WDAY
$130.43
Workday
($6.82)
(4.97%)
Earnings Details
2nd Quarter July 2018
Tuesday, September 4, 2018 4:01:00 PM
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Summary

Workday Misses

Workday (WDAY) reported 2nd Quarter July 2018 earnings of $0.24 per share on revenue of $671.7 million. The consensus earnings estimate was $0.26 per share on revenue of $662.8 million. The Earnings Whisper number was $0.30 per share. Revenue grew 27.9% on a year-over-year basis.

Workday Inc is a provider of enterprise cloud-based applications for human capital management, payroll, financial management, time tracking, procurement and employee expense management.

Results
Reported Earnings
$0.24
Earnings Whisper
$0.30
Consensus Estimate
$0.26
Reported Revenue
$671.7 Mil
Revenue Estimate
$662.8 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Workday Announces Fiscal 2019 Second Quarter Financial Results

Total Revenues of $671.7 Million, Up 27.9% Year Over Year
Subscription Revenue of $565.7 Million, Up 30.2% Year Over Year
Subscription Revenue Backlog of $5.5 Billion, Up 26.0% Year Over Year

PLEASANTON, Calif., Sept. 04, 2018 (GLOBE NEWSWIRE) --  Workday, Inc. (NASDAQ: WDAY), a leader in enterprise cloud applications for finance and human resources, today announced results for the fiscal 2019 second quarter ended July 31, 2018.

Fiscal Second Quarter Results

  • Total revenues were $671.7 million, an increase of 27.9% from the second quarter of fiscal 2018. Subscription revenues were $565.7 million, an increase of 30.2% from the same period last year.
     
  • Operating loss was $89.0 million, or negative 13.2% of revenues, compared to an operating loss of $81.6 million, or negative 15.5% of revenues, in the same period last year. Non-GAAP operating income for the second quarter was $68.1 million, or 10.1% of revenues, compared to a non-GAAP operating income of $49.0 million, or 9.3% of revenues, in the same period last year.1
     
  • Net loss per basic and diluted share was flat at $0.40 when compared to the prior year period. Non-GAAP net income per diluted share was $0.31, compared to a non-GAAP net income per diluted share of $0.24 in the same period last year.2
     
  • Operating cash flows were $57.6 million and free cash flows were $4.3 million. For the trailing twelve months, operating cash flows were $512.4 million and free cash flows were $337.8 million, representing year over year growth of 36.1% and 36.5%, respectively.3
     
  • Cash, cash equivalents, and marketable securities were $3.0 billion as of July 31, 2018. Unearned revenues were approximately $1.5 billion, a 21.3% increase from the same period last year.

Comments on the News

"Q2 was another strong quarter. We once again increased the number of both finance and HR customers in the Fortune 500 and made significant progress on our acquisition of Adaptive Insights to further enable customers to plan, execute, and analyze all in one system," said Aneel Bhusri, co-founder and CEO, Workday. "With our focused product strategy, continued investment in opening our platform, and relentless commitment to customer success, we continue to add levers that drive enduring growth and our long-term position as the trusted partner for finance, HR, and business transformation."

"We executed extremely well in Q2, delivering another strong quarter of outperformance," said Robynne Sisco, co-president and chief financial officer, Workday. "Based on our second quarter results, and inclusive of the acquisition of Adaptive Insights, we are raising our fiscal 2019 revenue outlook and now expect subscription revenue of $2.341 to $2.348 billion, or growth of 31%. We expect our third quarter subscription revenue to be between $609 and $611 million, representing 31% to 32% growth. We are excited to welcome Adaptive Insights to Workday and look forward to the future of the combined company."

Recent Highlights

  • Workday unveiled its plans to acquire Adaptive Insights, a leading cloud-based company for modernizing business planning, and most recently announced the completion of the acquisition, with the company operating as Adaptive Insights, a Workday company.
  • Underscoring its ongoing commitment to privacy, Workday announced its support for comprehensive U.S. and global privacy laws based on the Organization for Economic Cooperation and Development’s Fair Information Principles.
  • Workday acquired Stories.bi and Rallyteam – two companies with expertise in leveraging machine learning – to power Workday products with even more intelligence so customers can better understand and react to business needs. 

Earnings Call Details

Workday plans to host a conference call today to review its fiscal 2019 second quarter financial results and to discuss its financial outlook. The call is scheduled to begin at 1:30 p.m. PT/4:30 p.m. ET and can be accessed via webcast.

The webcast will be available live and a replay will be available following completion of the live broadcast for approximately 90 days.

Workday uses the Workday Blog as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

1 Non-GAAP operating income excludes share-based compensation expenses, employer payroll tax-related items on employee stock transactions, and amortization expense for acquisition-related intangible assets. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

2 Non-GAAP net income per share excludes share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization expense for acquisition-related intangible assets, non-cash interest expense related to our convertible senior notes, and income tax effects. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

3 Free cash flows are defined as operating cash flows minus capital expenditures (excluding owned real estate projects). See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

About Workday

Workday is a leading provider of enterprise cloud applications for finance and human resources. Founded in 2005, Workday delivers financial management, human capital management, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies. Organizations ranging from medium-sized businesses to Fortune 50 enterprises have selected Workday.

Use of Non-GAAP Financial Measures

Reconciliations of non-GAAP financial measures to Workday's financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled "About Non-GAAP Financial Measures." A reconciliation of our forward outlook for non-GAAP operating margin with our forward-looking GAAP operating margin is not available without unreasonable efforts as the quantification of share-based compensation expense, which is excluded from our non-GAAP operating margin, requires additional inputs such as number of shares granted and market price that are not ascertainable.

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding Workday's fiscal year 2019 subscription revenue projections and growth, products, and its acquisition of Adaptive Insights. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plans," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. Risks include, but are not limited to: (i) risks related to our ability to successfully integrate Adaptive Insights’ operations or failure to achieve the expected benefits of this or any other acquisition transaction; (ii) our ability to implement our plans, objectives, and other expectations with respect to the Adaptive Insights business or that of any other acquired company; (iii) breaches in our security measures, unauthorized access to our customers' data or disruptions in our data center operations; (iv) our ability to manage our growth effectively; (v) competitive factors, including pricing pressures, industry consolidation, entry of new competitors and new applications, and marketing initiatives by our competitors; (vi) the development of the market for enterprise cloud services; (vii) acceptance of our applications and services by customers; (viii) adverse changes in general economic or market conditions; (ix) delays or reductions in information technology spending; and (x) changes in sales, which may not be immediately reflected in our results due to our subscription model. Further information on risks that could affect Workday's results is included in our filings with the Securities and Exchange Commission (SEC), including our Form 10-Q for the quarter ended April 30, 2018 and our future reports that we may file with the SEC from time to time, which could cause actual results to vary from expectations. Workday assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

Any unreleased services, features, or functions referenced in this document, our website, or other press releases or public statements that are not currently available are subject to change at Workday's discretion and may not be delivered as planned or at all. Customers who purchase Workday services should make their purchase decisions based upon services, features, and functions that are currently available.

© 2018. Workday, Inc. All rights reserved. Workday and the Workday logo are registered trademarks of Workday, Inc. All other brand and product names are trademarks or registered trademarks of their respective holders.

Workday, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)

 July 31, 2018 January 31, 2018
Assets   
Current assets:   
Cash and cash equivalents$1,693,743  $1,134,355 
Marketable securities1,291,352  2,133,495 
Trade and other receivables, net457,496  528,208 
Deferred costs66,274  63,060 
Prepaid expenses and other current assets105,173  97,860 
Total current assets3,614,038  3,956,978 
Property and equipment, net678,525  546,609 
Deferred costs, noncurrent140,423  140,509 
Acquisition-related intangible assets, net35,927  34,234 
Goodwill175,073  159,376 
Other assets121,074  109,718 
Total assets$4,765,060  $4,947,424 
Liabilities and stockholders’ equity   
Current liabilities:   
Accounts payable$32,910  $20,998 
Accrued expenses and other current liabilities119,972  121,879 
Accrued compensation140,340  148,247 
Unearned revenue1,393,848  1,426,241 
Current portion of convertible senior notes, net226,877  341,509 
Total current liabilities1,913,947  2,058,874 
Convertible senior notes, net950,132  1,149,845 
Unearned revenue, noncurrent89,376  110,906 
Other liabilities36,381  47,434 
Total liabilities2,989,836  3,367,059 
Stockholders’ equity:   
Common stock218  211 
Additional paid-in capital3,869,111  3,354,423 
Treasury stock(193,679)  
Accumulated other comprehensive income (loss)(12,431) (46,413)
Accumulated deficit(1,887,995) (1,727,856)
Total stockholders’ equity1,775,224  1,580,365 
Total liabilities and stockholders’ equity$4,765,060  $4,947,424 
        


Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

 Three Months Ended July 31, Six Months Ended July 31,
 2018 2017 2018 2017
Revenues:       
Subscription services$565,659  $434,527  $1,087,808  $834,263 
Professional services106,061  90,793  202,555  170,918 
Total revenues671,720  525,320  1,290,363  1,005,181 
Costs and expenses (1):       
Costs of subscription services87,523  65,931  167,768  125,729 
Costs of professional services112,707  92,264  210,433  169,177 
Product development292,840  221,103  556,424  417,542 
Sales and marketing202,464  171,952  395,235  327,661 
General and administrative65,168  55,699  120,749  106,901 
Total costs and expenses760,702  606,949  1,450,609  1,147,010 
Operating loss(88,982) (81,629) (160,246) (141,829)
Other income (expense), net1,613  938  (2,235) (725)
Loss before provision for (benefit from) income taxes(87,369) (80,691) (162,481) (142,554)
Provision for (benefit from) income taxes(1,213) 1,841  (1,915) 4,022 
Net loss$(86,156) $(82,532) $(160,566) $(146,576)
Net loss per share, basic and diluted$(0.40) $(0.40) $(0.75) $(0.71)
Weighted-average shares used to compute net loss per
share, basic and diluted
215,932  207,028  214,517  205,453 


(1)  Costs and expenses include share-based compensation expenses as follows:    
Costs of subscription services$8,521  $6,580  $16,398  $12,271 
Costs of professional services12,518  9,301  23,310  17,322 
Product development75,354  56,923  143,865  107,952 
Sales and marketing29,367  25,942  54,979  49,101 
General and administrative21,303  22,777  41,170  42,665 
            


Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 Three Months Ended July 31, Six Months Ended July 31,
 2018 2017 2018 2017
Cash flows from operating activities       
Net loss$(86,156) $(82,532) $(160,566) $(146,576)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:       
Depreciation and amortization42,226  33,501  80,890  65,298 
Share-based compensation expenses147,063  121,523  279,722  229,311 
Amortization of deferred costs17,061  14,009  33,421  27,646 
Amortization of debt discount and issuance costs17,490  6,785  35,629  13,735 
Other(4,894) 1,927  (14,183) 6,185 
Changes in operating assets and liabilities, net of business combinations:       
Trade and other receivables, net(104,758) (71,422) 63,944  40,393 
Deferred costs(23,943) (19,437) (36,549) (30,818)
Prepaid expenses and other assets(5,446) (8,968) 3,042  (12,018)
Accounts payable5,987  10,778  13,941  10,213 
Accrued expenses and other liabilities(15,182) (13,472) (3,555) (9,383)
Unearned revenue68,168  22,434  (53,887) 1,162 
Net cash provided by (used in) operating activities57,616  15,126  241,849  195,148 
Cash flows from investing activities       
Purchases of marketable securities(526,216) (285,197) (1,434,342) (898,448)
Maturities of marketable securities655,205  371,471  1,341,881  813,341 
Sales of marketable securities914,938  180,863  942,297  189,937 
Owned real estate projects(49,537) (22,996) (88,770) (52,535)
Capital expenditures, excluding owned real estate projects(53,346) (38,528) (102,208) (69,121)
Business combinations, net of cash acquired(26,737)   (26,737)  
Purchase of other intangible assets(1,000)   (1,000)  
Purchases of non-marketable equity and other investments(1,000) (5,000) (3,400) (5,450)
Sale and maturities of non-marketable equity and other investments  732    732 
Net cash provided by (used in) investing activities912,307  201,345  627,721  (21,544)
Cash flows from financing activities       
Payments on convertible senior notes(350,005)   (350,005)  
Proceeds from issuance of common stock from employee equity plans38,686  32,274  41,297  34,527 
Other(59) (32) (116) (76)
Net cash provided by (used in) financing activities(311,378) 32,242  (308,824) 34,451 
Effect of exchange rate changes(162) 715  (582) 583 
Net increase (decrease) in cash, cash equivalents, and restricted cash658,383  249,428  560,164  208,638 
Cash, cash equivalents, and restricted cash at the beginning of period1,037,435  501,104  1,135,654  541,894 
Cash, cash equivalents, and restricted cash at the end of period$1,695,818  $750,532  $1,695,818  $750,532 


    
 Three Months Ended July 31, Six Months Ended July 31,
 2018 2017 2018 2017
Supplemental cash flow data       
Cash paid for interest, net of amounts capitalized$14  $46  $33  $46 
Cash paid for income taxes1,492  1,262  3,206  2,608 
Non-cash investing and financing activities:       
Vesting of early exercised stock options$  $282  $  $564 
Purchases of property and equipment, accrued but not paid63,052  33,219  63,052  33,219 
Non-cash additions to property and equipment307  485  365  627 


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


Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended July 31, 2018
(in thousands, except percentages and per share data)
(unaudited)

 GAAP Share-Based
Compensation
Expenses
 Other
Operating
Expenses (2)
 Amortization
of Debt
Discount and
Issuance
Costs
 Income Tax
Effects (3)
 Non-GAAP
Costs and expenses:           
Costs of subscription services$87,523  $(8,521) $(3,787) $  $  $75,215 
Costs of professional services112,707  (12,518) (519)     99,670 
Product development292,840  (75,354) (3,960)     213,526 
Sales and marketing202,464  (29,367) (1,039)     172,058 
General and administrative65,168  (21,303) (731)     43,134 
Operating income (loss)(88,982) 147,063  10,036      68,117 
Operating margin(13.2)% 21.9% 1.4% % % 10.1%
Other income (expense), net1,613      17,490    19,103 
Income (loss) before provision for (benefit from) income taxes(87,369) 147,063  10,036  17,490    87,220 
Provision for (benefit from) income taxes(1,213)       16,004  14,791 
Net income (loss)$(86,156) $147,063  $10,036  $17,490  $(16,004) $72,429 
Net income (loss) per share (1)$(0.40) $0.68  $0.05  $0.08  $(0.10) $0.31 

(1)         GAAP net loss per share is calculated based upon 215,932 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share is calculated based upon 237,404 diluted weighted-average shares of common stock.
(2)         Other operating expenses include total employer payroll tax-related items on employee stock transactions of $4.7 million and amortization of acquisition-related intangible assets of $5.3 million.
(3)         We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the interim reporting periods. For fiscal 2019, we have determined the projected non-GAAP tax rate to be 17%.


Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended July 31, 2017
(in thousands, except percentages and per share data)
(unaudited)

 GAAP Share-Based
Compensation
Expenses
 Other
Operating
Expenses (2)
 Amortization
of Debt
Discount and
Issuance
Costs
 Non-GAAP
Costs and expenses:         
Costs of subscription services$65,931  $(6,580) $(208) $  $59,143 
Costs of professional services92,264  (9,301) (379)   82,584 
Product development221,103  (56,923) (6,602)   157,578 
Sales and marketing171,952  (25,942) (1,126)   144,884 
General and administrative55,699  (22,777) (754)   32,168 
Operating income (loss)(81,629) 121,523  9,069    48,963 
Operating margin(15.5)% 23.1% 1.7% % 9.3%
Other income (expense), net938      6,785  7,723 
Income (loss) before provision for (benefit from) income taxes(80,691) 121,523  9,069  6,785  56,686 
Provision for (benefit from) income taxes1,841        1,841 
Net income (loss)$(82,532) $121,523  $9,069  $6,785  $54,845 
Net income (loss) per share (1)$(0.40) $0.59  $0.04  $0.01  $0.24 

(1)         GAAP net loss per share is calculated based upon 207,028 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share is calculated based upon 225,610 diluted weighted-average shares of common stock.
(2)         Other operating expenses include total employer payroll tax-related items on employee stock transactions of $4.3 million and amortization of acquisition-related intangible assets of $4.8 million.


Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Six Months Ended July 31, 2018
(in thousands, except percentages and per share data)
(unaudited)

 GAAP Share-Based
Compensation
Expenses
 Other
Operating
Expenses (2)
 Amortization
of Debt
Discount and
Issuance
Costs
 Income Tax
Effects (3)
 Non-GAAP
Costs and expenses:           
Costs of subscription services$167,768  $(16,398) $(8,239) $  $  $143,131 
Costs of professional services210,433  (23,310) (2,220)     184,903 
Product development556,424  (143,865) (12,757)     399,802 
Sales and marketing395,235  (54,979) (3,619)     336,637 
General and administrative120,749  (41,170) (2,598)     76,981 
Operating income (loss)(160,246) 279,722  29,433      148,909 
Operating margin(12.4)% 21.7% 2.2% % % 11.5%
Other income (expense), net(2,235)     35,629    33,394 
Income (loss) before provision for (benefit from) income taxes(162,481) 279,722  29,433  35,629    182,303 
Provision for (benefit from) income taxes(1,915)       32,870  30,955 
Net income (loss)$(160,566) $279,722  $29,433  $35,629  $(32,870) $151,348 
Net income (loss) per share (1)$(0.75) $1.30  $0.14  $0.17  $(0.22) $0.64 

(1)         GAAP net loss per share is calculated based upon 214,517 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share is calculated based upon 236,706 diluted weighted-average shares of common stock.
(2)         Other operating expenses include total employer payroll tax-related items on employee stock transactions of $19.0 million and amortization of acquisition-related intangible assets of $10.4 million.
(3)         We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the interim reporting periods. For fiscal 2019, we have determined the projected non-GAAP tax rate to be 17%.


Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Six Months Ended July 31, 2017
(in thousands, except percentages and per share data)
(unaudited)

 GAAP Share-Based
Compensation
Expenses
 Other
Operating
Expenses (2)
 Amortization
of Debt
Discount and
Issuance
Costs
 Non-GAAP
Costs and expenses:         
Costs of subscription services$125,729  $(12,271) $(754) $  $112,704 
Costs of professional services169,177  (17,322) (1,285)   150,570 
Product development417,542  (107,952) (15,564)   294,026 
Sales and marketing327,661  (49,101) (2,800)   275,760 
General and administrative106,901  (42,665) (2,072)   62,164 
Operating income (loss)(141,829) 229,311  22,475    109,957 
Operating margin(14.1)% 22.8% 2.2% % 10.9%
Other income (expense), net(725)     13,735  13,010 
Income (loss) before provision for (benefit from) income taxes(142,554) 229,311  22,475  13,735  122,967 
Provision for (benefit from) income taxes4,022        4,022 
Net income (loss)$(146,576) $229,311  $22,475  $13,735  $118,945 
Net income (loss) per share (1)$(0.71) $1.12  $0.11  $0.01  $0.53 

(1)         GAAP net loss per share is calculated based upon 205,453 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share is calculated based upon 223,825 diluted weighted-average shares of common stock.
(2)         Other operating expenses include total employer payroll tax-related items on employee stock transactions of $12.8 million and amortization of acquisition-related intangible assets of $9.7 million.


Workday, Inc.
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(A Non-GAAP Financial Measure)
(in thousands)
(unaudited)

 Three Months Ended July 31, Six Months Ended July 31,
 2018 2017 2018 2017
Net cash provided by (used in) operating activities$57,616  $15,126  $241,849  $195,148 
Capital expenditures, excluding owned real estate projects(53,346) (38,528) (102,208) (69,121)
Free cash flows$4,270  $(23,402) $139,641  $126,027 


  
 Trailing Twelve Months Ended July 31,
 2018 2017
Net cash provided by (used in) operating activities$512,428  $376,435 
Capital expenditures, excluding owned real estate projects(174,623) (128,917)
Free cash flows$337,805  $247,518 


About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Workday's results, we have disclosed the following non-GAAP financial measures: non-GAAP operating income (loss), non-GAAP net income (loss) per share, and free cash flows. Workday has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. Non-GAAP operating income (loss) differs from GAAP in that it excludes share-based compensation expenses, employer payroll tax-related items on employee stock transactions, and amortization of acquisition-related intangible assets. Non-GAAP net income (loss) per share differs from GAAP in that it excludes share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization of acquisition-related intangible assets, non-cash interest expense related to our convertible senior notes, and income tax effects. Free cash flows differ from GAAP cash flows from operating activities in that it treats capital expenditures (excluding owned real estate projects) as a reduction to cash flows.

Workday's management uses these non-GAAP financial measures 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 Workday's financial performance and the ability of operations to generate cash. Management believes these non-GAAP financial measures reflect Workday's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in Workday's business, as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Workday's operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Additionally, management believes information regarding free cash flows provides investors and others with an important perspective on the cash flows generated by normal recurring activities to make strategic acquisitions and investments, to fund ongoing operations, and to fund other capital expenditures.

Management believes excluding the following items from the GAAP Condensed Consolidated Statements of Operations is useful to investors and others in assessing Workday's operating performance due to the following factors:

  • 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 forfeitures 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 ongoing operations.
  • Amortization of debt discount and issuance costs. Under GAAP, we are required to separately account for liability (debt) and equity (conversion option) components of the convertible senior notes that were issued in private placements in June 2013 and September 2017. Accordingly, for GAAP purposes we are required to recognize the effective interest expense on our convertible senior notes and amortize the issuance costs over the term of the notes. The difference between the effective interest expense and the contractual interest expense, and the amortization expense of issuance costs are excluded from management's assessment of our operating performance because management believes that these non-cash expenses are not indicative of ongoing operating performance. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of Workday's operational performance.
  • Income tax effects. We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the interim reporting periods. In projecting this long-term non-GAAP tax rate, we utilize a three-year financial projection that excludes the direct impact of share-based compensation and related employer payroll taxes, amortization of acquisition-related intangible assets, and amortization of debt discount and issuance costs. The projected rate also assumes no new acquisition activity in the three-year period and considers other factors such as our current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where we operate. For fiscal 2019, we have determined the projected non-GAAP tax rate to be 17%. We will periodically re-evaluate this tax rate, as necessary, for significant events, based on our ongoing analysis of the 2017 U.S. Tax Cuts and Jobs Act, relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.

Additionally, we believe that the non-GAAP financial measure free cash flows is meaningful to investors because we review cash flows generated from or used in operations after deducting certain capital expenditures that are considered to be an ongoing operational component of our business. Capital expenditures deducted from cash flows from operations do not include purchases of land and buildings or construction costs of our new development center and of other owned buildings. We exclude these owned real estate projects as they are infrequent in nature. For the current fiscal year, these costs primarily represent the construction of our new development center, which is anticipated to be completed in fiscal 2020.

The use of non-GAAP operating income (loss) and non-GAAP net income (loss) per share measures has certain limitations as they do not reflect all items of income and expense that affect Workday's operations. Workday compensates 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. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review Workday's financial information in its entirety and not rely on a single financial measure.

Investor Relations Contact:
Michael Magaro
+1 (925) 379-6000
Michael.Magaro@Workday.com

Media Contact: 
Jeff Shadid
+1 (405) 834-7777
Jeff.Shadid@Workday.com

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Source: Workday, Inc.