10-Q 1 wday-4302019x10q.htm 10-Q Document

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 30, 2019
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35680
 
 
 
Workday, Inc.
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
20-2480422
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
6110 Stoneridge Mall Road
Pleasanton, California 94588
(Address of principal executive offices)
Telephone Number (925) 951-9000
(Registrant’s telephone number, including area code) 
 
 
 
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.001
WDAY
The Nasdaq Stock Market LLC
 
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ 
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of May 28, 2019, there were approximately 162 million shares of the registrant’s Class A common stock and 64 million shares of the registrant's Class B common stock outstanding.
 
 
 



Workday, Inc.
 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Workday, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
April 30, 2019
 
January 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
781,772

 
$
638,554

Marketable securities
1,110,141

 
1,139,864

Trade and other receivables, net
542,843

 
704,680

Deferred costs
82,316

 
80,809

Prepaid expenses and other current assets
148,062

 
136,689

Total current assets
2,665,134

 
2,700,596

Property and equipment, net
885,789

 
796,907

Operating lease right-of-use assets
280,145

 

Deferred costs, noncurrent
179,616

 
183,518

Acquisition-related intangible assets, net
293,897

 
313,240

Goodwill
1,379,125

 
1,379,125

Other assets
140,468

 
147,360

Total assets
$
5,824,174

 
$
5,520,746

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,146

 
$
29,093

Accrued expenses and other current liabilities
129,182

 
123,542

Accrued compensation
244,794

 
207,924

Unearned revenue
1,734,442

 
1,837,618

Operating lease liabilities
64,107

 

Current portion of convertible senior notes, net
235,408

 
232,514

Total current liabilities
2,443,079

 
2,430,691

Convertible senior notes, net
983,507

 
972,264

Unearned revenue, noncurrent
95,708

 
111,652

Operating lease liabilities, noncurrent
246,037

 

Other liabilities
11,095

 
47,697

Total liabilities
3,779,426

 
3,562,304

Stockholders’ equity:
 
 
 
Common stock
225

 
221

Additional paid-in capital
4,294,370

 
4,105,334

Accumulated other comprehensive income (loss)
13,113

 
(809
)
Accumulated deficit
(2,262,960
)
 
(2,146,304
)
Total stockholders’ equity
2,044,748

 
1,958,442

Total liabilities and stockholders’ equity
$
5,824,174

 
$
5,520,746


See Notes to Condensed Consolidated Financial Statements
3



Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended April 30,
 
2019
 
2018
Revenues:
 
 
 
Subscription services
$
701,024

 
$
522,149

Professional services
124,031

 
96,494

Total revenues
825,055

 
618,643

Costs and expenses (1):
 
 
 
Costs of subscription services
112,469

 
80,245

Costs of professional services
130,750

 
97,726

Product development
347,831

 
263,584

Sales and marketing
272,936

 
192,771

General and administrative
84,455

 
55,581

Total costs and expenses
948,441

 
689,907

Operating loss
(123,386
)
 
(71,264
)
Other income (expense), net
7,141

 
(3,848
)
Loss before provision for (benefit from) income taxes
(116,245
)
 
(75,112
)
Provision for (benefit from) income taxes
30

 
(702
)
Net loss
$
(116,275
)
 
$
(74,410
)
Net loss per share, basic and diluted
$
(0.52
)
 
$
(0.35
)
Weighted-average shares used to compute net loss per share, basic and diluted
223,309

 
213,055

(1)      Costs and expenses include share-based compensation expenses as follows:
Costs of subscription services
$
10,415

 
$
7,877

Costs of professional services
16,150

 
10,792

Product development
91,237

 
68,511

Sales and marketing
38,854

 
25,612

General and administrative
28,579

 
19,867


See Notes to Condensed Consolidated Financial Statements
4



Workday, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
Three Months Ended April 30,
 
2019
 
2018
Net loss
$
(116,275
)
 
$
(74,410
)
Other comprehensive income (loss), net of tax:
 
 
 
Net change in foreign currency translation adjustment
(646
)
 
(787
)
Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax provision of $219 and $0, respectively
703

 
(533
)
Net change in market value of effective foreign currency forward exchange contracts, net of tax provision of $1,981 and $2,424, respectively
13,865

 
16,967

Other comprehensive income (loss), net of tax
13,922

 
15,647

Comprehensive loss
$
(102,353
)
 
$
(58,763
)

See Notes to Condensed Consolidated Financial Statements
5



Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended April 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(116,275
)
 
$
(74,410
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
61,165

 
38,664

Share-based compensation expenses
185,235

 
132,659

Amortization of deferred costs
20,880

 
16,360

Amortization of debt discount and issuance costs
11,587

 
18,139

Other
8,976

 
(9,289
)
Changes in operating assets and liabilities:
 
 
 
Trade and other receivables, net
157,379

 
168,702

Deferred costs
(18,485
)
 
(12,606
)
Prepaid expenses and other assets
(5,107
)
 
8,488

Accounts payable
1,503

 
7,954

Accrued expenses and other liabilities
21,403

 
11,627

Unearned revenue
(119,098
)
 
(122,055
)
Net cash provided by (used in) operating activities
209,163

 
184,233

Cash flows from investing activities
 
 
 
Purchases of marketable securities
(471,054
)
 
(908,126
)
Maturities of marketable securities
460,097

 
686,676

Sales of marketable securities
50,948

 
27,359

Owned real estate projects
(39,634
)
 
(39,233
)
Capital expenditures, excluding owned real estate projects
(65,535
)
 
(48,862
)
Purchases of non-marketable equity and other investments
(2,200
)
 
(2,400
)
Other
23

 

Net cash provided by (used in) investing activities
(67,355
)
 
(284,586
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock from employee equity plans
3,455

 
2,611

Other
(93
)
 
(57
)
Net cash provided by (used in) financing activities
3,362

 
2,554

Effect of exchange rate changes
(327
)
 
(420
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
144,843

 
(98,219
)
Cash, cash equivalents, and restricted cash at the beginning of period
642,203

 
1,135,654

Cash, cash equivalents, and restricted cash at the end of period
$
787,046

 
$
1,037,435

 
Three Months Ended April 30,
 
2019
 
2018
Supplemental cash flow data
 
 
 
Cash paid for interest, net of amounts capitalized
$
3

 
$
19

Cash paid for income taxes
3,534

 
1,714

Non-cash investing and financing activities:
 
 
 
Purchases of property and equipment, accrued but not paid
77,429

 
62,196


See Notes to Condensed Consolidated Financial Statements
6



 
April 30,
 
2019
 
2018
Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of cash flows
 
 
 
Cash and cash equivalents
$
781,772

 
$
1,036,045

Restricted cash included in Prepaid expenses and other current assets
5,144

 

Restricted cash included in Other assets
130

 
1,390

Total cash, cash equivalents, and restricted cash
$
787,046

 
$
1,037,435



See Notes to Condensed Consolidated Financial Statements
7



Workday, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
 
Three Months Ended April 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balances as of January 31, 2019
222,052,063

 
$
221

 
$
4,105,334

 
$
(809
)
 
$
(2,146,304
)
 
$
1,958,442

Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No. 2018-07

 

 
381

 

 
(381
)
 

Issuance of common stock under employee equity plans
718,832

 
1

 
3,454

 

 

 
3,455

Vested restricted stock units
2,666,099

 
3

 
(3
)
 

 

 

Share-based compensation

 

 
185,204

 

 

 
185,204

Other comprehensive income (loss)

 

 

 
13,922

 

 
13,922

       Net loss

 

 

 

 
(116,275
)
 
(116,275
)
Balances as of April 30, 2019
225,436,994

 
$
225

 
$
4,294,370

 
$
13,113

 
$
(2,262,960
)
 
$
2,044,748


See Notes to Condensed Consolidated Financial Statements
8



Workday, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
 
Three Months Ended April 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balances as of January 31, 2018
211,977,495

 
$
211

 
$
3,354,423

 
$
(46,413
)
 
$
(1,727,856
)
 
$
1,580,365

Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No. 2016-16

 

 

 

 
427

 
427

Issuance of common stock under employee equity plans
516,354

 
1

 
2,611

 

 

 
2,612

Vested restricted stock units
2,639,972

 
3

 
(3
)
 

 

 

Share-based compensation

 

 
132,659

 

 

 
132,659

Other comprehensive income (loss)

 

 

 
15,647

 

 
15,647

       Net loss

 

 

 

 
(74,410
)
 
(74,410
)
Balances as of April 30, 2018
215,133,821

 
$
215

 
$
3,489,690

 
$
(30,766
)
 
$
(1,801,839
)
 
$
1,657,300


See Notes to Condensed Consolidated Financial Statements
9



Workday, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1. Overview and Basis of Presentation
Company and Background
Workday provides financial management, human capital management, planning, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible, and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources. We were originally incorporated in March 2005 in Nevada, and in June 2012 we reincorporated in Delaware. As used in this report, the terms “Workday,” “registrant,” “we,” “us,” and “our” mean Workday, Inc. and its subsidiaries unless the context indicates otherwise.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements include the results of Workday, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the information contained herein reflects all adjustments necessary for a fair presentation of Workday’s results of operations, financial position, cash flows, and shareholders' equity. All such adjustments are of a normal, recurring nature. The results of operations for the quarter ended April 30, 2019 shown in this report are not necessarily indicative of the results to be expected for the full year ending January 31, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the SEC on March 18, 2019.
There have been no material changes in our significant accounting policies as described in our Annual Report on Form 10-K for the year ended January 31, 2019, other than the adoption of accounting pronouncements as described in Note 2, Accounting Standards. Certain prior period amounts reported in our condensed consolidated financial statements have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, the fair value of assets acquired and liabilities assumed through business combinations, the determination of the period of benefit for deferred commissions, certain assumptions used in the valuation of equity awards, and assumptions used in the valuation of non-marketable equity investments. Actual results could differ from those estimates and such differences could be material to our condensed consolidated financial position and results of operations.
Segment Information
We operate in one operating segment, cloud applications. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker, who is our chief executive officer, in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

10


Note 2. Accounting Standards
Recently Adopted Accounting Pronouncements
ASU No. 2016-02
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires the recognition of right-of-use assets and lease liabilities on the balance sheet for those leases currently classified as operating leases under Accounting Standards Codification Topic 840 Leases. Accounting for finance leases remains substantially unchanged.
We adopted this standard effective February 1, 2019 using a modified retrospective method, under which financial results reported in periods prior to February 1, 2019 were not adjusted. We elected the package of transition practical expedients, which among other things, does not require reassessment of lease classifications. Additionally, we elected to combine lease and non-lease components for each of our existing underlying asset classes and to not include leases with a term of 12 months or less on our condensed consolidated balance sheets.
The most significant impact of adopting this standard was the recognition of $279 million of operating lease right-of-use assets and $307 million of operating lease liabilities on our condensed consolidated balance sheet as of February 1, 2019. Additionally, we reclassified $28 million in previously recognized deferred rent obligations and lease incentives to operating lease right-of-use assets. This adoption did not result in any cumulative-effect adjustments to Accumulated deficit, and there was no material impact on our condensed consolidated statement of operations. For further information, see Note 11, Leases.
ASU No. 2017-12
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. We adopted this new standard effective February 1, 2019. As a result of adopting the standard, the entire change in the fair value of our foreign currency forward contracts designated as cash flow hedges will be presented in the same income statement line item as the respective hedged items. This adoption did not result in any cumulative-effect adjustments to Accumulated deficit, and the amended presentation guidance will be applied prospectively. For further information, see Note 9, Derivative Instruments.
ASU No. 2018-02
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act to retained earnings. We adopted this new standard effective February 1, 2019. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.
ASU No. 2018-07
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, with certain exceptions. We adopted this standard effective February 1, 2019, and remeasured all outstanding equity-classified non-employee share-based payment awards at fair value as of the adoption date, which resulted in a $0.4 million cumulative-effect adjustment to Accumulated deficit.

11


Recently Issued Accounting Pronouncements
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses. We plan to adopt this new standard in the first quarter of our fiscal 2021. We are evaluating the accounting, transition, and disclosure requirements of this standard. The effect on our condensed consolidated financial statements will largely depend on the composition and credit quality of our investment portfolio and trade receivables as well as the economic conditions at the time of adoption.
Note 3. Investments
Debt Securities
As of April 30, 2019, debt securities consisted of the following (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
U.S. treasury securities
$
484,846

 
$
214

 
$
(79
)
 
$
484,981

U.S. agency obligations
188,057

 
117

 
(61
)
 
188,113

Corporate bonds
373,946

 
637

 
(121
)
 
374,462

Commercial paper
282,527

 
2

 

 
282,529

 
$
1,329,376

 
$
970

 
$
(261
)
 
$
1,330,085

Included in cash and cash equivalents
$
219,944

 
$

 
$

 
$
219,944

Included in marketable securities
$
1,109,432

 
$
970

 
$
(261
)
 
$
1,110,141

As of January 31, 2019, debt securities consisted of the following (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Fair Value
U.S. treasury securities
$
396,347

 
$
61

 
$
(178
)
 
$
396,230

U.S. agency obligations
241,914

 
73

 
(151
)
 
241,836

Corporate bonds
419,784

 
336

 
(352
)
 
419,768

Commercial paper
254,175

 

 
(2
)
 
254,173

 
$
1,312,220

 
$
470

 
$
(683
)
 
$
1,312,007

Included in cash and cash equivalents
$
216,270

 
$

 
$

 
$
216,270

Included in marketable securities
$
1,095,950

 
$
470

 
$
(683
)
 
$
1,095,737

We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of April 30, 2019, which includes an assessment of whether it is more likely than not that we will be required to sell the investment before recovery of the investment's amortized cost basis. The unrealized losses on debt securities that have been in a net loss position for 12 months or more were not material as of April 30, 2019. We classify our debt securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We consider all debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets in the accompanying condensed consolidated balance sheets. Debt securities included in Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase greater than three months, and the remainder of the securities is included in Cash and cash equivalents. There were no sales of debt securities during the three months ended April 30, 2019. We sold $27 million of our debt securities during the three months ended April 30, 2018. The realized gains and losses from the sales were immaterial.

12


Equity Investments
Money market funds and marketable equity investments are investments with readily determinable fair values. Non-marketable equity investments consist of investments in privately held companies without readily determinable fair values.
Equity investments consisted of the following (in thousands):
 
Condensed Consolidated Balance Sheets Location
 
April 30, 2019
 
January 31, 2019
Money market funds
Cash and cash equivalents
 
$
396,940

 
$
237,071

Marketable equity investments
Marketable securities
 

 
44,127

Non-marketable equity investments
Other assets
 
39,125

 
36,925

 
 
 
$
436,065

 
$
318,123

We sold $51 million of our marketable equity investments during the three months ended April 30, 2019, with a corresponding gain recognized of $7 million. There were no sales of marketable equity investments during the three months ended April 30, 2018. No material adjustments were made to the carrying value of the non-marketable equity investments as measured under the measurement alternative during the three months ended April 30, 2019 and 2018.
Note 4. Fair Value Measurements
We measure our cash equivalents, marketable securities, and foreign currency derivative contracts at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs that are supported by little or no market activity.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of April 30, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. treasury securities
$
484,981

 
$

 
$

 
$
484,981

U.S. agency obligations

 
188,113

 

 
188,113

Corporate bonds

 
374,462

 

 
374,462

Commercial paper

 
282,529

 

 
282,529

Money market funds
396,940

 

 

 
396,940

Foreign currency derivative assets

 
35,238

 

 
35,238

Total assets
$
881,921

 
$
880,342

 
$

 
$
1,762,263

Foreign currency derivative liabilities
$

 
$
752

 
$

 
$
752

Total liabilities
$

 
$
752

 
$

 
$
752


13


The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of January 31, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. treasury securities
$
396,230

 
$

 
$

 
$
396,230

U.S. agency obligations

 
241,836

 

 
241,836

Corporate bonds

 
419,768

 

 
419,768

Commercial paper

 
254,173

 

 
254,173

Money market funds
237,071

 

 

 
237,071

Marketable equity investments
44,127

 

 

 
44,127

Foreign currency derivative assets

 
22,570

 

 
22,570

Total assets
$
677,428

 
$
938,347

 
$

 
$
1,615,775

Foreign currency derivative liabilities
$

 
$
3,135

 
$

 
$
3,135

Total liabilities
$

 
$
3,135

 
$

 
$
3,135

Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands): 
 
April 30, 2019
 
January 31, 2019
 
Net Carrying Amount
 
Estimated Fair Value
 
Net Carrying Amount
 
Estimated Fair Value
1.50% Convertible senior notes
$
235,408

 
$
590,566

 
$
232,514

 
$
557,074

0.25% Convertible senior notes
983,507

 
1,707,750

 
972,264

 
1,560,228

In June 2013, we completed an offering of $250 million of 1.50% convertible senior notes due July 15, 2020 (“2020 Notes”). In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022 (“2022 Notes” and together with the 2020 Notes, the “Notes”). The estimated fair values of the Notes, which we have classified as Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of each reporting period. The if-converted value of the 2020 Notes exceeded the principal amount by $379 million. The if-converted value of the 2022 Notes exceeded the principal amount by $458 million. The if-converted values were determined based on the closing price of our common stock of $205.63 on April 30, 2019. For further information, see Note 10, Convertible Senior Notes, Net.
Note 5. Deferred Costs
Deferred costs, which consist of deferred sales commissions, were $262 million and $264 million as of April 30, 2019 and January 31, 2019, respectively. Amortization expense for the deferred costs was $21 million and $16 million for the three months ended April 30, 2019 and 2018, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

14


Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
April 30, 2019
 
January 31, 2019
Land and land improvements
$
34,050

 
$
22,694

Buildings
469,405

 
433,863

Computers, equipment, and software
599,584

 
539,090

Furniture and fixtures
46,339

 
38,840

Leasehold improvements
173,837

 
162,657

Property and equipment, gross (1)
1,323,215

 
1,197,144

Less accumulated depreciation and amortization
(437,426
)
 
(400,237
)
Property and equipment, net
$
885,789

 
$
796,907

(1)  
Property and equipment, gross included construction-in-progress for owned real estate projects of $413 million and $355 million that had not yet been placed in service as of April 30, 2019 and January 31, 2019, respectively.
Depreciation expense totaled $41 million and $33 million for the three months ended April 30, 2019 and 2018, respectively. Interest costs capitalized to property and equipment totaled $4 million and $2 million for the three months ended April 30, 2019 and 2018, respectively.
Note 7. Acquisition-related Intangible Assets, Net
Acquisition-related intangible assets, net consisted of the following (in thousands):
 
April 30, 2019
 
January 31, 2019
Developed technology
$
186,800

 
$
186,800

Customer relationships
189,000

 
189,000

Trade name
12,000

 
12,000

Backlog
11,000

 
11,000

Acquisition-related intangible assets, gross
398,800

 
398,800

Less accumulated amortization
(104,903
)
 
(85,560
)
Acquisition-related intangible assets, net
$
293,897

 
$
313,240

Amortization expense related to acquisition-related intangible assets was $19 million and $5 million for the three months ended April 30, 2019 and 2018, respectively.
As of April 30, 2019, our future estimated amortization expense related to acquisition-related intangible assets is as follows (in thousands):
Fiscal period:
 
Remainder of 2020
$
49,513

2021
48,142

2022
43,733

2023
41,009

2024
29,833

Thereafter
81,667

Total
$
293,897


15


Note 8. Other Assets
Other assets consisted of the following (in thousands):
 
April 30, 2019
 
January 31, 2019
Non-marketable equity and other investments
$
52,879

 
$
50,546

Prepayments for computing infrastructure platforms
14,510

 
16,976

Technology patents and other intangible assets, net
19,519

 
20,335

Deposits
5,370

 
4,383

Net deferred tax assets
4,504

 
4,544

Other
43,686

 
50,576

Total
$
140,468

 
$
147,360

Technology patents and other intangible assets with estimable useful lives are amortized on a straight-line basis. As of April 30, 2019, the future estimated amortization expense is as follows (in thousands):
Fiscal period:
 
Remainder of 2020
$
2,438

2021
2,926

2022
2,512

2023
2,246

2024
1,943

Thereafter
7,454

Total
$
19,519

Note 9. Derivative Instruments
We conduct business on a global basis in multiple foreign currencies, subjecting Workday to foreign currency risk. To mitigate this risk, we utilize hedging contracts as described below. We do not enter into any derivatives for trading or speculative purposes.
Our foreign currency contracts are classified within Level 2 of the fair value hierarchy because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.
Foreign Currency Forward Contracts Designated as Cash Flow Hedges
We are exposed to foreign currency fluctuations resulting from customer contracts denominated in foreign currencies. We have a hedging program in which we enter into foreign currency forward contracts related to certain customer contracts. We designate these forward contracts as cash flow hedging instruments since the accounting criteria for such designation have been met.
Foreign currency forward contracts designated as cash flow hedges are recorded on the condensed consolidated balance sheets at fair value. Gains or losses resulting from changes in the fair value of these hedges are recorded in Accumulated other comprehensive income (loss) (“OCI”) on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the condensed consolidated statements of operations in the same period that the underlying revenues are earned. Prior to the adoption of ASU No. 2017-12, the changes in value of these contracts resulting from changes in forward points were excluded from the assessment of hedge effectiveness and were recorded as incurred in Other income (expense), net on the condensed consolidated statements of operations. Upon adoption of ASU No. 2017-12, we elected to prospectively include changes in the value of these contracts resulting from changes in forward points in the assessment of hedge effectiveness. These changes are recorded in OCI on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the condensed consolidated statements of operations in the same period that the underlying revenues are earned. Cash flows from such forward contracts are classified as operating activities.
As of April 30, 2019 and January 31, 2019, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $788 million and $717 million, respectively. All contracts have maturities not greater than 36 months. The notional value represents the amount that will be bought or sold upon maturity of the forward contract.

16


Foreign Currency Forward Contracts Not Designated as Hedges
We also enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets and liabilities. These forward contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities and are recorded on the condensed consolidated balance sheet at fair value. The forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are recorded in Other income (expense), net on the condensed consolidated statements of operations. Cash flows from such forward contracts are classified as operating activities.
As of April 30, 2019 and January 31, 2019, we had outstanding forward contracts not designated as hedges with total notional values of $134 million and $198 million, respectively.
The fair values of outstanding derivative instruments were as follows (in thousands):
 
 
Condensed Consolidated Balance Sheets Location
 
April 30, 2019
 
January 31, 2019
Derivative assets:
 
 
 
 
 
 
Foreign currency forward contracts designated as cash flow hedges
 
Prepaid expenses and other current assets
 
$
18,172

 
$
12,076

Foreign currency forward contracts designated as cash flow hedges
 
Other assets
 
15,303

 
10,015

Foreign currency forward contracts not designated as hedges
 
Prepaid expenses and other current assets
 
1,685

 
459

Foreign currency forward contracts not designated as hedges
 
Other assets
 
78

 
20

Total derivative assets
 
 
 
$
35,238

 
$
22,570

Derivative liabilities:
 
 
 
 
 
 
Foreign currency forward contracts designated as cash flow hedges
 
Accrued expenses and other current liabilities
 
$
154

 
$
983

Foreign currency forward contracts designated as cash flow hedges
 
Other liabilities
 
275

 
706

Foreign currency forward contracts not designated as hedges
 
Accrued expenses and other current liabilities
 
314

 
1,446

Foreign currency forward contracts not designated as hedges
 
Other liabilities
 
9

 

Total derivative liabilities
 
 
 
$
752

 
$
3,135

The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations was as follows (in thousands):
 
 
Condensed Consolidated Statements of Operations Location
 
Three Months Ended April 30, 2019
Total revenues
 
Revenues
 
$
825,055

Amount of gains (losses) related to foreign currency forward contracts designated as cash flow hedges
 
Revenues
 
16


17


Pre-tax gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):
 
 
Condensed Consolidated Statements of Operations and Statements of Comprehensive Loss Locations
 
Three Months Ended April 30,
 
 
 
2019
 
2018
Gains (losses) recognized in OCI (1)
 
Net change in market value of effective foreign currency forward exchange contracts
 
$
15,862

 
$
18,274

Gains (losses) reclassified from OCI into income
 
Revenues
 
16

 
(1,117
)
Gains (losses) recognized in income (amount excluded from effectiveness testing and ineffective portion)
 
Other income (expense), net
 

 
2,231

(1) 
Of the total value accumulated in OCI from foreign currency forward contracts designated as cash flow hedges as of April 30, 2019, net gains of $7 million are expected to be reclassified out of OCI within the next 12 months.
Gains (losses) associated with foreign currency forward contracts not designated as cash flow hedges were as follows (in thousands):
 
 
Condensed Consolidated Statements of Operations Location
 
Three Months Ended April 30,
Derivative Type
 
 
2019
 
2018
Foreign currency forward contracts not designated as hedges
 
Other income (expense), net
 
$
2,398

 
$
1,794

We are subject to master netting agreements with certain counterparties of the foreign exchange contracts, under which we are permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is our policy to present the derivatives gross on the condensed consolidated balance sheets. Our foreign currency forward contracts are not subject to any credit contingent features or collateral requirements. We manage our exposure to counterparty risk by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
As of April 30, 2019, information related to these offsetting arrangements was as follows (in thousands):
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented on the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets
 
Net Assets Exposed
 
 
 
 
 
Financial Instruments
 
Cash Collateral Received
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty A
 
$
2,603

 
$

 
$
2,603

 
$
(272
)
 
$

 
$
2,331

Counterparty B
 
30,084

 

 
30,084

 
(448
)
 

 
29,636

Counterparty C
 
2,551

 

 
2,551

 
(32
)
 

 
2,519

Total
 
$
35,238

 
$

 
$
35,238

 
$
(752
)
 
$

 
$
34,486

 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented on the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets
 
Net Liabilities Exposed
 
 
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty A
 
$
272

 
$

 
$
272

 
$
(272
)
 
$

 
$

Counterparty B
 
448

 

 
448

 
(448
)
 

 

Counterparty C
 
32

 

 
32

 
(32
)
 

 

Total
 
$
752

 
$

 
$
752

 
$
(752
)
 
$

 
$


18


Note 10. Convertible Senior Notes, Net
Convertible Senior Notes
In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 with a principal amount of $350 million (“2018 Notes”). The 2018 Notes were unsecured, unsubordinated obligations, and interest was payable in cash in arrears at a fixed rate of 0.75% on January 15 and July 15 of each year. During the second quarter of fiscal 2019, the 2018 Notes were converted by note holders and we repaid the $350 million principal balance in cash. We also distributed approximately 1.5 million shares of our Class A common stock to note holders during the second quarter of fiscal 2019, which represents the conversion value in excess of the principal amount.
In June 2013, we issued 1.50% convertible senior notes due July 15, 2020 with a principal amount of $250 million. The 2020 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 1.50% on January 15 and July 15 of each year. The 2020 Notes mature on July 15, 2020 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2020 Notes prior to maturity.
In September 2017, we issued 0.25% convertible senior notes due October 1, 2022 with a principal amount of $1.15 billion. The 2022 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.25% on April 1 and October 1 of each year. The 2022 Notes mature on October 1, 2022 unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2022 Notes prior to maturity.
The terms of the Notes are governed by Indentures by and between us and Wells Fargo Bank, National Association, as Trustee (the “Indentures”). Upon conversion, holders of the Notes will receive cash, shares of Class A common stock, or a combination of cash and shares of Class A common stock, at our election.
For the 2020 Notes, the initial conversion rate is 12.2340 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $81.74 per share of Class A common stock, subject to adjustment. Prior to the close of business on March 13, 2020, conversion of the 2020 Notes is subject to the satisfaction of certain conditions, as described below. For the 2022 Notes, the initial conversion rate is 6.7982 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $147.10 per share of Class A common stock, subject to adjustment. Prior to the close of business on May 31, 2022, conversion of the 2022 Notes is subject to the satisfaction of certain conditions, as described below.
Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indentures) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indentures), holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest.
Holders of the 2020 Notes and 2022 Notes may convert all or a portion of their Notes prior to the close of business on March 13, 2020 and May 31, 2022, respectively, in multiples of $1,000 principal amount, only under the following circumstances:
if the last reported sale price of Class A common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the respective Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the respective Notes for each day of that five day consecutive trading day period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate of the respective Notes on such trading day; or
upon the occurrence of specified corporate events, as noted in the Indentures.
On or after March 15, 2020 for the 2020 Notes and June 1, 2022 for the 2022 Notes, holders of the respective Notes may convert their Notes at any time until the close of business on the second scheduled trading day immediately preceding the respective maturity date of their Notes.
In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components. The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity components representing the conversion option were determined by deducting the fair value of the liability components from the par value of the respective Notes. These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification.

19


In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes. The issuance costs attributable to the equity components were netted against the respective equity components in Additional paid-in capital. For the 2018 Notes, we recorded liability issuance costs of $7 million and equity issuance costs of $2 million. Amortization expense for the liability issuance costs was $0.4 million for the three months ended April 30, 2018. There was no related amortization expense for the three months ended April 30, 2019, as the 2018 Notes were converted and repaid during the second quarter of fiscal 2019. For the 2020 Notes, we recorded liability issuance costs of $5 million and equity issuance costs of $2 million. Amortization expense for the liability issuance costs was $0.2 million for each of the three-month periods ended April 30, 2019 and 2018. For the 2022 Notes, we recorded liability issuance costs of $14 million and equity issuance costs of $4 million. Amortization expense for the liability issuance costs was $1 million for each of the three-month periods ended April 30, 2019 and 2018.
The Notes, net consisted of the following (in thousands):
 
April 30, 2019
 
January 31, 2019
 
2020 Notes
 
2022 Notes
 
2020 Notes
 
2022 Notes
Principal amounts:
 
 
 
 
 
 
 
   Principal
$
249,975

 
$
1,150,000

 
$
249,975

 
$
1,150,000

   Unamortized debt discount
(13,755
)
 
(156,720
)
 
(16,480
)
 
(167,249
)
   Unamortized debt issuance costs
(812
)
 
(9,773
)
 
(981
)
 
(10,487
)
   Net carrying amount
$
235,408

 
$
983,507

 
$
232,514

 
$
972,264

Carrying amount of the equity component (1)
$
66,007

 
$
219,702

 
$
66,007

 
$
219,702

(1) 
Included on the condensed consolidated balance sheets within Additional paid-in capital, net of $2 million and $4 million for the 2020 Notes and 2022 Notes, respectively, in equity issuance costs.
As of April 30, 2019, the 2020 Notes and 2022 Notes have remaining lives of approximately 14 months and 41 months, respectively.
For more than 20 trading days during the 30 consecutive trading days ended April 30, 2018, July 31, 2018, October 31, 2018, January 31, 2019, and April 30, 2019, the last reported sale price of our Class A common stock exceeded 130% of the conversion price of the 2020 Notes. As a result, the 2020 Notes were convertible at the option of the holders during the second, third, and fourth quarter of fiscal 2019, the first quarter of fiscal 2020, and will continue to be convertible during the second quarter of fiscal 2020. Accordingly, the 2020 Notes are classified as current on the condensed consolidated balance sheet as of April 30, 2019. From May 1, 2018 through the date of this filing, the amount of the principal balance of the 2020 Notes that has been converted or for which conversion has been requested was not material.
The effective interest rates of the liability components of the 2018 Notes, 2020 Notes, and 2022 Notes are 5.75%, 6.25%, and 4.60%, respectively. These interest rates were based on the interest rates of similar liabilities at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended April 30,
 
2019
 
2018
 
2018 Notes
 
2020 Notes
 
2022 Notes
 
2018 Notes
 
2020 Notes
 
2022 Notes
Contractual interest expense
$

 
$
937

 
$
719

 
$
656

 
$
937

 
$
719

Interest cost related to amortization of debt issuance costs

 
169

 
714

 
352

 
168

 
714

Interest cost related to amortization of the debt discount

 
2,725

 
10,529

 
4,283

 
2,561

 
10,061

We capitalized interest costs related to the Notes of $4 million and $2 million for the three months ended April 30, 2019 and 2018, respectively.

20


Notes Hedges
In connection with the issuance of the Notes, we entered into convertible note hedge transactions with respect to our Class A common stock (“Purchased Options”). The Purchased Options relating to the 2018 Notes gave us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2018 Notes, approximately 4.2 million shares of our Class A common stock for $83.28 per share, exercisable upon conversion of the 2018 Notes. During the second quarter of fiscal 2019, we received approximately 1.5 million shares of our Class A common stock from the exercise of the Purchased Options relating to the 2018 Notes. These shares were recorded as treasury stock.
The Purchased Options relating to the 2020 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2020 Notes, approximately 3.1 million shares of our Class A common stock for $81.74 per share, exercisable upon conversion of the 2020 Notes. The Purchased Options relating to the 2022 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2022 Notes, approximately 7.8 million shares of our Class A common stock for $147.10 per share, exercisable upon conversion of the 2022 Notes. The Purchased Options will expire in 2020 for the 2020 Notes and in 2022 for the 2022 Notes, if not exercised earlier.
The Purchased Options are intended to offset potential economic dilution to our Class A common stock upon any conversion of the Notes. The Purchased Options are separate transactions and are not part of the terms of the Notes.
We paid an aggregate amount of $144 million for the Purchased Options relating to the 2018 Notes and 2020 Notes, and $176 million for the Purchased Options relating to the 2022 Notes. The amount paid for the Purchased Options is included in Additional paid-in capital on the condensed consolidated balance sheets.
Warrants
In connection with the issuance of the Notes, we also entered into warrant transactions to sell warrants (“Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 4.2 million shares over 60 scheduled trading days beginning in October 2018, 3.1 million shares over 60 scheduled trading days beginning in October 2020, and 7.8 million shares over 60 scheduled trading days beginning in January 2023 of our Class A common stock at an exercise price of $107.96, $107.96, and $213.96 per share, respectively. If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of our Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants will have a dilutive effect on our earnings per share assuming that we are profitable. The Warrants are separate transactions and are not part of the terms of the Notes or the Purchased Options.
We received aggregate proceeds of $93 million from the sale of the Warrants related to the 2018 Notes and the 2020 Notes, and $81 million from the sale of the Warrants related to the 2022 Notes. The proceeds from the sale of the Warrants are recorded in Additional paid-in capital on the condensed consolidated balance sheets.
During the third and fourth quarters of fiscal 2019, Warrants related to the 2018 Notes were exercised, and we distributed approximately 1.1 million shares of our Class A common stock to warrant holders primarily utilizing treasury stock. The number of net shares distributed was determined based on the number of Warrants exercised multiplied by the difference between the exercise price of the Warrants and their daily volume weighted-average stock price. As of April 30, 2019, there were no Warrants outstanding related to the 2018 Notes.
Note 11. Leases
We have entered into operating lease agreements for our office space, data centers, and other property and equipment. Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Right-of-use assets also include adjustments related to prepaid or deferred lease payments and lease incentives. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. As of April 30, 2019, total operating lease right-of-use assets and operating lease liabilities were approximately $280 million and $310 million, respectively.
Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise such options. The remaining lease term of our leases generally ranges from less than one year to ten years.

21


The components of operating lease expense were as follows (in thousands):
 
Three Months Ended April 30, 2019
Operating lease cost
$
18,514

Short-term lease cost
3,640

Variable lease cost
3,426

Total operating lease cost
$
25,580

Information related to our operating lease right-of-use assets and operating lease liabilities was as follows (in thousands, except periods and percentages):
 
April 30, 2019
Cash paid for operating lease liabilities
$
16,184

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities (1)
295,950

Weighted average remaining lease term (in years)
6.1

Weighted average discount rate
3.53
%
(1) 
Includes $279 million for operating leases existing on February 1, 2019 and $17 million for operating leases that commenced in the first quarter of fiscal 2020.
As of April 30, 2019, maturities of operating lease liabilities were as follows (in thousands):
Fiscal period:
 
Remainder of 2020
$
56,829

2021
76,593

2022
63,106

2023
49,777

2024
40,533

Thereafter
70,484

Total lease payments
357,322

Less imputed interest
(47,178
)
Total
$
310,144

As of April 30, 2019, we have additional operating leases, primarily for office space, that have not yet commenced with total undiscounted lease payments of $21 million. These operating leases will commence between fiscal 2020 and fiscal 2021, with lease terms ranging from 4.9 years to 9.0 years.
Related Party Lease Transactions
We lease certain office space from an affiliate of our Chairman, Mr. Duffield, adjacent to our corporate headquarters in Pleasanton, California, under various lease agreements. As of April 30, 2019, the operating lease right-of-use assets and operating lease liabilities related to these agreements were $55 million and $68 million, respectively. The weighted average remaining lease term of these agreements is 5.4 years. The total rent expense under these agreements was $3 million for each of the three-month periods ended April 30, 2019 and 2018.
Note 12. Commitments and Contingencies
Computing Infrastructure-related Commitments
We have entered into non-cancelable agreements with computing infrastructure vendors with various expiration dates. As of April 30, 2019, the future non-cancelable minimum payments under these agreements were $68 million.

22


Legal Matters
We are a party to various legal proceedings and claims that arise in the ordinary course of business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. In our opinion, as of April 30, 2019, there was not at least a reasonable possibility that we had incurred a material loss, or a material loss in excess of a recorded accrual, with respect to such loss contingencies.
Note 13. Common Stock and Stockholders’ Equity
Common Stock
As of April 30, 2019, there were 161 million shares of Class A common stock, and 64 million shares of Class B common stock outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Each share of Class B common stock can be converted into a share of Class A common stock at any time at the option of the holder.
Employee Equity Plans
Our 2012 Equity Incentive Plan (“EIP”) serves as the successor to our 2005 Stock Plan (together with the EIP, the “Stock Plans”). Pursuant to the terms of the EIP, the share reserve increased by 11 million shares in March 2019. As of April 30, 2019, we had approximately 72 million shares of Class A common stock available for future grants.
In connection with the acquisition of Adaptive Insights, Inc. in fiscal 2019, we assumed unvested awards that had been granted under the Adaptive Insights, Inc. 2013 Equity Incentive Plan.
We also have a 2012 Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees are granted options to purchase shares at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about June 1 and December 1 and exercisable on or about the succeeding November 30 and May 31, respectively, of each year. As of April 30, 2019, approximately 6 million shares of Class A common stock were available for issuance under the ESPP.
Restricted Stock Units
The Stock Plans provide for the issuance of restricted stock units (“RSUs”) to employees and non-employees. RSUs generally vest over four years. A summary of information related to RSU activity during the three months ended April 30, 2019 is as follows: 
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Balance as of January 31, 2019
13,013,289

 
$
108.12

RSUs granted
4,239,303

 
189.42

RSUs vested
(2,172,249
)
 
106.12

RSUs forfeited
(205,799
)
 
114.15

Balance as of April 30, 2019
14,874,544

 
$
131.50

As of April 30, 2019, there was a total of $1.9 billion in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 3.1 years.
Performance-based Restricted Stock Units
During fiscal 2019, 0.5 million shares of performance-based restricted stock units (“PRSUs”) were granted to all employees other than executive management that included both service conditions and performance conditions related to company-wide goals. These performance conditions were met and the PRSUs vested on March 15, 2019. During the three months ended April 30, 2019, we recognized $15 million in compensation cost related to these PRSUs.

23


Stock Options
The Stock Plans provide for the issuance of incentive and nonstatutory stock options to employees and non-employees. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over five years. A summary of information related to stock option activity during the three months ended April 30, 2019 is as follows (in millions, except share and per share data):
 
Outstanding Stock Options
 
Weighted-Average Exercise Price
 
Aggregate Intrinsic Value
Balance as of January 31, 2019
5,780,742

 
$
7.96

 
$
1,003

Stock options granted

 

 
 
Stock options exercised
(718,332
)
 
4.77

 
 
Stock options canceled
(10,865
)
 
22.99

 
 
Balance as of April 30, 2019
5,051,545

 
$
8.38

 
$
996

Vested and expected to vest as of April 30, 2019
4,985,749

 
$
8.07

 
$
985

Exercisable as of April 30, 2019
4,366,227

 
$
5.22

 
$
875

As of April 30, 2019, there was a total of $62 million in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.1 years.
Note 14. Unearned Revenue and Performance Obligations
$642 million and $487 million of subscription services revenue was recognized during the three months ended April 30, 2019 and 2018, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. Professional services revenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods was not material.
Transaction Price Allocated to the Remaining Performance Obligations
As of April 30, 2019, approximately $6.8 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately $4.56 billion of these remaining performance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of April 30, 2019 was not material.
Note 15. Other Income (Expense), Net
Other income (expense), net consisted of the following (in thousands):
 
Three Months Ended April 30,
 
2019
 
2018
Interest income
$
10,350

 
$
12,236

Interest expense (1)
(11,601
)
 
(18,302
)
Other (2)
8,392

 
2,218

Other income (expense), net
$
7,141

 
$
(3,848
)
(1) 
Interest expense includes the contractual interest expense related to the 2018 Notes, 2020 Notes, and 2022 Notes and non-cash interest expense related to amortization of the debt discount and debt issuance costs, net of capitalized interest costs. For further information, see Note 10, Convertible Senior Notes, Net.
(2) 
Other includes the net gains (losses) from our equity investments. For further information, see Note 3, Investments.

24


Note 16. Income Taxes
We compute the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax income or loss and adjust for discrete tax items in the period. We reported a tax expense of less than $0.1 million and a tax benefit of $1 million for the three months ended April 30, 2019 and 2018, respectively. The income tax expense for the three months ended April 30, 2019 was primarily attributable to state taxes and income tax expenses in profitable foreign jurisdictions. The tax expense was partially offset by the application of intra-period tax allocation rules for the gains from comprehensive income and the excess tax benefits in certain foreign jurisdictions from share-based compensation. The income tax benefit for the three months ended April 30, 2018 was primarily attributable to the application of intra-period tax allocation rules for the gains from comprehensive income and the excess tax benefits in certain foreign jurisdictions from share-based compensation. The income tax benefit was partially offset by state taxes and income tax expenses in profitable foreign jurisdictions.
We are subject to income tax audits in the U.S. and foreign jurisdictions. We record liabilities related to uncertain tax positions and believe that we have provided adequate reserves for income tax uncertainties in all open tax years. Due to our history of tax losses, all years remain open to tax audit.
We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. As of April 30, 2019, we continue to maintain a full valuation allowance on our deferred tax assets except in certain jurisdictions.
Note 17. Net Loss Per Share
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, outstanding warrants, common stock related to unvested early exercised stock options, common stock related to unvested restricted stock units and awards and convertible senior notes to the extent dilutive, and common stock issuable pursuant to the ESPP. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive.
The net loss per share attributable to common stockholders is allocated based on the contractual participation rights of the Class A common shares and Class B common shares as if the loss for the period had been distributed. As the liquidation and dividend rights are identical, the net loss attributable to common stockholders is allocated on a proportionate basis.
The following table presents the calculation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share data):
 
Three Months Ended April 30,
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
Net loss per share, basic and diluted:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Allocation of distributed net loss
$
(82,589
)
 
$
(33,686
)
 
$
(50,145
)
 
$
(24,265
)
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
158,613

 
64,696

 
143,579

 
69,476

Basic and diluted net loss per share
$
(0.52
)
 
$
(0.52
)
 
$
(0.35
)
 
$
(0.35
)

25


The anti-dilutive securities excluded from the weighted-average shares used to calculate the diluted net loss per common share were as follows (in thousands):
 
As of April 30,
 
2019
 
2018
Outstanding common stock options
5,052

 
6,079

Unvested restricted stock awards, units, and PRSUs
14,926

 
15,051

Shares related to the convertible senior notes
10,876

 
15,079

Shares subject to warrants related to the issuance of convertible senior notes
10,876

 
15,079

Shares issuable pursuant to the ESPP
402

 
466

 
42,132

 
51,754

Note 18. Geographic Information
Disaggregation of Revenue
We sell our subscription contracts and related services in two primary geographical markets: to customers located in the United States and to customers located outside of the United States. Revenue by geography is generally based on the address of the customer as specified in our master subscription agreement. The following table sets forth revenue by geographic area (in thousands):
 
Three Months Ended April 30,
 
2019
 
2018
United States
$
628,529

 
$
480,082

Other countries
196,526

 
138,561

Total
$
825,055

 
$
618,643

No single country other than the United States had revenues greater than 10% of total revenues for three months ended April 30, 2019 and 2018. No customer individually accounted for more than 10% of our trade and other receivables, net as of April 30, 2019 or January 31, 2019.
Long-Lived Assets
We attribute our long-lived assets, which primarily consist of property and equipment, to a country based on the physical location of the assets. The following table sets forth Property and equipment, net by geographic area (in thousands):
 
April 30, 2019
 
January 31, 2019
United States
$
809,652

 
$
726,801

Ireland
61,064

 
55,306

Other countries
15,073

 
14,800

Total
$
885,789

 
$
796,907


26


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which are subject to safe harbor protection under the Private Securities Litigation Reform Act of 1995. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe, “may, “will, “estimate, “continue, “anticipate, “intend, “expect, “seek, “plan, and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors section, which we encourage you to read carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report.
Overview
Workday provides financial management, human capital management, planning, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers with highly adaptable, accessible, and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources.
We were founded in 2005 to deliver cloud applications to global enterprises. Our applications are designed around the way people work today—in an environment that is global, collaborative, fast-paced, and mobile. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our HCM application in 2006 and our Financial Management application in 2007. Since then we have continued to invest in innovation and have consistently introduced new services to our customers.
We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with contract terms of three years or longer and with subscription fees largely based on the size of the customer’s workforce. We generally recognize revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription services revenues from subscriptions to our HCM application. We market our applications primarily through our direct sales force.
Our diverse customer base includes medium-sized and large, global companies, as well as smaller organizations that primarily use our planning product. We have achieved significant growth in a relatively short period of time with a substantial amount of our growth coming from new customers. Our current financial focus is on growing our revenues and expanding our customer base. While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to the significant growth of our employee population. We had approximately 11,000 and approximately 8,600 employees as of April 30, 2019 and 2018, respectively.
We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our product development efforts to deliver additional compelling applications and to address customers’ evolving needs. In addition, we plan to continue to expand our ability to sell our applications globally, particularly in Europe and Asia, by investing in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, acquiring, building and/or leasing additional office space, and expanding our ecosystem of service partners to support local deployments. We expect to make further significant investments in our data center capacity as we plan for future growth. We are also investing in personnel to service our growing customer base.

27


We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, and intellectual property rights in an effort to expand our product and service offerings. We expect to continue to make such acquisitions and investments in the future, and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the industry. While we remain focused on improving operating margins, these acquisitions and investments will increase our costs on an absolute basis in the near-term. Many of these investments will occur in advance of experiencing any direct benefit from them and could make it difficult to determine if we are allocating our resources efficiently. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs and by utilizing more of the capacity of our data centers.
Since inception, we have also invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. Additionally, we continue to expand our professional service partner ecosystem to further support our customers. We believe our investment in professional services, as well as partners building consulting practices around Workday, will drive additional customer subscriptions and continued growth in revenues. Due to our ability to leverage the expanding partner ecosystem, we expect that the rate of professional services revenue growth will decline over time and continue to be lower than subscription services revenue growth.
Components of Results of Operations
Revenues
We primarily derive our revenues from subscription services and professional services. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include related customer support. Professional services fees include deployment services, optimization services, and training.
Subscription services revenues accounted for 85% of our total revenues during the three months ended April 30, 2019, and represented 96% of our total unearned revenue as of April 30, 2019. Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the specific applications subscribed to by each customer, and the price of our applications.
The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Pricing for our applications varies based on many factors, including the complexity and maturity of the application and its acceptance in the marketplace. New products or services offerings by competitors in the future could also impact the mix and pricing of our offerings.
Subscription services revenues are recognized over time as they are delivered and consumed concurrently over the contractual term, beginning on the date our service is made available to the customer. Our subscription contracts typically have a term of three years or longer and are generally non-cancelable. We generally invoice our customers annually in advance. Amounts that have been invoiced are initially recorded as unearned revenue.
Our consulting engagements are billed on a time and materials or fixed fee basis, and revenues are typically recognized over time as the services are performed. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As our professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenues, we expect professional services revenues as a percentage of total revenues to decline over time.
Costs and Expenses
Costs of subscription services revenues. Costs of subscription services revenues consist primarily of employee-related expenses related to hosting our applications and providing customer support, the costs of data center capacity, and depreciation of computer equipment and software.
Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors, and travel.
Product development. Product development expenses consist primarily of employee-related costs. We continue to focus our product development efforts on adding new features and applications, increasing the functionality, and enhancing the ease of use of our cloud applications.

28


Sales and marketing. Sales and marketing expenses consist primarily of employee-related costs, sales commissions, marketing programs, and travel. Marketing programs consist of advertising, events, corporate communications, brand building, and product marketing activities. Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period.
General and administrative. General and administrative expenses consist of employee-related costs for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses.
Results of Operations
Revenues
Our total revenues for the three months ended April 30, 2019 and 2018 were as follows (in thousands, except percentages):
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
% Change
Revenues:
 
 
 
 
 
Subscription services
$
701,024

 
$
522,149

 
34%
Professional services
124,031

 
96,494

 
29%
Total revenues
$
825,055

 
$
618,643

 
33%
Total revenues were $825 million for the three months ended April 30, 2019, compared to $619 million during the prior year period, an increase of $206 million, or 33%. Subscription services revenues were $701 million for the three months ended April 30, 2019, compared to $522 million for the prior year period, an increase of $179 million, or 34%. The increase in subscription services revenues was due primarily to an increased number of customer contracts as compared to the prior year period. Professional services revenues were $124 million for the three months ended April 30, 2019, compared to $96 million for the prior year period, an increase of $28 million, or 29%. The increase in professional services revenues was due primarily to Workday performing deployment and integration services for a greater number of customers than in the prior year period.
Operating Expenses
GAAP operating expenses were $948 million for the three months ended April 30, 2019, compared to $690 million for the prior year period, an increase of $258 million, or 37%. The increase was primarily due to an increase of $189 million in employee-related costs driven by higher headcount, $23 million in depreciation and amortization expenses, $11 million in professional fees, $11 million in facility and IT-related expenses, and $11 million in third-party costs for hardware maintenance and data center capacity.
We use the non-GAAP financial measure of non-GAAP operating expenses to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude expenses that are not reflective of ongoing operating results. We also believe that non-GAAP operating expenses provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
Non-GAAP operating expenses are calculated by excluding share-based compensation expenses, and certain other expenses, which consist of employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.
Non-GAAP operating expenses were $717 million for the three months ended April 30, 2019, compared to $538 million for the prior year period, an increase of $179 million, or 33%. The increase was primarily due to an increase of $124 million in employee-related costs driven by higher headcount, $11 million in professional fees, $11 million in facility and IT-related expenses, $11 million in third-party costs for hardware maintenance and data center capacity, and $8 million in depreciation and amortization expenses.

29


Reconciliations of our GAAP to non-GAAP operating expenses were as follows (in thousands):
 
Three Months Ended April 30, 2019
 
GAAP Operating Expenses
 
Share-Based Compensation Expenses (1)
 
Other Operating Expenses (2)
 
Non-GAAP Operating Expenses (3)
Costs of subscription services
$
112,469

 
$
(10,415
)
 
$
(12,660
)
 
$
89,394

Costs of professional services
130,750

 
(16,150
)
 
(3,459
)
 
111,141

Product development
347,831

 
(91,237
)
 
(13,631
)
 
242,963

Sales and marketing
272,936

 
(38,854
)
 
(12,834
)
 
221,248

General and administrative
84,455

 
(28,579
)
 
(3,298
)
 
52,578

Total costs and expenses
$
948,441

 
$
(185,235
)
 
$
(45,882
)
 
$
717,324

 
Three Months Ended April 30, 2018
 
GAAP Operating Expenses
 
Share-Based Compensation Expenses (1)
 
Other Operating Expenses (2)
 
Non-GAAP Operating Expenses (3)
Costs of subscription services
$
80,245

 
$
(7,877
)
 
$
(4,452
)
 
$
67,916

Costs of professional services
97,726

 
(10,792
)
 
(1,701
)
 
85,233

Product development
263,584

 
(68,511
)
 
(8,797
)
 
186,276

Sales and marketing
192,771

 
(25,612
)
 
(2,580
)
 
164,579

General and administrative
55,581

 
(19,867
)
 
(1,867
)
 
33,847

Total costs and expenses
$
689,907

 
$
(132,659
)
 
$
(19,397
)
 
$
537,851

(1) 
Share-based compensation expenses were $185 million and $133 million for the three months ended April 30, 2019 and 2018, respectively. The increase in share-based compensation expenses was primarily due to grants of restricted stock units (“RSUs”) to existing and new employees and assumed Adaptive Insights, Inc. (“Adaptive Insights”) awards.
(2) 
Other operating expenses include employer payroll tax-related items on employee stock transactions of $27 million and $14 million for the three months ended April 30, 2019 and 2018, respectively. In addition, other operating expenses included amortization of acquisition-related intangible assets of $19 million and $5 million for the three months ended April 30, 2019 and 2018, respectively.
(3) 
See “Non-GAAP Financial Measures” below for further information.
Costs of Subscription Services
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in costs of subscription services were $112 million for the three months ended April 30, 2019, compared to $80 million for the prior year period, an increase of $32 million, or 40%. The increase was primarily due to increases of $14 million in depreciation and amortization expense including our acquisition-related intangible assets, $7 million in employee-related costs driven by higher headcount, and $7 million in third-party costs for hardware maintenance and data center capacity.
Non-GAAP operating expenses in costs of subscription services were $89 million for the three months ended April 30, 2019, compared to $68 million for the prior year period, an increase of $21 million, or 31%. The increase was primarily due to increases of $7 million in third-party costs for hardware maintenance and data center capacity, and $6 million in depreciation expense related to equipment in our data centers.
We expect that GAAP and non-GAAP operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our data center capacity and operations.
Costs of Professional Services
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in costs of professional services were $131 million for the three months ended April 30, 2019, compared to $98 million for the prior year period, an increase of $33 million, or 34%. The increase was primarily due to additional costs to staff our deployment and integration engagements.

30


Non-GAAP operating expenses in costs of professional services were $111 million for the three months ended April 30, 2019, compared to $85 million for the prior year period, an increase of $26 million, or 31%. The increase was primarily due to additional costs to staff our deployment and integration engagements.
Going forward, we expect GAAP and non-GAAP costs of professional services as a percentage of total revenues to continue to decline as we continue to rely on our service partners to deploy our applications and as the number of our customers continues to grow. For fiscal 2020, we anticipate GAAP and non-GAAP professional services margins to be lower than fiscal 2019 as we invest in programs to ensure ongoing customer success.
Product Development
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in product development were $348 million for the three months ended April 30, 2019, compared to $264 million for the prior year period, an increase of $84 million, or 32%. The increase was primarily due to increases of $72 million in employee-related costs driven by higher headcount and $6 million in facility and IT-related expenses.
Non-GAAP operating expenses in product development were $243 million for the three months ended April 30, 2019, compared to $186 million for the prior year period, an increase of $57 million, or 31%. The increase was primarily due to increases of $45 million in employee-related costs driven by higher headcount and $6 million in facility and IT-related expenses.
We expect that GAAP and non-GAAP product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.
Sales and Marketing
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in sales and marketing were $273 million for the three months ended April 30, 2019, compared to $193 million for the prior year period, an increase of $80 million, or 41%. The increase was primarily due to $60 million increase in employee-related costs driven by higher headcount and higher commissionable sales volume, and $7 million in amortization expense related to our acquisition-related intangible assets.
Non-GAAP operating expenses in sales and marketing were $221 million for the three months ended April 30, 2019, compared to $165 million for the prior year period, an increase of $56 million, or 34%. The increase was primarily due to increases of $43 million in employee-related costs driven by higher headcount and higher commissionable sales volume.
We expect that GAAP and non-GAAP sales and marketing expenses will increase in absolute dollars as we continue to invest in our domestic and international selling and marketing activities to expand brand awareness and attract new customers.
General and Administrative
See the table above for a reconciliation of GAAP to non-GAAP operating expenses.
GAAP operating expenses in general and administrative were $84 million for the three months ended April 30, 2019, compared to $56 million for the prior year period, an increase of $28 million, or 50%. The increase was primarily due to additional employee-related costs driven by higher headcount.
Non-GAAP operating expenses in general and administrative were $53 million for the three months ended April 30, 2019, compared to $34 million for the prior year period, an increase of $19 million, or 56%. The increase was primarily due to additional employee-related costs driven by higher headcount.
We expect GAAP and non-GAAP general and administrative expenses will continue to increase in absolute dollars as we further invest in our infrastructure and support our global expansion.
Operating Margins
GAAP operating margins declined from (11.5)% for the three months ended April 30, 2018 to (15.0)% for the three months ended April 30, 2019. The reduction in our GAAP operating margins in the three months ended April 30, 2019 was primarily due to higher share-based compensation and other operating expenses from increased headcount and higher acquisition-related amortization expenses, offset by higher revenues.

31


We use the non-GAAP financial measure of non-GAAP operating margins to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP operating margins reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude expenses that are not reflective of ongoing operating results. We also believe that non-GAAP operating margins provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
Non-GAAP operating margins are calculated using GAAP revenues and non-GAAP operating expenses. See “Non-GAAP Financial Measures” below for further information.
Non-GAAP operating margins remained constant at 13.1% for each of the three months ended April 30, 2019 and 2018, primarily due to higher revenues that were offset by higher operating expenses.
Reconciliations of our GAAP to non-GAAP operating margins were as follows:
 
Three Months Ended April 30, 2019
 
GAAP Operating Expenses
 
Share-Based Compensation Expenses
 
Other Operating Expenses
 
Non-GAAP Operating Expenses (1)
Operating margin
(15.0
)%
 
22.5
%
 
5.6
%
 
13.1
%
 
Three Months Ended April 30, 2018
 
GAAP Operating Expenses
 
Share-Based Compensation Expenses
 
Other Operating Expenses
 
Non-GAAP Operating Expenses (1)
Operating margin
(11.5
)%
 
21.4
%
 
3.2
%
 
13.1
%
(1) 
See “Non-GAAP Financial Measures” below for further information.
Other Income (Expense), Net
Other income, net increased $11 million for the three months ended April 30, 2019 as compared to the prior year period. The increase was primarily due to a $7 million reduction in interest expense and a $7 million gain resulting from sales of marketable equity investments.
Liquidity and Capital Resources
As of April 30, 2019, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.9 billion, which were primarily held for working capital purposes. Our cash equivalents and marketable securities are composed primarily of U.S. treasury securities, U.S. agency obligations, corporate bonds, commercial paper, and money market funds.
We have financed our operations primarily through customer payments, sales of equity securities, and issuance of debt. Our future capital requirements will depend on many factors, including our customer growth rate, subscription renewal activity, the timing of construction of facilities in Pleasanton, California, and the acquisition of additional facilities, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of our services, and acquisition activities. We may enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future. We also may choose to seek additional equity or debt financing.
Our cash flows for the three months ended April 30, 2019 and 2018 were as follows (in thousands):
 
Three Months Ended April 30,
 
2019
 
2018
Net cash provided by (used in):
 
 
 
Operating activities
$
209,163

 
$
184,233

Investing activities
(67,355
)
 
(284,586
)
Financing activities
3,362

 
2,554

Effect of exchange rate changes
(327
)
 
(420
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
144,843

 
$
(98,219
)

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Operating Activities
Cash provided by operating activities was $209 million and $184 million for the three months ended April 30, 2019 and 2018, respectively. The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections, partially offset by higher operating expenses driven by increased headcount.
Investing Activities
Cash used in investing activities for the three months ended April 30, 2019 was $67 million, which was primarily the result of capital expenditures for data center and office space projects of $66 million, capital expenditures related to the construction of our development center of $34 million, and the timing of purchases and maturities of marketable securities. These payments were partially offset by proceeds of $51 million from sales of marketable equity investments.
Cash used in investing activities for the three months ended April 30, 2018 was $285 million, which was primarily the result of the timing of purchases and maturities of marketable securities, capital expenditures related to the construction of our development center of $32 million and capital expenditures for data center and office space projects of $49 million. These payments were partially offset by proceeds of $27 million from the sale of marketable securities.
We expect capital expenditures related to owned real estate projects, including construction of our development center, will be approximately $130 million for fiscal 2020. We also expect capital expenditures, excluding owned real estate projects, will be approximately $280 million for fiscal 2020. These capital outlays will largely be used to expand the infrastructure of our data centers and to build out additional office space to support our growth.
Financing Activities
Cash provided by financing activities was $3 million for each of the three-month periods ended April 30, 2019 and 2018, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

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Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of non-GAAP financial measures in Commission filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP operating expenses and non-GAAP operating margin meet the definition of a non-GAAP financial measure.
Non-GAAP Operating Expenses and Non-GAAP Operating Margins
We define non-GAAP operating expenses as our total operating expenses excluding the following components, which we believe are not reflective of our ongoing operational expenses. Similarly, the same components are also excluded from the calculation of non-GAAP operating margins. In each case, for the reasons set forth below, management believes that excluding the component provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business.
Share-Based Compensation Expenses. Although share-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude share-based compensation expenses to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. Share-based compensation expenses are determined using a number of factors, including our stock price, volatility, and forfeiture rates that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients.
Other Operating Expenses. Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition, and thus we do not believe it is reflective of our ongoing operations.
Limitations on the Use of Non-GAAP Financial Measures
A limitation of our non-GAAP financial measures of non-GAAP operating expenses and non-GAAP operating margin is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Further, the non-GAAP financial measure of non-GAAP operating expenses has certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP financial measure of total operating expenses. In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll tax-related items, the cash salary expense included in costs of revenues and operating expenses would be higher, which would affect our cash position.
We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
See Results of Operations—Operating Expenses and Results of Operations—Operating Margins for reconciliations from the most directly comparable GAAP financial measures, GAAP operating expenses and GAAP operating margins, to the non-GAAP financial measures, non-GAAP operating expenses and non-GAAP operating margins, for the three months ended April 30, 2019 and 2018.
Contractual Obligations
Our contractual obligations primarily consist of our convertible senior notes, as well as obligations under leases for office space, co-location facilities for data center capacity, and computing infrastructure platforms for business operations. During the remainder of fiscal 2020, we anticipate leasing additional office space near our headquarters and in various other locations around the world to support our growth. In addition, our existing lease agreements often provide us with an option to renew. We expect our future operating lease obligations will increase as we expand our operations.

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We are not required to make principal payments under the Notes prior to maturity. If the Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay $250 million in principal on July 15, 2020 and $1.15 billion in principal on October 1, 2022. We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 10, Convertible Senior Notes, Net, of the notes to condensed consolidated financial statements.
We do not consider outstanding purchase orders to be contractual obligations as they represent authorizations to purchase rather than binding agreements.
Off-Balance Sheet Arrangements
Through April 30, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
During the three months ended April 30, 2019, there were no significant changes to our critical accounting policies and estimates as described in the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended January 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We transact business globally in multiple currencies. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. As of April 30, 2019 and 2018, our most significant currency exposures were the euro, British pound, Canadian dollar, and Australian dollar.
Due to our exposure to market risks that may result from changes in foreign currency exchange rates, we enter into foreign currency derivative hedging transactions to mitigate these risks. For further information, see Note 9, Derivative Instruments, of the notes to condensed consolidated financial statements.
Interest Rate Sensitivity
We had cash, cash equivalents, and marketable securities totaling $1.9 billion and $1.8 billion as of April 30, 2019 and January 31, 2019, respectively. Cash equivalents and marketable securities were invested primarily in U.S. treasury securities, U.S. agency obligations, corporate bonds, commercial paper, and money market funds. The cash, cash equivalents, and marketable securities are held primarily for working capital purposes. Our investment portfolios are managed to preserve capital and meet liquidity needs. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of debt 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 fluctuate 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 in income 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.
An immediate increase of 100 basis points in interest rates would have resulted in a $6 million and $5 million market value reduction in our investment portfolio as of April 30, 2019 and January 31, 2019, respectively. An immediate decrease of 100 basis points in interest rates would have increased the market value by $6 million and $5 million as of April 30, 2019 and January 31, 2019, respectively. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. 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 Accumulated other comprehensive income (loss) and are realized only if we sell the underlying securities before maturity.
Market Risk and Market Interest Risk
In June 2013, we completed an offering of $350 million of 0.75% convertible senior notes due July 15, 2018, which were subsequently converted by note holders during the second quarter of fiscal 2019. In June 2013, concurrent with the 2018 Notes offering, we issued $250 million of 1.50% convertible senior notes due July 15, 2020 (“2020 Notes”). In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022 (“2022 Notes” and together with the 2020 Notes, referred to as the “Notes”).
Holders may convert the Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, holders of the Notes will receive cash, shares of Class A common stock, or a combination of cash and shares of Class A common stock, at our election.
Concurrently with the issuance of the Notes, we entered into separate note hedge and warrant transactions. These separate transactions were completed to reduce the potential economic dilution from the conversion of the Notes.
The 2020 Notes and 2022 Notes have fixed annual interest rates of 1.50% and 0.25%, respectively, and therefore we do not have economic interest rate exposure on the Notes. However, the values of the Notes are exposed to interest rate risk. Generally, the fair values of the fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the Notes are affected by our stock price. The carrying values of the 2020 Notes and 2022 Notes were $235 million and $984 million, respectively, as of April 30, 2019. The carrying values represent the liability components of the principal balances of the Notes as of April 30, 2019. The estimated fair values of the 2020 Notes and 2022 Notes were $591 million and $1.7 billion, respectively, as of April 30, 2019. The estimated fair values were determined based on the quoted bid prices of the 2020 and 2022 Notes in an over-the-counter market as of the last trading day for the current fiscal quarter, which were $236.25 and $148.50, respectively. For further information, see Note 10, Convertible Senior Notes, Net, of the notes to condensed consolidated financial statements.

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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are or may be involved in various legal proceedings arising from the normal course of business including matters related to alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other claims. 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. The resolution of legal matters could prevent us from offering one or more of our applications, services or features to others, could require us to change our technology or business practices, pay monetary damages or enter into short- or long-term royalty or licensing agreements, or could otherwise be material to our financial condition or cash flows, or both, or adversely affect our operating results.

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ITEM 1A. RISK FACTORS
Investing in our securities 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 report, including the condensed consolidated financial statements and the related notes included elsewhere in this report, before making an investment decision. 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 materially and adversely affect our business. If any of the following risks actually occurs, our business operations, financial condition, results of operations, and prospects could be materially and adversely affected. The market price of our securities could decline due to the materialization of these or any other risks, and you could lose part or all of your investment.
Risk Factors Related to 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’ sensitive and proprietary information, including personal or identifying information regarding their employees, customers, and suppliers, as well as their finance and payroll data, and other sensitive business information. As a result, unauthorized access or use of this data could expose us to regulatory actions, litigation, investigations, remediation obligations, damage to our reputation and brand, supplemental disclosure obligations, loss of customer and partner confidence in the security of our applications, destruction of information, indemnity obligations, and resulting fees, costs, expenses, loss of revenues, and other potential liabilities. We devote significant financial and personnel resources to implement and maintain security measures. While we have security measures in place designed to protect the integrity of customer information and prevent data loss, misappropriation, and other security breaches, if these measures are compromised as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance, or otherwise, and someone obtains unauthorized access to or use of our customers’ data, our reputation could be damaged, our business may suffer, and we could incur significant liabilities as well as incur significant costs to remediate any incidents.
Cybersecurity challenges, including threats to our own IT infrastructure or those of our customers or third-party providers, are often targeted at companies such as ours and may take a variety of forms ranging from individual and groups of hackers to sophisticated organizations, including state-sponsored actors. Key cybersecurity risks range from viruses, worms, and other malicious software programs to “mega breaches” targeted against cloud services and other hosted software, any of which can result in disclosure of confidential information and intellectual property, defective products, production downtimes, supply shortages, and compromised data. As 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.
Furthermore, we have acquired a number of companies, products, services, and technologies over the years. Although we devote significant resources to address any security issues with respect to such acquisitions, we may still inherit additional risks when we integrate these companies within Workday. In addition, if a high-profile security breach occurs with respect to an industry peer, our customers and potential customers may generally lose trust in the security of financial management, HCM, and planning applications, analytics platforms, or in cloud applications for enterprises in general. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect to terminate or not renew their subscriptions, result in reputational damage, cause us to pay remediation costs and/or issue service credits or refunds to customers for prepaid and unused subscription services, require us to compensate our customers for certain losses, or result in lawsuits, regulatory fines, or other action or liabilities, which could adversely affect our business and operating results.
We depend on data centers and computing infrastructure operated by third parties, and any disruption in these operations could adversely affect our business.
We host our applications and serve our customers from data centers located in the United States, Europe, and Canada. 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 and security of these facilities. The owners of our data center facilities have limited or 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 or ceases business, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and experience possible service interruption in connection with doing so.
In addition, we rely upon third-party hosted infrastructure partners globally, including Amazon Web Services (“AWS”) and Dimension Data, to serve customers and operate certain aspects of our services, such as environments for development testing, training, sales demonstrations, and production usage. Given this, any disruption of or interference at our hosted infrastructure partners would impact our operations and our business could be adversely impacted.

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Problems faced by our third-party data center operations or hosted infrastructure partners, 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 center operators or hosted infrastructure partners could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data center operators, our hosted infrastructure partners, or any of the other 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 or hosted infrastructure partners are unable to keep up with our needs for capacity, this could have an adverse effect on our business. Any changes in third-party service levels at our data centers or at our hosted infrastructure partners or any errors, defects, disruptions, or other performance problems with our applications or the hosted infrastructure on which they run 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 adversely affect our reputation and operating results, cause us to issue refunds or service credits to customers for prepaid and unused subscription services, subject us to potential liabilities, result in contract terminations, or adversely affect our renewal rates.
Furthermore, our financial management application is essential to Workday’s and our customers’ financial projections, reporting, and compliance programs, particularly customers who are public reporting companies. Any interruption in our service may affect the availability, accuracy or timeliness of such projections, reporting and compliance programs and as a result could damage our reputation, cause our customers to terminate their use of our applications, require us to issue refunds for prepaid and unused subscription services, require us to compensate our customers for certain losses, and prevent us from gaining additional business from current or future customers as well as impact our ability to accurately and timely meet our reporting and other compliance obligations.
If we fail to manage our technical operations infrastructure or experience service outages or delays in the deployment of our applications, we may be subject to liabilities and our reputation and operating results may be adversely affected.
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, as well as our own needs, and to ensure that our services and solutions are accessible within an acceptable load time. 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, updates, the evolution of our applications, and to reduce infrastructure latency associated with dispersed geographic locations. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages. If our operations infrastructure fails to scale, new customers may experience delays as we seek to obtain additional capacity, and no assurance can be made that we will be able to secure such additional capacity at the same or similar terms we currently have, which could result in a significant increase in our operating costs. Furthermore, any failure to scale and secure additional capacity could result in delays in new feature rollouts, reduce the demand for our applications, result in customer dissatisfaction, and adversely affect our business and results of operations.
We have experienced, and may in the future experience, system disruptions, outages, and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, vendor issues, human or software errors, viruses, security attacks (internal and external), 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. 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 issue service credits or refunds to customers for prepaid and unused subscription services, our customers may make warranty or other claims against us, or we could face contract terminations, which would adversely affect our attrition rates. Any extended service outages could result in customer losses and adversely affect our reputation, business, and operating results.

40


Privacy concerns and domestic or foreign laws and regulations may reduce the effectiveness of our applications, result in significant costs and compliance challenges, and adversely affect our business.
Our customers can use our applications to collect, use, and store personal or identifying information regarding a variety of individuals in connection with their operations, including but not limited to their employees, contractors, students, job applicants, customers, and suppliers. National and local governments and agencies in the countries in which our customers operate have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage, processing, and disclosure of personal information obtained from consumers and individuals, which could impact our ability to offer our services in certain jurisdictions or our customers’ ability to deploy our solutions globally. Privacy-related laws are particularly stringent in Europe. The costs of compliance with and other burdens imposed by privacy-related laws, regulations, and standards may limit the use and adoption of our services, reduce overall demand for our services, lead to significant fines, penalties, or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business. Moreover, if we or our subprocessors fail to adhere to adequate data protection practices around the usage of our customers’ personal data, we may be liable for certain losses of our customers, and it may damage our reputation and brand.
Additionally, we expect that existing laws, regulations, and standards may be interpreted in new and differing manners in the future and may be inconsistent among jurisdictions. Future laws, regulations, standards, and other obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could result in increased regulation, increased costs of compliance and penalties for non-compliance, and limitations on data collection, use, disclosure, and transfer for Workday and our customers. In 2016, the European Union (“EU”) adopted a new regulation governing data privacy called the General Data Protection Regulation (“GDPR”), which became effective in May 2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to 4% of worldwide revenue. Customers, particularly in the EU, are seeking assurances from their suppliers, including us, that their processing of personal data of EU nationals is in accordance with the GDPR. If we are unable to provide