LLP, the last 10 years as a partner. Mr. Peek is a director of Trimble Navigation Limited, an advanced positioning systems company. Mr. Peek received a B.S. in Accounting and Business Administration from Minnesota State University.

Michael A. Stankey has served as our President and Chief Operating Officer since September 2009. From October 2007 to September 2009, Mr. Stankey was a Partner with Greylock Partners. From December 2001 until its acquisition by Hewlett-Packard Company in April 2007, Mr. Stankey served as Chairman and Chief Executive Officer of PolyServe Inc., a storage virtualization software company. From 1993 to 2001, Mr. Stankey held a number of senior management positions with PeopleSoft, including Senior Vice President of North American Sales. Mr. Stankey received a B.B.A. in Accounting from the University of Wisconsin, Eau Claire.

James P. Shaughnessy has served as our Vice President and General Counsel since August 2011. From June 2007 to August 2011, Mr. Shaughnessy was Senior Vice President, Chief Administrative Officer and General Counsel of Orbitz Worldwide, Inc., a global online travel company. Mr. Shaughnessy served as Senior Vice President, General Counsel and Secretary of PeopleSoft in 2004. Prior to 2007, Mr. Shaughnessy also served as Senior Vice President and General Counsel of Lenovo Group Ltd. and in senior legal positions with Hewlett-Packard Company, Compaq Computer Company and Digital Equipment Corporation. Mr. Shaughnessy received a B.S. in Political Science from Northern Michigan University and a J.D. and a Masters of Public Policy from the University of Michigan.

Other Executive Management

James J. Bozzini has served as our Senior Vice President of Operations since January 2007. Between 1991 and 1999, Mr. Bozzini held a number of senior management positions at PeopleSoft, including Senior Vice President of Services Operations. Prior to joining Workday, Mr. Bozzini also worked for Evolve Software, Inc. and Andersen Consulting (now known as Accenture Ltd.). Mr. Bozzini received a B.S. in Business Administration from California State University, Chico.

Petros Dermetzis has served as our Vice President of Development since February 2005. From 1993 to 2005, Mr. Dermetzis held a number of key development and international sales operations positions at PeopleSoft, most recently as General Manager and Group Vice President of Tools & Technology. Mr. Dermetzis received a B.A. in Marketing Engineering from Huddersfield University and an M.S. in Information Management from Lancaster University.

Michael Frandsen has served as our Vice President of Application Development since January 2010. From January 2008 to December 2008, Mr. Frandsen served as Chief Executive Officer at Potenco, Inc. a developer of hand-held micro-generators. From November 2006 to July 2007, Mr. Frandsen served as Senior Vice President Product Management and Strategy at DemandTec, Inc., a SaaS marketing and merchandising optimization solutions company. Mr. Frandsen received a B.S. in Business from the University of Colorado at Boulder.

Debi Hirshlag has served as our Vice President of Human Resources since January 2012. From March 2008 to December 2011, Ms. Hirshlag was Vice President, Global Human Resources at Flextronics International Ltd. (Flextronics), an electronics manufacturing services provider. From July 2005 to March 2008, Ms. Hirshlag worked at Trimble Navigation Limited, a positioning product solutions company, as Vice President of Human Resources. Prior to joining Trimble, Ms. Hirshlag served as Vice President of Human Resources at Ariba Inc., as Vice President of Corporate Services at Latitude Communications, and held human resources positions at Seagate Technology, Inc., Pepsi-Cola and Amoco Corporation. Ms. Hirshlag received her B.S. in Industrial Management from Carnegie Mellon University and an M.A. in Labor and Industrial Relations from the University of Illinois.

Stan Swete has served as our Vice President of Strategy and Chief Technology Officer since February 2007. From April 2005 to February 2007, Mr. Swete served as our Vice President of Products and Technology. From 1992 to 2002 and in 2004, Mr. Swete held a number of key leadership roles at PeopleSoft, including head of the products and technology organization. He was also manager of

 

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tools development, general manager of financial applications, general manager of CRM, and was responsible for the initial release of PeopleSoft’s Internet architecture. Mr. Swete received a B.S. and M.S. in Industrial Engineering from Stanford University.

Directors

A. George (“Skip”) Battle has served as a Director since March 2007. From 2004 to 2005, Mr. Battle served as Executive Chairman at Ask Jeeves, Inc., a provider of information search and retrieval services. From 2000 until 2004, Mr. Battle served as Chief Executive Officer at Ask Jeeves. From 1968 until his retirement in 1995, Mr. Battle was an employee and then partner at Arthur Andersen LLP and Andersen Consulting (now known as Accenture Ltd.), global accounting and consulting firms. Mr. Battle is a director of Expedia, Inc., Fair Isaac Corporation, LinkedIn Corporation, Netflix, Inc., OpenTable, Inc. and Sungevity, Inc. He is also a director at the Masters Select family of funds and as a director of Advent Software, Inc. until May 2011. Mr. Battle