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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 30, 2024
OR
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☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For transition period from to
Commission File Number: 001-35680
WORKDAY, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 20-2480422 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S Employer Identification No.) |
6110 Stoneridge Mall Road
Pleasanton, California 94588
(Address of principal executive offices, including zip code)
(925) 951-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
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 ☒ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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Large accelerated filer | ☒ | 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 ☒
As of May 24, 2024, there were approximately 212 million shares of the registrant’s Class A common stock, net of treasury stock, and 53 million shares of the registrant’s Class B common stock outstanding.
Workday, Inc.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Workday, Inc.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited)
| | | | | | | | | | | |
| April 30, 2024 | | January 31, 2024 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,752 | | | $ | 2,012 | |
Marketable securities | 5,430 | | | 5,801 | |
Trade and other receivables, net | 1,133 | | | 1,639 | |
Deferred costs | 232 | | | 232 | |
Prepaid expenses and other current assets | 327 | | | 255 | |
Total current assets | 8,874 | | | 9,939 | |
Property and equipment, net | 1,238 | | | 1,234 | |
Operating lease right-of-use assets | 323 | | | 289 | |
Deferred costs, noncurrent | 489 | | | 509 | |
Acquisition-related intangible assets, net | 351 | | | 233 | |
Deferred tax assets | 1,056 | | | 1,065 | |
Goodwill | 3,257 | | | 2,846 | |
Other assets | 353 | | | 337 | |
Total assets | $ | 15,941 | | | $ | 16,452 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 76 | | | $ | 78 | |
Accrued expenses and other current liabilities | 254 | | | 287 | |
Accrued compensation | 451 | | | 544 | |
Unearned revenue | 3,552 | | | 4,057 | |
Operating lease liabilities | 95 | | | 89 | |
| | | |
Total current liabilities | 4,428 | | | 5,055 | |
Debt, noncurrent | 2,981 | | | 2,980 | |
Unearned revenue, noncurrent | 61 | | | 70 | |
Operating lease liabilities, noncurrent | 268 | | | 227 | |
Other liabilities | 40 | | | 38 | |
Total liabilities | 7,778 | | | 8,370 | |
Stockholders’ equity: | | | |
Common stock | 0 | | | 0 | |
Additional paid-in capital | 10,512 | | | 10,400 | |
Treasury stock | (742) | | | (608) | |
Accumulated other comprehensive income (loss) | 17 | | | 21 | |
Accumulated deficit | (1,624) | | | (1,731) | |
Total stockholders’ equity | 8,163 | | | 8,082 | |
Total liabilities and stockholders’ equity | $ | 15,941 | | | $ | 16,452 | |
See Notes to Condensed Consolidated Financial Statements
3
Workday, Inc.
Condensed Consolidated Statements of Operations
(in millions, except number of shares which are reflected in thousands and per share data)
(unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Revenues: | | | | | | | |
Subscription services | $ | 1,815 | | | $ | 1,528 | | | | | |
Professional services | 175 | | | 156 | | | | | |
Total revenues | 1,990 | | | 1,684 | | | | | |
Costs and expenses (1): | | | | | | | |
Costs of subscription services | 290 | | | 239 | | | | | |
Costs of professional services | 199 | | | 178 | | | | | |
Product development | 656 | | | 600 | | | | | |
Sales and marketing | 573 | | | 519 | | | | | |
General and administrative | 208 | | | 168 | | | | | |
Total costs and expenses | 1,926 | | | 1,704 | | | | | |
Operating income (loss) | 64 | | | (20) | | | | | |
Other income (expense), net | 59 | | | 27 | | | | | |
Income (loss) before provision for (benefit from) income taxes | 123 | | | 7 | | | | | |
Provision for (benefit from) income taxes | 16 | | | 7 | | | | | |
Net income (loss) | $ | 107 | | | $ | 0 | | | | | |
Net income (loss) per share, basic | $ | 0.40 | | | $ | 0.00 | | | | | |
Net income (loss) per share, diluted | $ | 0.40 | | | $ | 0.00 | | | | | |
Weighted-average shares used to compute net income (loss) per share, basic | 264,444 | | | 258,820 | | | | | |
Weighted-average shares used to compute net income (loss) per share, diluted | 270,298 | | | 261,371 | | | | | |
| | | | | | | | | | | | | | | |
(1) Costs and expenses include share-based compensation expenses as follows: |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Costs of subscription services | $ | 38 | | | $ | 29 | | | | | |
Costs of professional services | 31 | | | 30 | | | | | |
Product development | 173 | | | 170 | | | | | |
Sales and marketing | 72 | | | 80 | | | | | |
General and administrative | 71 | | | 60 | | | | | |
Total share-based compensation expenses | $ | 385 | | | $ | 369 | | | | | |
See Notes to Condensed Consolidated Financial Statements
4
Workday, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in millions)
(unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Net income (loss) | $ | 107 | | | $ | 0 | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Net change in foreign currency translation adjustment | (2) | | | (1) | | | | | |
Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax provision (benefit) of $(9) and $0, respectively | (25) | | | 7 | | | | | |
Net change in unrealized gains (losses) on cash flow hedges, net of tax provision of $1 and $2, respectively | 23 | | | (16) | | | | | |
Other comprehensive income (loss), net of tax | (4) | | | (10) | | | | | |
Comprehensive income (loss) | $ | 103 | | | $ | (10) | | | | | |
See Notes to Condensed Consolidated Financial Statements
5
Workday, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in millions, except number of shares which are reflected in thousands)
(unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Common stock: | | | | | | | |
Balance, beginning of period | $ | 0 | | | $ | 0 | | | | | |
Issuance of common stock under employee equity plans | 0 | | | 0 | | | | | |
Shares withheld related to net share settlement of equity awards | 0 | | | 0 | | | | | |
| | | | | | | |
Balance, end of period | 0 | | | 0 | | | | | |
Additional paid-in capital: | | | | | | | |
Balance, beginning of period | 10,400 | | | 8,829 | | | | | |
Issuance of common stock under employee equity plans | 0 | | | 1 | | | | | |
Shares withheld related to net share settlement of equity awards | (274) | | | (3) | | | | | |
Share-based compensation | 386 | | | 369 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance, end of period | 10,512 | | | 9,196 | | | | | |
Treasury stock: | | | | | | | |
Balance, beginning of period | (608) | | | (185) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Common stock repurchases under share repurchase programs | (134) | | | 0 | | | | | |
Balance, end of period | (742) | | | (185) | | | | | |
Accumulated other comprehensive income (loss): | | | | | | | |
Balance, beginning of period | 21 | | | 53 | | | | | |
Other comprehensive income (loss) | (4) | | | (10) | | | | | |
Balance, end of period | 17 | | | 43 | | | | | |
Accumulated deficit: | | | | | | | |
Balance, beginning of period | (1,731) | | | (3,112) | | | | | |
Net income (loss) | 107 | | | 0 | | | | | |
| | | | | | | |
| | | | | | | |
Balance, end of period | (1,624) | | | (3,112) | | | | | |
Total stockholders’ equity | $ | 8,163 | | | $ | 5,942 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Common stock shares: | | | | | | | |
Balance, beginning of period | 263,862 | | | 257,991 | | | | | |
Issuance of common stock under employee equity plans | 2,876 | | | 2,434 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Shares withheld related to net share settlement of equity awards | (1,018) | | | (17) | | | | | |
Common stock repurchased | (502) | | | 0 | | | | | |
| | | | | | | |
Balance, end of period | 265,218 | | | 260,408 | | | | | |
See Notes to Condensed Consolidated Financial Statements
6
Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Cash flows from operating activities: | | | | | | | |
Net income (loss) | $ | 107 | | | $ | 0 | | | | | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
Depreciation and amortization | 75 | | | 70 | | | | | |
Share-based compensation expenses | 385 | | | 369 | | | | | |
Amortization of deferred costs | 59 | | | 49 | | | | | |
Non-cash lease expense | 25 | | | 24 | | | | | |
(Gains) losses on investments | 7 | | | 8 | | | | | |
Accretion of discounts on marketable debt securities, net | (33) | | | (34) | | | | | |
Deferred income taxes | 6 | | | 2 | | | | | |
Other | 1 | | | (5) | | | | | |
Changes in operating assets and liabilities, net of business combinations: | | | | | | | |
Trade and other receivables, net | 509 | | | 473 | | | | | |
Deferred costs | (40) | | | (35) | | | | | |
Prepaid expenses and other assets | (21) | | | (19) | | | | | |
Accounts payable | 10 | | | (58) | | | | | |
Accrued expenses and other liabilities | (193) | | | (223) | | | | | |
Unearned revenue | (525) | | | (344) | | | | | |
Net cash provided by (used in) operating activities | 372 | | | 277 | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of marketable securities | (778) | | | (1,888) | | | | | |
Maturities of marketable securities | 1,096 | | | 1,232 | | | | | |
Sales of marketable securities | 17 | | | 22 | | | | | |
Capital expenditures | (81) | | | (59) | | | | | |
| | | | | | | |
| | | | | | | |
Business combinations, net of cash acquired | (512) | | | 0 | | | | | |
Purchase of other intangible assets | 0 | | | (9) | | | | | |
Purchases of non-marketable equity and other investments | 0 | | | (11) | | | | | |
| | | | | | | |
| | | | | | | |
Net cash provided by (used in) investing activities | (258) | | | (713) | | | | | |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Repurchases of common stock | (128) | | | 0 | | | | | |
Proceeds from issuance of common stock from employee equity plans | 0 | | | 1 | | | | | |
Taxes paid related to net share settlement of equity awards | (239) | | | (3) | | | | | |
| | | | | | | |
Net cash provided by (used in) financing activities | (367) | | | (2) | | | | | |
Effect of exchange rate changes | 0 | | | (1) | | | | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | (253) | | | (439) | | | | | |
Cash, cash equivalents, and restricted cash at the beginning of period | 2,024 | | | 1,895 | | | | | |
Cash, cash equivalents, and restricted cash at the end of period | $ | 1,771 | | | $ | 1,456 | | | | | |
See Notes to Condensed Consolidated Financial Statements
7
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Supplemental cash flow data: | | | | | | | |
Cash paid for interest | $ | 55 | | | $ | 55 | | | | | |
Cash paid for income taxes, net of refunds | 6 | | | 11 | | | | | |
Non-cash investing and financing activities: | | | | | | | |
Purchases of property and equipment, accrued but not paid | 37 | | | 54 | | | | | |
Accrued taxes related to net share settlement of equity awards | 35 | | | 0 | | | | | |
| | | | | | | | | | | |
| As of April 30, |
| 2024 | | 2023 |
Reconciliation of cash, cash equivalents, and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows: | | | |
Cash and cash equivalents | $ | 1,752 | | | $ | 1,444 | |
Restricted cash included in Prepaid expenses and other current assets | 19 | | | 12 | |
| | | |
Total cash, cash equivalents, and restricted cash | $ | 1,771 | | | $ | 1,456 | |
See Notes to Condensed Consolidated Financial Statements
8
Workday, Inc.
Notes to Condensed Consolidated Financial Statements
As used in this report, the terms “Workday,” “registrant,” “we,” “us,” and “our” mean Workday, Inc. and its subsidiaries unless the context indicates otherwise.
Amounts in this report may not recalculate due to rounding. Year-over-year comparisons, operating margin, and net income (loss) per share are calculated using unrounded data.
Note 1. Overview and Basis of Presentation
Description of the Business
Workday delivers applications for financial management, spend management, human capital management, planning, and analytics. With Workday, our customers have a unified system that can help them plan, execute, analyze, and extend to other applications and environments, thereby helping them continuously adapt how they manage their business and operations.
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 financial position, results of operations, stockholders’ equity, and cash flows. All such adjustments are of a normal, recurring nature. The results of operations for the three months ended April 30, 2024, shown in this report are not necessarily indicative of the results to be expected for the full fiscal year ending January 31, 2025. 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, 2024, filed with the SEC on March 8, 2024.
Certain prior period amounts reported in our unaudited condensed consolidated financial statements and notes thereto have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, judgments, and assumptions include, but are not limited to, the identification of distinct performance obligations for revenue recognition, the determination of the period of benefit for deferred commissions, the realizability of deferred tax assets, the measurement of uncertain tax positions, the fair value and useful lives of assets acquired and liabilities assumed through business combinations, and the valuation of non-marketable equity investments. Actual results could differ from those estimates, judgments, and assumptions, and such differences could be material to our condensed consolidated financial statements.
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 (“CODM”) in deciding how to allocate resources and assessing performance. Our CODM, the Chief Executive Officer, allocates resources and assesses performance based upon discrete financial information at the consolidated level.
Note 2. Significant Accounting Policies and Accounting Standards
Significant Accounting Policies
There have been no material changes in our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024.
Concentrations of Risk and Significant Customers
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, debt securities, derivative instruments, and trade and other receivables. Our deposits exceed federally insured limits.
No customer individually accounted for more than 10% of trade and other receivables, net as of April 30, 2024, or January 31, 2024. No customer individually accounted for more than 10% of total revenues during the three months ended April 30, 2024, or 2023.
Other than the United States, no country individually accounted for more than 10% of total revenues during the three months ended April 30, 2024, or 2023.
In order to reduce the risk of disruption of our cloud applications, we have established data centers in various geographic regions. We serve our customers and users from data center facilities operated by third parties, located in North America and Europe. We have internal procedures to restore services in the event of disruption at one of our data center facilities. Even with these procedures for disaster recovery in place, our cloud applications could be significantly interrupted during the implementation of the procedures to restore services.
In addition, we rely upon third-party hosted infrastructure partners globally, including Amazon Web Services (“AWS”) and Google LLC, to serve customers and operate certain aspects of our services. Given this, any disruption of or interference at our hosted infrastructure partners may impact our operations and our business could be adversely impacted.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The standard requires retrospective application to all prior periods presented in the financial statements. We do not intend to early adopt, and are currently evaluating the impacts of the new standard.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Disclosures, which requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. This ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard allows for adoption on a prospective basis, with a retrospective option. We do not intend to early adopt, and are currently evaluating the impacts of the new standard.
Note 3. Investments
Debt Securities
As of April 30, 2024, debt securities consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
U.S. treasury securities | $ | 1,684 | | | $ | 0 | | | $ | (6) | | | $ | 1,678 | |
U.S. agency obligations | 675 | | | 0 | | | (2) | | | 673 | |
Corporate bonds | 2,604 | | | 1 | | | (20) | | | 2,585 | |
Commercial paper | 1,166 | | | 0 | | | 0 | | | 1,166 | |
Total debt securities | $ | 6,129 | | | $ | 1 | | | $ | (28) | | | $ | 6,102 | |
Included in Cash and cash equivalents | $ | 672 | | | $ | 0 | | | $ | 0 | | | $ | 672 | |
Included in Marketable securities | $ | 5,457 | | | $ | 1 | | | $ | (28) | | | $ | 5,430 | |
As of January 31, 2024, debt securities consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
U.S. treasury securities | $ | 2,072 | | | $ | 4 | | | $ | (2) | | | $ | 2,074 | |
U.S. agency obligations | 753 | | | 2 | | | (1) | | | 754 | |
Corporate bonds | 2,496 | | | 9 | | | (5) | | | 2,500 | |
Commercial paper | 1,232 | | | 0 | | | 0 | | | 1,232 | |
Total debt securities | $ | 6,553 | | | $ | 15 | | | $ | (8) | | | $ | 6,560 | |
Included in Cash and cash equivalents | $ | 759 | | | $ | 0 | | | $ | 0 | | | $ | 759 | |
Included in Marketable securities | $ | 5,794 | | | $ | 15 | | | $ | (8) | | | $ | 5,801 | |
The fair values of debt securities, by remaining contractual maturity, were as follows (in millions):
| | | | | |
| April 30, 2024 |
Due within 1 year | $ | 3,346 | |
Due in 1 year through 5 years | 2,756 | |
Total debt securities | $ | 6,102 | |
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 funds available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets on the 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 remaining securities are included in Cash and cash equivalents.
As of April 30, 2024, and January 31, 2024, the fair value of debt securities in an unrealized loss position totaled $4.6 billion and $2.4 billion, respectively, the majority of which had been in a continuous unrealized loss position for less than 12 months. Unrealized losses on debt securities primarily resulted from changes in market interest rates. We do not intend to sell these debt securities and it is not more likely than not that we will be required to sell the debt securities before recovery of their amortized cost bases, which may be at maturity. We did not recognize any credit or non-credit related losses related to our debt securities during the periods presented.
We sold $17 million and $12 million of debt securities during the three months ended April 30, 2024, and 2023, respectively. The realized gains and losses from the sales were immaterial.
Equity Investments
Equity investments consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Consolidated Balance Sheets Location | | April 30, 2024 | | January 31, 2024 |
Money market funds | Cash and cash equivalents | | $ | 873 | | | $ | 1,017 | |
| | | | | |
Non-marketable equity investments measured using the measurement alternative | Other assets | | 240 | | | 248 | |
| | | | | |
Total equity investments | | | $ | 1,113 | | | $ | 1,265 | |
Total realized and unrealized gains and losses associated with our equity investments consisted of the following (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
2024 | | 2023 | | | | |
Net realized gains (losses) recognized on equity investments sold (1) | $ | 0 | | | $ | 0 | | | | | |
Net unrealized gains (losses) recognized on equity investments held as of the end of the period | (8) | | | (8) | | | | | |
Total net gains (losses) recognized in Other income (expense), net | $ | (8) | | | $ | (8) | | | | | |
(1)Reflects the difference between the sale proceeds and the carrying value of the equity investments at the beginning of the period.
Non-Marketable Equity Investments Measured Using the Measurement Alternative
Non-marketable equity investments measured using the measurement alternative include investments in privately held companies without readily determinable fair values in which we do not own a controlling interest or exercise significant influence. These investments are recorded at cost and are adjusted for observable transactions for same or similar securities of the same issuer or impairment events. The carrying values for our non-marketable equity investments are summarized below (in millions):
| | | | | | | | | | | | | | | |
| April 30, 2024 | | January 31, 2024 | | |
Total initial cost | $ | 213 | | | $ | 213 | | | | | |
Cumulative net unrealized gains (losses) | 27 | | | 35 | | | | | |
Carrying value | $ | 240 | | | $ | 248 | | | | | |
During the three months ended April 30, 2024, and 2023, we recorded impairment losses on our non-marketable equity investments of $8 million and $3 million, respectively.
Marketable Equity Investments
We may hold marketable equity investments with readily determinable fair values over which we do not own a controlling interest or exercise significant influence. As of April 30, 2024, and January 31, 2024, we did not hold any such investments.
During the three months ended April 30, 2023, we recorded unrealized net losses of $5 million on our marketable equity investment balance held as of the end of the period of $66 million. Additionally, we sold marketable equity investments for proceeds of $10 million with an immaterial corresponding realized gain.
Note 4. Fair Value Measurements
We use 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, 2024 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
U.S. treasury securities | $ | 1,678 | | | $ | 0 | | | $ | 0 | | | $ | 1,678 | |
U.S. agency obligations | 0 | | | 673 | | | 0 | | | 673 | |
Corporate bonds | 0 | | | 2,585 | | | 0 | | | 2,585 | |
Commercial paper | 0 | | | 1,166 | | | 0 | | | 1,166 | |
Money market funds | 873 | | | 0 | | | 0 | | | 873 | |
| | | | | | | |
Foreign currency derivative assets | 0 | | | 64 | | | 0 | | | 64 | |
Total assets | $ | 2,551 | | | $ | 4,488 | | | $ | 0 | | | $ | 7,039 | |
Foreign currency derivative liabilities | $ | 0 | | | $ | 20 | | | $ | 0 | | | $ | 20 | |
Total liabilities | $ | 0 | | | $ | 20 | | | $ | 0 | | | $ | 20 | |
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, 2024 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
U.S. treasury securities | $ | 2,074 | | | $ | 0 | | | $ | 0 | | | $ | 2,074 | |
U.S. agency obligations | 0 | | | 754 | | | 0 | | | 754 | |
Corporate bonds | 0 | | | 2,500 | | | 0 | | | 2,500 | |
Commercial paper | 0 | | | 1,232 | | | 0 | | | 1,232 | |
Money market funds | 1,017 | | | 0 | | | 0 | | | 1,017 | |
| | | | | | | |
Foreign currency derivative assets | 0 | | | 46 | | | 0 | | | 46 | |
Total assets | $ | 3,091 | | | $ | 4,532 | | | $ | 0 | | | $ | 7,623 | |
Foreign currency derivative liabilities | $ | 0 | | | $ | 27 | | | $ | 0 | | | $ | 27 | |
Total liabilities | $ | 0 | | | $ | 27 | | | $ | 0 | | | $ | 27 | |
Non-Marketable Equity Investments Measured at Fair Value on a Non-Recurring Basis
Non-marketable equity investments that have been remeasured due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold. For further information, see Note 3, Investments. Fair Value Measurements of Other Financial Instruments
We carry our debt at face value less unamortized debt discount and issuance costs on our Condensed Consolidated Balance Sheets and present the fair value for disclosure purposes only. All of our debt obligations are categorized as Level 2 financial instruments. For further information on the fair values of our debt and the inputs used in the calculations, see Note 11, Debt. Note 5. Deferred Costs
Deferred costs, which consist of deferred sales commissions, were $721 million and $741 million as of April 30, 2024, and January 31, 2024, respectively. Amortization expense for the deferred costs was $59 million and $49 million for the three months ended April 30, 2024, and 2023, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.
Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following (in millions):
| | | | | | | | | | | |
| April 30, 2024 | | January 31, 2024 |
Computers, equipment, and software | $ | 1,337 | | | $ | 1,387 | |
Buildings | 723 | | | 726 | |
Leasehold improvements | 224 | | | 213 | |
Furniture, fixtures, and transportation equipment | 101 | | | 99 | |
Land and land improvements | 81 | | | 81 | |
Property and equipment, gross | 2,466 | | | 2,506 | |
Less accumulated depreciation and amortization | (1,228) | | | (1,272) | |
Property and equipment, net | $ | 1,238 | | | $ | 1,234 | |
Depreciation expense totaled $56 million and $48 million for the three months ended April 30, 2024, and 2023.
Note 7. Business Combination
HiredScore Acquisition
On March 29, 2024, we acquired all outstanding stock of HiredScore, Inc. (“HiredScore”), a provider of AI-powered talent orchestration solutions. With HiredScore, Workday provides customers with a comprehensive, transparent, and intelligent talent acquisition and internal mobility offering, helping them better address their ever-evolving people needs. We have included the financial results of HiredScore in our condensed consolidated financial statements from the date of acquisition.
The total acquisition-date fair value of the purchase consideration was $530 million, which was paid in cash. The purchase consideration was preliminarily allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess recorded to goodwill. The fair values of assets acquired and liabilities assumed may be subject to change over the measurement period as additional information is received and certain tax matters are finalized. The primary areas that are subject to change include income taxes payable and deferred taxes. The measurement period will end no later than one year from the acquisition date. The preliminary fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows (in millions):
| | | | | |
Cash | $ | 11 | |
Acquisition-related intangible assets | 135 | |
Goodwill | 411 | |
Other assets | 11 | |
| |
Other liabilities | (38) | |
Total | $ | 530 | |
The fair values and weighted-average useful lives of the acquired intangible assets by category were as follows (in millions, except years):
| | | | | | | | | | | |
| Estimated Fair Values | | Weighted-Average Useful Lives (in Years) |
Developed technology | $ | 111 | | | 8 |
Customer relationships | 23 | | | 14 |
Trade name | 1 | | | 1 |
Total acquisition-related intangible assets | $ | 135 | | | 9 |
The goodwill recognized was primarily attributable to the assembled workforce and the expected synergies from integrating HiredScore’s technology into our product portfolio. The goodwill is not deductible for income tax purposes.
Separate operating results and pro forma results of operations for HiredScore have not been presented as the effect of this acquisition was not material to our financial results.
Note 8. Acquisition-Related Intangible Assets, Net
Acquisition-related intangible assets, net consisted of the following as of April 30, 2024 (in millions):
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Developed technology | $ | 429 | | | $ | (266) | | | $ | 163 | |
Customer relationships | 334 | | | (147) | | | 187 | |
Backlog | 15 | | | (15) | | | 0 | |
Trade name | 14 | | | (13) | | | 1 | |
Total | $ | 792 | | | $ | (441) | | | $ | 351 | |
Acquisition-related intangible assets, net consisted of the following as of January 31, 2024 (in millions):
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Developed technology | $ | 318 | | | $ | (256) | | | $ | 62 | |
Customer relationships | 311 | | | (140) | | | 171 | |
Backlog | 15 | | | (15) | | | 0 | |
Trade name | 13 | | | (13) | | | 0 | |
Total | $ | 657 | | | $ | (424) | | | $ | 233 | |
Amortization expense related to acquisition-related intangible assets was $17 million and $21 million for the three months ended April 30, 2024, and 2023, respectively.
As of April 30, 2024, the future estimated amortization expense related to acquisition-related intangible assets was as follows (in millions):
| | | | | |
Fiscal Period: | |
Remainder of 2025 | $ | 59 | |
2026 | 72 | |
2027 | 47 | |
2028 | 43 | |
2029 | 33 | |
Thereafter | 97 | |
Total | $ | 351 | |
Note 9. Other Assets
Other assets consisted of the following (in millions):
| | | | | | | | | | | |
| April 30, 2024 | | January 31, 2024 |
Non-marketable equity and other investments | $ | 240 | | | $ | 248 | |
Contract assets | 31 | | | 21 | |
Technology patents and other intangible assets, net | 25 | | | 26 | |
Derivative assets | 24 | | | 14 | |
Prepayments for goods and services | 13 | | | 14 | |
Deposits | 8 | | | 8 | |
| | | |
Other | 12 | | | 6 | |
Total other assets | $ | 353 | | | $ | 337 | |
Technology patents and other intangible assets with estimable useful lives are amortized on a straight-line basis. As of April 30, 2024, the future estimated amortization expense was as follows (in millions):
| | | | | |
Fiscal Period: | |
Remainder of 2025 | $ | 3 | |
2026 | 3 | |
2027 | 3 | |
2028 | 3 | |
2029 | 3 | |
Thereafter | 10 | |
Total | $ | 25 | |
Note 10. Derivative Instruments
We conduct business on a global basis in multiple foreign currencies, subjecting Workday to foreign currency exchange risk. To mitigate this risk, we utilize derivative hedging contracts as described below. We do not enter into any derivatives for trading or speculative purposes.
Our foreign currency contracts are classified within Level 2 of the fair value hierarchy because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.
Cash Flow Hedges
We enter into foreign currency forward contracts to hedge a portion of our forecasted revenue and expense transactions (“cash flow hedges”). We designate these forward contracts as cash flow hedging instruments since the accounting criteria for such designation has been met.
Cash flow hedges are recorded on the Condensed Consolidated Balance Sheets at fair value. Cash flows from the settlement of these forward contracts are classified as operating activities on the Condensed Consolidated Statements of Cash Flows. Gains or losses resulting from changes in the fair value of these hedges are recorded in Accumulated other comprehensive income (loss) (“AOCI”) on the Condensed Consolidated Balance Sheets and are subsequently reclassified to the same line item as the hedged transaction on the Condensed Consolidated Statements of Operations in the same period that the hedged transaction affects earnings. As of April 30, 2024, we estimate that $27 million of net gains recorded in AOCI related to our cash flow hedges will be reclassified into income within the next 12 months.
As of April 30, 2024, and January 31, 2024, the notional values of the cash flow hedges that we held to buy U.S. dollars in exchange for other currencies were $2.7 billion and $2.5 billion, respectively. The notional values of the cash flow hedges that we held to sell U.S. dollars in exchange for other currencies were $393 million and $399 million as of April 30, 2024, and January 31, 2024, respectively. All contracts had maturities of less than 59 months.
Non-Designated Hedges
We also enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets and liabilities (“non-designated hedges”). These forward contracts are intended to offset foreign currency gains or losses associated with the underlying monetary assets and liabilities and are recorded on the Condensed Consolidated Balance Sheets at fair value. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of these forward contracts are recorded in Other income (expense), net on the Condensed Consolidated Statements of Operations. Cash flows from the settlement of these forward contracts are classified as operating activities on the Condensed Consolidated Statements of Cash Flows.
As of April 30, 2024, and January 31, 2024, the notional values of the non-designated hedges that we held to buy U.S. dollars in exchange for other currencies were $68 million and $237 million, respectively, and the notional values of the non-designated hedges that we held to sell U.S. dollars in exchange for other currencies were $49 million and $11 million, respectively.
The fair values of outstanding derivative instruments were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Condensed Consolidated Balance Sheets Location | | April 30, 2024 | | January 31, 2024 |
Derivative assets: | | | | | |
Cash flow hedges | Prepaid expenses and other current assets | | $ | 39 | | | $ | 30 | |
Cash flow hedges | Other assets | | 24 | | | 14 | |
Non-designated hedges | Prepaid expenses and other current assets | | 1 | | | 2 | |
| | | | | |
Total derivative assets | | | $ | 64 | | | $ | 46 | |
Derivative liabilities: | | | | | |
Cash flow hedges | Accrued expenses and other current liabilities | | $ | 12 | | | $ | 14 | |
Cash flow hedges | Other liabilities | | 7 | | | 12 | |
Non-designated hedges | Accrued expenses and other current liabilities | | 1 | | | 1 | |
| | | | | |
Total derivative liabilities | | | $ | 20 | | | $ | 27 | |
The effect of cash flow hedges on the Condensed Consolidated Statements of Operations was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, |
Condensed Consolidated Statements of Operations Location | 2024 | | 2023 |
| Total | | Gains (losses) related to cash flow hedges | | Total | | Gains (losses) related to cash flow hedges |
Revenues | $ | 1,990 | | | $ | 8 | | | $ | 1,684 | | | $ | 16 | |
Costs and expenses | 1,926 | | | (2) | | | 1,704 | | | (1) | |
Pre-tax gains (losses) associated with cash flow hedges were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Condensed Consolidated Statements of Operations and Statements of Comprehensive Income (Loss) Locations | | Three Months Ended April 30, | | |
| | 2024 | | 2023 | | | | |
Gains (losses) recognized in OCI | Net change in unrealized gains (losses) on cash flow hedges | | $ | 30 | | | $ | 1 | | | | | |
Gains (losses) reclassified from AOCI into income (effective portion) | Revenues | | 8 | | | 16 | | | | | |
Gains (losses) reclassified from AOCI into income (effective portion) | Costs and expenses | | (2) | | | (1) | | | | | |
Gains (losses) associated with non-designated hedges were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Condensed Consolidated Statements of Operations Location | | Three Months Ended April 30, | | |
| | 2024 | | 2023 | | | | |
Gains (losses) related to non-designated hedges | Other income (expense), net | | $ | 1 | | | $ | 2 | | | | | |
We are subject to netting agreements with all of the 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, 2024, information related to these offsetting arrangements was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 17 | | | $ | 0 | | | $ | 17 | | | $ | (2) | | | $ | 0 | | | $ | 15 | |
Counterparty B | 16 | | | 0 | | | 16 | | | (6) | | | 0 | | | 10 | |
Counterparty C | 3 | | | 0 | | | 3 | | | (2) | | | 0 | | | 1 | |
Counterparty D | 24 | | | 0 | | | 24 | | | (9) | | | 0 | | | 15 | |
Counterparty E | 3 | | | 0 | | | 3 | | | (1) | | | 0 | | | 2 | |
Counterparty F | 1 | | | 0 | | | 1 | | | 0 | | | 0 | | | 1 | |
Total | $ | 64 | | | $ | 0 | | | $ | 64 | | | $ | (20) | | | $ | 0 | | | $ | 44 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 2 | | | $ | 0 | | | $ | 2 | | | $ | (2) | | | $ | 0 | | | $ | 0 | |
Counterparty B | 6 | | | 0 | | | 6 | | | (6) | | | 0 | | | 0 | |
Counterparty C | 2 | | | 0 | | | 2 | | | (2) | | | 0 | | | 0 | |
Counterparty D | 9 | | | 0 | | | 9 | | | (9) | | | 0 | | | 0 | |
Counterparty E | 1 | | | 0 | | | 1 | | | (1) | | | 0 | | | 0 | |
Counterparty F | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total | $ | 20 | | | $ | 0 | | | $ | 20 | | | $ | (20) | | | $ | 0 | | | $ | 0 | |
Note 11. Debt
Outstanding debt consisted of the following (in millions):
| | | | | | | | | | | | | |
| April 30, 2024 | | January 31, 2024 | | |
2027 Notes | $ | 1,000 | | | $ | 1,000 | | | |
2029 Notes | 750 | | | 750 | | | |
2032 Notes | 1,250 | | | 1,250 | | | |
| | | | | |
Total principal amount | 3,000 | | | 3,000 | | | |
Less: unamortized debt discount and issuance costs | (19) | | | (20) | | | |
Net carrying amount | 2,981 | | | 2,980 | | | |
| | | | | |
Debt, noncurrent | $ | 2,981 | | | $ | 2,980 | | | |
As of April 30, 2024, the future principal payments for the outstanding debt were as follows (in millions):
| | | | | |
Fiscal Period: | |
Remainder of 2025 | $ | 0 | |
2026 | 0 | |
2027 | 0 | |
2028 | 1,000 | |
2029 | 0 | |
Thereafter | 2,000 | |
Total principal amount | $ | 3,000 | |
Senior Notes
In April 2022, we issued $3.0 billion aggregate principal amount of senior notes, consisting of $1.0 billion aggregate principal amount of 3.500% notes due April 1, 2027 (“2027 Notes”), $750 million aggregate principal amount of 3.700% notes due April 1, 2029 (“2029 Notes”), and $1.25 billion aggregate principal amount of 3.800% notes due April 1, 2032 (“2032 Notes,” and together with the 2027 Notes and the 2029 Notes, “Senior Notes”). Interest is payable semi-annually in arrears on April 1 and October 1 of each year.
The Senior Notes are unsecured obligations and rank equally with all existing and future unsecured and unsubordinated indebtedness of Workday. We may redeem the Senior Notes in whole or in part at any time or from time to time, at specified redemption dates and prices. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Senior Notes under specified terms. The indenture governing the Senior Notes also includes covenants (including certain limited covenants restricting our ability to incur certain liens and enter into certain sale and leaseback transactions), events of default, and other customary provisions. As of April 30, 2024, we were in compliance with all covenants associated with the Senior Notes.
We incurred debt discount and issuance costs of approximately $27 million in connection with the Senior Notes offering, which were allocated on a pro rata basis to the 2027 Notes, 2029 Notes, and 2032 Notes. The debt discount and issuance costs are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the contractual term of each arrangement. The effective interest rates on the 2027 Notes, 2029 Notes, and 2032 Notes, which are calculated as the contractual interest rates adjusted for the debt discount and issuance costs, are 3.67%, 3.82%, and 3.90%, respectively.
As of April 30, 2024, and January 31, 2024, the total estimated fair value of the Senior Notes was $2.7 billion and $2.8 billion, respectively. The estimated fair values of the Senior Notes, which we have classified as Level 2 financial instruments, were determined based on quoted bid prices in an over-the-counter market on the last trading day of the reporting period.
Credit Agreement
In April 2022, we entered into a credit agreement (“2022 Credit Agreement”) which provides for a revolving credit facility in an aggregate principal amount of $1.0 billion. As of April 30, 2024, we had no outstanding revolving loans under the 2022 Credit Agreement. The revolving loans under the 2022 Credit Agreement may be borrowed, repaid, and reborrowed until April 6, 2027, at which time all amounts borrowed must be repaid. The revolving loans under the 2022 Credit Agreement will bear interest, at our option, at a base rate plus a margin of 0.000% to 0.500% or a secured overnight financing rate (“SOFR”) plus 10 basis points, plus a margin of 0.750% to 1.500%, with such margin being determined based on our consolidated leverage ratio or debt rating. We are also obligated to pay an ongoing commitment fee on undrawn amounts.
The 2022 Credit Agreement contains customary representations, warranties, and affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions on the incurrence of liens and indebtedness, certain merger transactions, and other matters, all subject to certain exceptions. The financial covenant, based on a quarterly financial test, requires that we do not exceed a maximum leverage ratio of 3.50:1.00, subject to a step-up to 4.50:1.00 at our election for a certain period following an acquisition. As of April 30, 2024 and January 31, 2024, we were in compliance with all covenants included in the 2022 Credit Agreement.
Interest Expense on Debt
The following table sets forth total interest expense recognized related to our debt (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Contractual interest expense | $ | 28 | | | $ | 28 | | | | | |
Interest cost related to amortization of debt discount and issuance costs | 1 | | | 1 | | | | | |
Total interest expense | $ | 29 | | | $ | 29 | | | | | |
Note 12. 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 were $323 million and $289 million as of April 30, 2024, and January 31, 2024, respectively, and operating lease liabilities were $363 million and $316 million as of April 30, 2024, and January 31, 2024, respectively.
The components of operating lease expense were as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Operating lease cost | $ | 29 | | | $ | 29 | | | | | |
Short-term lease cost | 0 | | | 1 | | | | | |
Variable lease cost | 10 | | | 11 | | | | | |
Total operating lease cost | $ | 39 | | | $ | 41 | | | | | |
Supplemental cash flow information related to our operating leases was as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Cash paid for operating lease liabilities | $ | 23 | | $ | 28 | | | | |
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | 61 | | 32 | | | | |
| | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
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Other information related to our operating leases was as follows:
| | | | | | | | | | | |
| April 30, 2024 | | January 31, 2024 |
Weighted average remaining lease term (in years) | 6 | | 5 |
Weighted average discount rate | 3.97 | % | | 3.95 | % |
As of April 30, 2024, maturities of operating lease liabilities were as follows (in millions):
| | | | | | | |
Fiscal Period: | | | |
Remainder of 2025 | $ | 79 | | | |
2026 | 91 | | | |
2027 | 72 | | | |
2028 | 59 | | | |
2029 | 45 | | | |
Thereafter | 69 | | | |
Total lease payments | 415 | | | |
Less imputed interest | (52) | | | |
Total operating lease liabilities | $ | 363 | | | |
As of April 30, 2024, we have additional operating leases for data centers and office space that had not yet commenced with total undiscounted lease payments of $41 million. These operating leases will commence in fiscal 2025 and fiscal 2026, with lease terms ranging from approximately two to seven years.
Note 13. Commitments and Contingencies
Purchase Obligations
Our purchase obligations are primarily related to agreements for third-party hosted infrastructure platforms, data center equipment and software, business technology software and support, and sales and marketing activities. During the three months ended April 30, 2024, there were no material changes outside the ordinary course of business to our non-cancelable purchase obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024.
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, 2024, 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 14. Stockholders’ Equity
Common Stock
As of April 30, 2024, there were 212 million shares of Class A common stock, net of treasury stock, and 53 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.
Share Repurchase Programs
In November 2022, our Board of Directors authorized the repurchase of up to $500 million of our outstanding shares of Class A common stock (“2022 Share Repurchase Program”). As of April 30, 2024, we had completed the purchase authorization under this program.
In February 2024, our Board of Directors authorized a new program under which we may repurchase up to an additional $500 million of our outstanding shares of Class A common stock (“2024 Share Repurchase Program”). We may repurchase shares of Class A common stock from time to time through open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act, in privately negotiated transactions, or by other means, in accordance with applicable securities laws and other restrictions. The timing and total amount of share repurchases under this program will depend upon business, economic, and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The 2024 Share Repurchase Program has a term of 18 months, may be suspended or discontinued at any time, and does not obligate us to acquire any amount of Class A common stock.
During the three months ended April 30, 2024, we repurchased a total of approximately 0.5 million shares of Class A common stock for approximately $134 million at an average price per share of $267.09. Of the shares repurchased, $2 million were acquired under the 2022 Share Repurchase Program, with the remainder acquired under the 2024 Share Repurchase Program. All repurchases were made in open market transactions. No shares were repurchased during the three months ended April 30, 2023. As of April 30, 2024, we were authorized to repurchase a remaining $369 million of our outstanding shares of Class A common stock under the 2024 Share Repurchase Program.
Employee Equity Plans
In June 2022, our stockholders approved the 2022 Equity Incentive Plan (“2022 Plan”), with a reserve of 30 million shares for issuance. The 2022 Plan serves as the successor to our 2012 Equity Incentive Plan (“2012 Plan” and, together with the 2022 Plan, “Stock Plans”). Awards that are granted on or after the effective date of the 2022 Plan will be granted pursuant to and subject to the terms and provisions of the 2022 Plan. Prior awards granted under the 2012 Plan continue to be subject to the terms and provisions of the 2012 Plan. Shares that are withheld in connection with the net share settlement of RSUs or forfeited are added to the reserves of the 2022 Plan. As of April 30, 2024, we had 17 million shares of Class A common stock available for future grants.
In June 2022, our stockholders approved the Amended and Restated 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 are exercisable on or about the succeeding November 30 and May 31, respectively. As of April 30, 2024, 4 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. RSU activity during the three months ended April 30, 2024, was as follows (in thousands, except per share data):
| | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
Outstanding balance as of January 31, 2024 | 15,020 | | | $ | 203.94 | |
RSUs granted | 5,535 | | | 254.94 | |
RSUs vested | (1,836) | | | 195.81 | |
RSUs forfeited and canceled (1) | (1,210) | | | 201.71 | |
Outstanding balance as of April 30, 2024 | 17,509 | | | 221.07 | |
(1)Includes shares withheld in connection with the net share settlement of RSUs.
As of April 30, 2024, there was a total of $3.0 billion in unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately three years.
Market-Based Restricted Stock Units
In December 2022, 0.3 million shares of market-based RSUs were granted to Mr. Eschenbach in connection with his appointment as Co-CEO that vest based on appreciation of the price of our Class A common stock over a multi-year period and upon continued service (“PVU Award”). We estimated the fair value of the PVU Award on the grant date using the Monte Carlo simulation model with the following assumptions: (i) expected volatility of 40%, (ii) risk-free interest rate of 4%, and (iii) total performance period of six years. The weighted-average grant date fair value of the PVU Award was $124.80 per share. We recognize expense for the PVU Award over the requisite service period of five years using the accelerated attribution method. Provided that the requisite service is rendered, the total fair value of the PVU Award at the date of grant is recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the achievement of the specified market criteria.
As of April 30, 2024, there was a total of $16 million in unrecognized compensation cost related to the PVU Award, which is expected to be recognized over approximately four years.
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 ten years and generally vest over five years.
As of April 30, 2024, there were 0.1 million options outstanding and exercisable with a weighted-average exercise price of $29.18, and an aggregate intrinsic value of $18 million. All stock options were fully vested, with no remaining unrecognized compensation cost.
Note 15. Contract Balances and Performance Obligations
Contract Balances
Contract assets and unearned revenue balances were as follows (in millions):
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| Condensed Consolidated Balance Sheets Location | | April 30, 2024 | | January 31, 2024 |
Contract assets: | | | | | |
Contract assets, current | Trade and other receivables, net | | $ | 298 | | | $ | 240 | |
Contract assets, noncurrent | Other assets | | 31 | | | 21 | |
Total contract assets | | | $ | 329 | | | $ | 261 | |
Unearned revenue (1): | | | | | |
Unearned revenue, current | Unearned revenue | | $ | 3,552 | | | $ | 4,057 | |
Unearned revenue, noncurrent | Unearned revenue, noncurrent | | 61 | | | 70 | |
Total unearned revenue | | | $ | 3,613 | | | $ | 4,127 | |
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(1)Included in the unearned revenue balance are amounts related to professional services that are subject to cancellation and pro-rated refund rights of $74 million and $76 million as of April 30, 2024, and January 31, 2024, respectively.
Revenues of $1.5 billion and $1.3 billion were recognized during the three months ended April 30, 2024, and 2023, respectively, that were included in the unearned revenue balances as of January 31, 2024, and 2023, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
As of April 30, 2024, approximately $20.7 billion of revenues are expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenues on approximately $6.6 billion and $11.6 billion of these remaining performance obligations over the next 12 and 24 months, respectively, with the balance recognized thereafter. Revenues from remaining performance obligations for professional services contracts as of April 30, 2024, were not material.
Note 16. Other Income (Expense), Net
Other income (expense), net consisted of the following (in millions):
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| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Interest income | $ | 93 | | | $ | 63 | | | | | |
Interest expense (1) | (29) | | | (29) | | | | | |
Other (2) | (5) | | | (7) | | | | | |
Total other income (expense), net | $ | 59 | | | $ | 27 | | | | | |
(1)Interest expense primarily includes the contractual interest expense of our debt obligations, and the related non-cash interest expense attributable to amortization of the debt discount and issuance costs. For further information, see Note 11, Debt. (2)Other primarily includes the net gains (losses) from our equity investments. For further information, see Note 3, Investments. Note 17. Income Taxes
We reported an income tax provision of $16 million and $7 million for the three months ended April 30, 2024, and 2023, respectively. The income tax provision for the three months ended April 30, 2024, was primarily attributable to earnings in U.S. and profitable foreign jurisdictions, offset by the excess tax benefit from stock-based compensation. The income tax provision for the three months ended April 30, 2023, was primarily attributable to income tax expenses in profitable foreign jurisdictions and an increase in U.S. taxes due to capitalized research and development expenditures.
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, 2024, we continue to maintain valuation allowances related to tax credits in certain state jurisdictions and net operating loss in certain foreign jurisdictions. We will continue to evaluate the need for valuation allowances for our deferred tax assets.
Note 18. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, net of treasury stock. Diluted net income (loss) per share is computed by giving effect to all potentially dilutive shares of common stock, including outstanding share-based awards consisting primarily of unvested RSUs and ESPP obligations and outstanding warrants related to the issuance of convertible senior notes. We determine the dilutive effect of outstanding share-based awards and warrants using the treasury stock method.
The net income (loss) per share is allocated based on the contractual participation rights of the Class A common shares and Class B common shares as if the income (loss) for the period had been distributed. As the liquidation and dividend rights are identical, the net income (loss) is allocated on a proportionate basis. The computation of the diluted net income per share of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted net income (loss) per share of Class B common stock does not assume the conversion of those shares.
The following table presents the calculation of basic and diluted net income (loss) per share (in millions, except number of shares, which are reflected in thousands, and per share data):
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| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
| Class A | | Class B | | Class A | | Class B | | | | | | | | |
Net income (loss) per share, basic: | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | |
Net income (loss) | $ | 85 | | | $ | 22 | | | $ | 0 | | | $ | 0 | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | |
Weighted-average shares outstanding, basic | 211,369 | | | 53,075 | | | 204,187 | | | 54,633 | | | | | | | | | |
Net income (loss) per share, basic | $ | 0.40 | | | $ | 0.40 | | | $ | 0.00 | | | $ | 0.00 | | | | | | | | | |
Net income (loss) per share, diluted: | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | |
Net income (loss) | $ | 85 | | | $ | 22 | | | $ | 0 | | | $ | 0 | | | | | | | | | |
Reallocation of net income as a result of conversion of Class B to Class A common stock | 22 | | | 0 | | | 0 | | | 0 | | | | | | | | | |
Reallocation of net income to Class B common stock | 0 | | | (1) | | | 0 | | | 0 | | | | | | | | | |
Net income (loss) for diluted calculation | 107 | | | 21 | | | 0 | | | 0 | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | |
Weighted-average shares outstanding, basic | 211,369 | | | 53,075 | | | 204,187 | | | 54,633 | | | | | | | | | |
Conversion of Class B to Class A common stock | 53,075 | | | 0 | | | 54,633 | | | 0 | | | | | | | | | |
Dilutive effect of share-based awards | 5,854 | | | 0 | | | 2,551 | | | 0 | | | | | | | | | |
Weighted-average shares outstanding, diluted | 270,298 | | | 53,075 | | | 261,371 | | | 54,633 | | | | | | | | | |
Net income (loss) per share, diluted | $ | 0.40 | | | $ | 0.40 | | | $ | 0.00 | | | $ | 0.00 | | | | | | | | | |
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The computation of diluted net income (loss) per share does not include the effect of the following potentially outstanding weighted-average shares of common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted net income (loss) per share because the effect would have been anti-dilutive (in thousands):
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| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
Shares related to outstanding share-based awards | 72 | | | 3,909 | | | | | |
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Shares subject to warrants related to the issuance of convertible senior notes | 0 | | | 2,108 | | | | | |
Total | 72 | | | 6,017 | | | | | |
Note 19. Geographic Information
Revenues
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. Revenues by geography are generally based on the address of the customer as specified in our customer subscription agreement. The following table sets forth revenues by geographic area (in millions):
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| Three Months Ended April 30, | | |
| 2024 | | 2023 | | | | |
United States | $ | 1,493 | | | $ | 1,264 | | | | | |
Other countries | 497 | | | 420 | | | | | |
Total revenues | $ | 1,990 | | | $ | 1,684 | | | | | |
Long-Lived Assets
Our long-lived assets are attributed to a country based on the physical location of the assets. We define long-lived assets as property and equipment and operating lease right-of-use assets because many of these assets cannot be readily moved and are relatively illiquid, subjecting them to geographic risk. None of our other assets are subject to significant geographic risk. Aggregate Property and equipment, net and Operating lease right-of-use assets by geographic area was as follows (in millions):
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| April 30, 2024 | | January 31, 2024 |
United States | $ | 1,208 | | | $ | 1,199 | |
Ireland | 216 | | | 213 | |
Other countries | 137 | | | 111 | |
Total long-lived assets | $ | 1,561 | | | $ | 1,523 | |
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 financial condition and operating results, business strategy and plans, and 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, beliefs, and projections about future events, conditions, and trends that we believe may affect our financial condition, operating results, 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, assumptions, and changes in circumstances that are difficult to predict and many of which are outside of our control, such as those arising from the impact of recent macroeconomic events, including inflation, increased interest rates, and geopolitical factors, as well as 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, assumptions, and potential changes in circumstances, the future events, conditions, 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. Accordingly, you should not rely upon any forward-looking statements. 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, except as required by applicable law. If we do update any forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
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 in Part I, Item 1 of this report.
Overview
Workday delivers applications for financial management, spend management, human capital management, planning, and analytics. With Workday, our customers have a unified system that can help them plan, execute, analyze, and extend to other applications and environments, thereby helping them continuously adapt how they manage their business and operations. Our diverse customer base includes medium-sized and large, global organizations within numerous industry categories, including professional and business services, financial services, healthcare, education, government, technology, media, retail, and hospitality.
We have achieved significant growth since our inception in 2005. Our current financial focus is on growing our revenues, operating margin, and operating cash flows, and expanding both our customer base and our footprint within our existing customers. While we have a history of GAAP operating losses prior to fiscal 2024, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues will decrease over the longer term 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.
We plan to reinvest a significant portion of our incremental revenues in future periods to continue growing our business. We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling applications, increase our product localization in targeted international markets, meet our customers’ evolving industry needs, and enhance our existing applications. In addition, we plan to continue to expand our ability to sell our applications globally, particularly in Europe and the Asia-Pacific region, by increasing our sales organization and marketing programs and by expanding our ecosystem of partners to deliver deployments, sales, and co-innovation on the Workday platform. We are also investing in our personnel to support the growing opportunity in our financial management applications business and our growing customer base. Additionally, we expect to make further significant investments in our data center capacity, third-party hosted infrastructure platforms, and cybersecurity capabilities as we plan for future growth.
We regularly evaluate acquisition and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings, and expect to continue making acquisitions and investments in the future. While we remain focused on improving our operating margin, these acquisitions and investments may increase our costs on an absolute basis in the near term. Many of these investments will occur in advance of experiencing any direct benefit from them and could make it difficult to determine if we are allocating our resources efficiently.
Since inception, we have also invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. Additionally, we continue to expand our professional services partner ecosystem to further support our customers. We believe our investment in professional services, as well as partners building consulting practices around Workday and helping to deliver additional innovation and solutions, will drive additional customer subscriptions and continued growth in revenues. As we continue to leverage our expanding partner ecosystem, we expect that professional services revenue will continue to decline over time as a percentage of total revenues.
Impact of Current Economic Conditions
Recent macroeconomic events including higher inflation and interest rates, as well as geopolitical factors including the Russia-Ukraine and Israel-Hamas conflicts, have negatively impacted the global economy and created continued uncertainty, volatility, and disruption of financial markets. Despite this, we are confident in the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy and help our customers on their human capital and finance digital transformation journeys. Demand for our products remains strong, we continue to achieve solid new subscription bookings, and our near-term revenues are relatively predictable as a result of our subscription-based business model.
We have experienced, and may continue to experience, a moderation of revenue growth rates due to increased deal scrutiny and the lengthening of certain sales cycles, particularly within net new opportunities, and lower headcount level commitments upon renewals of existing customers. Further, we have provided, and may continue to provide, certain customers with more flexible payment terms. If the economic uncertainty continues, we may also experience additional negative impacts on customer renewals, customer collections, sales and marketing efforts, customer deployments, product development, or other financial metrics. Any of these factors could harm our business, financial condition, and operating results. For further discussion of the potential impacts of recent macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this report.