TABLE OF CONTENTS
| PART I | ||
| Item 1. | ||
| Item 1A. | ||
| Item 1B. | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| PART II | ||
| Item 5. | ||
| Item 6. | ||
| Item 7. | ||
| Item 7A. | ||
| Item 8. | ||
| Item 9. | ||
| Item 9A. | ||
| Item 9B. | ||
| PART III | ||
| Item 10. | ||
| Item 11. | ||
| Item 12. | ||
| Item 13. | ||
| Item 14. | ||
| PART IV | ||
| Item 15. | ||
| Item 16. | ||
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements.statements, which are subject to safe harbor protection under the Private Securities Litigation Reform Act of 1995. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,“believe,” “may,“may,” “will,“will,” “estimate,“estimate,” “continue,“continue,” “anticipate,“anticipate,” “intend,“intend,” “expect,“expect,” “seek”,“seek,”“plan,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the “Risk Factors” section.“Risk Factors” section, which we encourage you to read carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied inby the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
As used in this report, the terms “Workday,“Workday,” “Registrant,“registrant,” “we,“we,” “us,“us,” and “our”“our” mean Workday, Inc. and its subsidiaries unless the context indicates otherwise.
Our fiscal year ends on January 31. References to fiscal 2019, for example, refer to the year ended January 31, 2019.
ITEM 1. BUSINESS
Overview
Workday is a leading provider of enterprise cloud applications for finance and human resources. Founded in 2005, Workday delivers financial management, human capital management, planning, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies. Organizations headquartered around the globe, ranging from medium-sized businesses to the world's largestFortune 50 enterprises have selected Workday. We achieved this leadership position through our innovative and adaptable technology, focus on the consumer Internet experience and cloud delivery model.commitment to customer satisfaction.
Organizations today operate in environments that are highly complex and changing at an increasing rate. Managers and employees must quickly synthesize vast amounts of information and react to rapid changes in global business and regulatory environments. To be successful, they need highly functional and flexible software that enables informed decision-making about the enterprise-wide allocation of their resources. Additionally, managers and employees expect to interact with enterprise systems in an open, intuitive, and collaborative way, including real-time access through a wide range of mobile and computing devices. We believe that legacy, on-premise systems make those interactions difficult, as their user interfaces are not intuitive and were not originally designed for mobility.
Workday is leading the way in helping organizations better manage their financial and human capital resources. As part of our applications, we provide embedded analytics that capture the content and context of everyday business events, facilitating fast and informed decision-making from wherever users are working. In addition, we provide an intuitive user experience similar to those of leading consumer Internetinternet sites, reducing the time for training on our applications.
Since Workday is delivered in the cloud, organizations can embrace change in their operating environments with support for new regulatory requirements, increased performance, and enhancement of the user experience that we deliver through our rapid innovation cycle of frequent functionality-rich feature releases. We deliver continuous innovation regularly, with major feature releases delivered two times per year, as partin addition to weekly updates where smaller sets of our customers' subscription agreement.features are delivered to customers with minimal downtime disruption. When the new feature releases are delivered, the prior version is fully replaced. As a result, all Workday customers are on the same version at all times. Feature releases are included in our customers’ Workday subscription and are not subject to an additional fee. Workday customers benefit from the most current technologies without the burden of large upgrade costs typically associated with traditional on-premise software.
We deliver our cloud applications using an innovative technology foundation that leverages the most recent advances in cloud computing and data management and allows us to deliver applications that are highly functional, flexible, and fast. Our use of a multi-tenant architecture in which customers are on the same version of our software enables innovations to be deployed quickly. In addition, we use objects to represent real-world entities such as employees, benefits, budgets, charts of accounts, and organizations, combining business logic and data in one place and creating actionable analytics that are part of our core transactional systems of record. Our use of in memory data management allows rapid and efficient delivery of embedded business intelligence. Workday leverages machine learning in our applications to help customers make smarter financial and workforce decisions. We also provide open, standards-based web-services application programming interfaces and pre-built packaged integrations and connectors. This shift in approach substantially reduces the need for our customers to buy and support a broad range of IT infrastructure, significantly reducing costs and complexity.
Our ApplicationsProducts
Workday Financial Management
Workday Financial Management is a comprehensive, unified application built on a single, global core with a full range of financial capabilities, relevant analytics and metrics, and fully auditable process management built to help manage financial processes for global organizations.
Workday Financial Management provides the core finance functions of general(general ledger, global accounting, accounts payable, accounts receivable, cash management, asset management, employee expense management, revenue management, projects, procurement, inventory, and grants management.management). It also supports built-in financial, operational, and management reporting and analysis in real time without the use of complex and expensive bolt-on business intelligence systems.
Financial Management Complementary Solutions
Workday Expenses provides organizations with a user-friendly platform to capture, monitor, and control employee expenses on any device.
Workday Procurement provides a single solution to manage and provide complete visibility across the procure-to-pay process for both goods and services spend.
Workday Inventory helps organizations manage their internal supply chain with an end-to-end solution for all aspects of the materials management process for goods and supplies that are used internally.
Workday Professional Services Automation supports the complete billable projects lifecycle, including project and resource management, time and expense tracking, project billing, revenue recognition, financial reporting, and analytics within a single, unified solution.
Workday Human Capital Management (HCM)
Designed for the largest organizations in the world, Workday Human Capital Management (HCM)(“HCM”) allows an organization to staff, pay, organize, and develop its global workforce. This unified application includes global human resources management (workforce lifecycle management, organization management, compensation, absence, and employee benefits administration) and global talent management (goal management, performance management, succession planning, and career and development planning).
Workday offers a variety of other applications that complement and are unified with Workday Financial Management and Workday HCM. Workday Recruiting is an end-to-end application that supports the needs of candidates, hiring managers, the interview team, and recruiters.
Workday Time Tracking, our time and attendance application, is designed to automate workforce management processes and thereby reduce costs and compliance risks.
Workday Payroll is designed to address the full spectrum of enterprise payroll needs and provides control, accuracy, and flexibility, with native payroll offerings in the U.S., Canada, andthe United Kingdom (“UK”), and France, as well as a global payroll cloud partner program to support additional customer needs.
Workday Time Tracking, our timeLearning combines the capabilities of an enterprise-grade learning system with modern social content sharing and attendance application,curation in one platform.
Business Planning, Analytics, and Other Solutions
Workday offers a variety of other solutions that are unified with Workday Financial Management and Workday HCM.
Adaptive Insights Business Planning Cloud is designeda solution with built-in intelligence for finance, human resources, and sales teams, with powerful and flexible modeling capabilities that enables collaborative, company-wide business planning.
Workday Prism Analytics enables customers to automate workforce management processesbring together any data, including Workday data and thereby reduce costs and compliance risks. Workday Professional Services Automation (PSA) supports the complete billable projects lifecycle, including project and resource management, time and expense tracking, project billing, revenue recognition, financial reporting, anddata from any outside source, with leading-edge analytics within a single, unified solution. Workday Insight Applications leverages advanced data science and machine learning methodologies to help customers make smartertools for enriched financial and workforce decisions, including retention risk analysis through Workday Talent Insights. people analytics to make better business decisions.
Workday Student Recruiting and Workday Student Admissions are available as part of Workday Student, an end-to-endis a student and faculty lifecycle information system to help colleges and universities advance their institutions and enable student success. The Workday Student application suite includes: Academic Foundation, Student Recruiting, Student Admissions, Curriculum Management, Student Records, Academic Advising, Financial Aid, Student Financials, and Student Recruiting.
Workday Data-as-a-Service (“DaaS”) is a cloud service that provides valuable data to customers to enable more informed decision-making. The first service delivered on the DaaS offering, Workday Benchmarking, provides key metrics to customers seeking a better understanding of their company’s relative performance in comparison to peers to help achieve optimal performance in their respective markets.
Customers
We have built a company culture centered around our customers’ success and satisfaction. We have developed several programs designed to provide customers with service options to enhance their experience with our applications. These services include 24x7 support; a professional services ecosystem that consists of our Workday consulting teams and system integrators that are trained on our applications; a Customer Success Management group to assist customers in production; and an online community to facilitate collaboration among customers and with the Workday applicationproduct development teams.
Employees
As of January 31, 2016,2019, we had approximately 5,20010,500 employees. We also engage contractors and consultants. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be very good.
Backlog
Backlog, which is equivalent to our remaining performance obligations, represents our total contractual commitments for which services will be performed. Backlog generally increases with bookings and generally converts into revenue as contractual commitments are fulfilled. For further information, see Note 14 of the notes to consolidated financial statements.
Sales and Marketing
We sell the Workday Servicesubscription services primarily through our direct sales organization, thatwhich is comprised of field sales and field sales support personnel. Workday’s field sales team is aligned by geography, and the number of employees in aindustry, and/or prospect account.size.
We generate customer leads, accelerate sales opportunities, and build brand awareness through our marketing programs and through our strategic relationships. Our marketing programs target senior business leaders, including finance, HRhuman resources, and IT executives.
As a core part of our strategy, we have developed an ecosystem of partners to both broaden and complement our application offerings and to provide services that lieare outside of Workday’s areas of focus. These relationships include software and technology partners, consulting and implementation servicesservice providers, and business process outsourcing (BPO) partners, andwhich enable Workday to address the finance and HR-relatedhuman resources-related challenges our customers face while maintaining focus on executing against our strategy.
Product Development
Our ability to compete depends in large part on our continuous commitment to product development and our ability to rapidly introduce new applications,products, technologies, features, and functionality. Our product development organization is responsible for the design, development, testing, and certification of our applications.products. We focus our efforts on developing new applicationsproducts and core technologies andas well as further enhancing the usability, functionality, reliability, performance, and flexibility of existing applications.products.
Competition
The overall market for enterprise application software is rapidly evolving, highly competitive, and subject to changing technology, shifting customer needs, and frequent introductions of new applications.products. We currently compete with large, well-established, enterprise application software vendors, such as SAP SE (SAP)(“SAP”) and Oracle Corporation (Oracle)(“Oracle”). SAP and Oracle are established enterprise software companies that have greater name recognition, much longer operating histories, and significantly greater financial, technical, sales, marketing, and other resources than we have and are able to provide a broader scope of business applications than our current suite of applications. We also face competition from other enterprise software vendors and from vendors of specific applications, some of which offer cloud-based solutions. These vendors include The Ultimate Software Group, Inc., AutomatedAutomatic Data Processing, Inc. (ADP), Infor, Inc., Ceridian HCM Holding Inc., Microsoft Corporation, and Infor Global Solutions, among others. We also face competition from cloud-based vendors including: providers of applications for HCM and payroll services, such as Ceridian, Inc. and providers of financial management applications such as NetSuite,Anaplan, Inc. We may also face competition from a variety of vendors of cloud-based and on-premise software applications that address only one or a portion of one of our applications. In addition, other cloud companies that provide services in different markets may develop solutions in our target markets, and some potential customers may elect to develop their own internal solutions. However, the domain expertise that is required for a successful solution in the areas of financial management, HCM, and analytics may inhibit new entrants that are unable to invest the necessary capital to accurately reflect global requirements and regulations. We expect continued consolidation in our industry that could lead to significantly increased competition.
We believe the principal competitive factors in our market include the following:
level of customer satisfaction;
ease of deployment and use of applications;
breadth and depth of application functionality;
total cost of ownership;
brand awareness and reputation;
capability for configuration, integration, security, scalability, and reliability of applications;
ability to innovate and respond to customer needs rapidly;
domain expertise on financial, HRhuman resources, and payroll regulations;
size of customer base and level of user adoption;
customer confidence in financial stability and future viability; and
ability to integrate with legacy enterprise infrastructures and third-party applications.
We believe that we compete favorably on the basis of these factors. Our ability to remain competitive will largely depend on our ongoing performance in the areas of applicationproduct development and customer support.
Intellectual Property
We rely on a combination of trade secrets, patents, copyrights, and trademarks, as well as contractual protections, to establish and protect our intellectual property rights. We require our employees, contractors, consultants, and other third parties to enter into confidentiality and proprietary rights agreements, and we control access to software, documentation, and other proprietary information. Although we rely on intellectual property rights, including trade secrets, patents, copyrights, and trademarks, as well as contractual protections and controls to establish and protect our proprietary rights, we believe that factors such as the technological and creative skills of our personnel, creation of new modules,products, features and functionality, and frequent enhancements to our applications are more essential to establishing and maintaining our technology leadership position. Our patents begin to expire in 2017.
Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy or obtain and use our technology to develop applications with the same functionality as our application.applications. Policing unauthorized use of our technology and intellectual property rights is difficult.
We expect that software and other applications in our industry may be subject to third-party infringement claims as the number of competitors grows and the functionality of applications in different industry segments overlaps. Any of these third parties mightmay make a claim of infringement against us at any time.
Corporate Information
We were incorporated in March 2005 in Nevada, and in June 2012 we reincorporated in Delaware. Our principal executive offices are located at 62306110 Stoneridge Mall Road, Pleasanton, California 94588, and our telephone number is (877) WORKDAY. Our website address is www.workday.com. The information on, or that can be accessed through, our website is not part of this report. Workday, is our registered trademark in the United States, the European Community, Canada, Norway, Switzerland, New Zealand, Hong Kong and Australia and the Workday logo, our Built for the Future tagline, and allother trademarks of our product namesours are our trademarks.registered intellectual property in the United States and elsewhere. Other trademarks, service marks, or trade names appearing in this report are the property of their respective owners.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements, and amendments to reports filed or furnished pursuant to Sections 13(a), 14, and 15(d) of the Securities Exchange Act of 1934, as amended.amended, (the “Exchange Act”). The public may obtain these filings atfrom the Securities and Exchange Commission (SEC)(“SEC”)’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov, thatwhich contains reports, proxy and information statements, and other information regarding Workday and other companies that file materials with the SEC electronically. Copies of Workday’s reports on Form 10-K, Forms 10-Q, and Forms 8-K, may be obtained, free of charge as soon as reasonably practicable after we file such material with, or furnish such material to, the SEC, electronically through our internet website, http://www.workday.com/company/investor_relations/sec_filings.php.
ITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including the consolidated financial statements and the related notes included elsewhere in this report, before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that materially and adversely affect our business. If any of the following risks actually occurs, our business operations, financial condition, results of operations, and prospects could be materially and adversely affected. The market price of our securities could decline due to the materialization of these or any other risks, and you could lose part or all of your investment.
Risk Factors Related to Our Business
If our security measures are breached or unauthorized access to customer data is otherwise obtained, our applications may be perceived as not being secure, customers may reduce the use of or stop using our applications, and we may incur significant liabilities.
Our applications involve the storage and transmission of our customers’ sensitive and proprietary information, including personal or identifying information regarding their employees, customers, and suppliers, as well as their finance and payroll data.data, and other sensitive business information. As a result, unauthorized or excessive access or security breachesuse of this data could resultexpose us to regulatory actions, litigation, investigations, remediation obligations, damage to our reputation and brand, supplemental disclosure obligations, loss of customer and partner confidence in the losssecurity of our applications, destruction of information, litigation, indemnity obligations, and resulting fees, costs, expenses, loss of revenues, and other potential liabilities. We devote significant financial and personnel resources to implement and maintain security measures. While we have security measures in place designed to protect the integrity of customer information and prevent data loss, misappropriation, and other security breaches, if these measures are breachedcompromised as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance, or otherwise, and someone obtains unauthorized access to or use of our customers’ data, our reputation could be damaged, our business may suffer, and we could incur significant liabilities. Becauseliabilities as well as incur significant costs to remediate any incidents.
Cybersecurity challenges, including threats to our own IT infrastructure or those of our customers or third-party providers, are often targeted at companies such as ours and may take a variety of forms ranging from individual and groups of hackers to sophisticated organizations, including state-sponsored actors. Key cybersecurity risks range from viruses, worms, and other malicious software programs to “mega breaches” targeted against cloud services and other hosted software, any of which can result in disclosure of confidential information and intellectual property, defective products, production downtimes, supply shortages, and compromised data. As the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
Furthermore, we have acquired a number of companies, products, services, and technologies over the years. Although we devote significant resources to address any security issues with respect to such acquisitions, we may still inherit additional risks when we integrate these companies within Workday. In addition, if a high-profile security breach occurs with respect to an industry peer, our customers and potential customers may generally lose trust in the security of financial management and HCM applications, analytics platforms, or in cloud applications for enterprises in general. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect to terminate or not renew their subscriptions, result in reputational damage, cause us to pay remediation costs and/or issue refunds or service credits or refunds to customers for prepaid and unused subscription services, require us to compensate our customers for certain losses, or result in lawsuits, regulatory fines, or other action or liabilities, which could adversely affect our business and operating results.
We depend on data centers and computing infrastructure operated by third parties, and any disruption in these operations could adversely affect our business.
We host our applications and serve all of our customers from data centers located in Ashburn, Virginia; Atlanta, Georgia; Portland, Oregon; Dublin, Ireland;the United States, Europe, and Amsterdam, the Netherlands.Canada. While we control and have access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation and security of these facilities. The owners of our data center facilities have limited or no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired or ceases business, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and experience possible service interruption in connection with doing so.
In addition, we rely upon third-party hosted infrastructure partners globally, including Amazon Web Services (AWS), which provides a distributed computing infrastructure platform for business operations,(“AWS”) and Dimension Data, to serve customers and operate certain aspects of our services, such as environments for development testing, training, sales demonstrations, and sales demonstrations.production usage. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference withat our use of AWShosted infrastructure partners would impact our operations and our business could be adversely impacted.
Problems faced by our third-party data center operations or hosted infrastructure partners, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, or problems faced by AWS, could adversely affect the experience of our customers. Our third-party data center operators or hosted infrastructure partners could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data center operators, our hosted infrastructure partners, or any of the other service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers or AWShosted infrastructure partners are unable to keep up with our needs for capacity, this could have an adverse effect on our business. Any changes in third-party service levels at our data centers or at AWSour hosted infrastructure partners or any errors, defects, disruptions, or other performance problems with our applications or the hosted infrastructure on which they run could adversely affect our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits to customers for prepaid and unused subscription services, subject us to potential liabilities, result in contract terminations, or adversely affect our renewal rates.
Furthermore, our financial management application is essential to Workday'sWorkday’s and our customers’ financial projections, reporting, and compliance programs, particularly customers who are public reporting companies. Any interruption in our service may affect the availability, accuracy or timeliness of such projections, reporting and compliance programs and as a result could damage our reputation, cause our customers to terminate their use of our applications, require us to indemnifyissue refunds for prepaid and unused subscription services, require us to compensate our customers againstfor certain losses, and prevent us from gaining additional business from current or future customers.customers as well as impact our ability to accurately and timely meet our reporting and other compliance obligations.
If we fail to manage our technical operations infrastructure or experience service outages or delays in the deployment of our applications, we may be subject to liabilities and our reputation and operating results may be adversely affected.
We have experienced significant growth in the number of users, transactions, and data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers, as well as our own needs, and to ensure that our services and solutions are accessible within an acceptable load time. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters, updates, the evolution of our applications, and to reduce infrastructure latency associated with dispersed geographic locations. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages. If our operations infrastructure fails to scale, new customers may experience delays as we seek to obtain additional capacity.capacity, and no assurance can be made that we will be able to secure such additional capacity at the same or similar terms we currently have, which could result in a significant increase in our operating costs. Furthermore, any failure to scale and secure additional capacity could result in delays in new feature rollouts, reduce the demand for our applications, result in customer dissatisfaction, and adversely affect our business and results of operations.
We have experienced, and may in the future experience, system disruptions, outages, and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, vendor issues, human or software errors, viruses, security attacks (internal and external), fraud, spikes in customer usage, and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Our customer agreements typically provide service level commitments on a monthly basis. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our applications, we may be contractually obligated to issue refundsservice credits or service creditsrefunds to customers for prepaid and unused subscription services, our customers may make warranty or other claims against us, or we could face contract terminations.terminations, which would adversely affect our attrition rates. Any extended service outages could result in customer losses and adversely affect our reputation, revenuesbusiness, and operating results.
Privacy concerns and laws or other domestic or foreign laws and regulations may reduce the effectiveness of our applications, result in significant costs and compliance challenges, and adversely affect our business.
Our customers can use our applications to collect, use, and store personal or identifying information regarding a variety of individuals in connection with their operations, including but not limited to their employees, contractors, students, job applicants, customers, and suppliers. National and local governments and agencies in the countries in which our customers operate have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage, processing, and disclosure of personal information obtained from consumers and individuals, which could impact our ability to offer our services in certain jurisdictions or our customers'customers’ ability to deploy our solutions globally. Privacy-related laws are particularly stringent in Europe. The costs of compliance with and other burdens imposed by privacy-related laws, regulations, and standards may limit the use and adoption of our services, reduce overall demand for our services, lead to significant fines, penalties, or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business. Moreover, if Workday employeeswe or our subprocessors fail to adhere to adequate data protection practices around the usage of our customer’scustomers’ personal data, we may be liable for certain losses of our customers, and it may damage our reputation and brand.
Additionally, we expect that existing laws, regulations, and standards may be interpreted in new and differing manners in the future, and may be inconsistent among jurisdictions. For example, the European Court of Justice in October 2015 issued a ruling immediately invalidating the U.S.-EU Safe Harbor Framework, which facilitated personal data transfers to the U.S. in compliance with applicable European data protection laws. While we do not depend upon the U.S.-EU Safe Harbor Framework for transferring European personal data to the U.S., there is regulatory uncertainty surrounding how data transfers from the European Union to the U.S. will be authorized in the future and different European data protection regulators could apply differing standards for the transfer of personal data. Future laws, regulations, standards, and other obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could result in increased regulation, costincreased costs of compliance and penalties for non-compliance, and limitations on data collection, use, disclosure, and transfer for Workday and our customers,customers. In 2016, the European Union (“EU”) adopted a new regulation governing data privacy called the General Data Protection Regulation (“GDPR”), which could decreasebecame effective in May 2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to 4% of worldwide revenue. Customers, particularly in the EU, are seeking assurances from their suppliers, including us, that their processing of personal data of EU nationals is in accordance with the GDPR. If we are unable to provide adequate assurances to such customers, demand for our applications require uscould be adversely affected. In addition, we must continue to restrictseek assurances from our business operations,subprocessors that they are handling personal data in accordance with GDPR requirements in order to meet our own obligations under the GDPR. In addition, in June 2018, the California Consumer Privacy Act (“CCPA”), which takes effect on January 1, 2020, was enacted. The CCPA gives California consumers certain rights similar to those provided by the GDPR, and impair our ability to maintain and grow our customer base and increase our revenue.customers may seek similar assurances from suppliers regarding compliance.
The costs of compliance with, and other burdens imposed by, privacy laws and regulations that are applicable to the businesses of our customers may adversely affect our customers’ ability and willingness to process, handle, store, use, and transmit demographic and personal information of their employees, customers and suppliers,data, which in turn could limit the use, effectiveness, and adoption of our applications and reduce overall demand. In addition, the other bases on which we and our customers rely on for the transfer of data, such as model contracts, continue to be subjected to regulatory and judicial scrutiny. In 2016, the EU and United States agreed to the Privacy Shield framework for data transferred from the EU to the United States, but this new framework has been challenged by private parties and may face additional challenges by national regulators or additional private parties. In 2017, another legal challenge to the validity of the EU Standard Contractual Clauses (a data transfer mechanism) was referred to the Court of Justice of the EU for review. If we or our customers are unable to transfer data between and among countries and regions in which we operate, it could decrease demand for our applications, require us to restrict our business operations, and impair our ability to maintain and grow our customer base and increase our revenue. Even the perception of privacy concerns, whether or not valid, may inhibit the adoption, effectiveness, or use of our applications.
In addition to government activity, privacy advocacy groups and the technology and other industriesindustry groups have established or may establish various new, additional, or different self-regulatory standards that may place additional burdens on us. Our customers may expect us to meet voluntary certifications such as ISO 27018 or adhere to other standards established by third parties, such as TRUSTe.parties. If we are unable to maintain these certifications or meet these standards, it could reduce demand for our applications and adversely affect our business.
We have experienced rapid growth. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and operational controls, or adequately address competitive challenges.
We have experienced, and are continuing to experience, a period of rapid growth in our customers, headcount, and operations. In particular, we grew from approximately 3001,550 employees asat the time of December 31, 2008our initial public offering (“IPO”) in October 2012 to approximately 5,20010,500 employees as of January 31, 2016,2019, and we have also significantly increased the size of our customer base. We anticipate that we will significantlycontinue to expand our operations and headcount in the near term, and will continue to expand our customer base. This growth has placed, and future growth will place, a significant strain on our management, general and administrative resources, and operational infrastructure. Our success will depend in part on our ability to manage this growth effectively and to scale our operations. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial, and management controls andas well as our reporting systems and procedures. As we continue to grow, we also need to ensure that our policies and procedures evolve to reflect our current operations and are appropriately communicated to and observed by employees, and that we appropriately manage our corporate information assets, including confidential and proprietary information. Failure to effectively manage growth could result in difficulty or delays in deploying customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features, or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.
We depend on our senior management team and the loss of one or more key employees could adversely affect our business.
Our success dependsand future growth depend largely upon the continued services of our executive officers.officers and other key employees. We also rely on our leadership team in the areas of product development, marketing, sales, services, and general and administrative functions and on mission-critical individual contributors in product development. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period, and they could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees and any failure to develop an appropriate succession plan for these persons could have a serious adverse effect on our business.business and results of operations.
To execute our growth plan, we must attract and retain highly qualified personnel, and our managers must be successful in hiring employees who are a good cultural fitshare our values and have the competencies to succeed at Workday. Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and Internet-relatedinternet-related services, and for senior sales executives. From time to time, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications, and we may not be able to fill positions in desired geographic areas or at all.
Many of the companies with which we compete for experienced personnel have greater resources than we have and some of these companies may offer greatermore lucrative compensation packages. Particularly in the San Francisco Bay Area, job candidates and existing employees carefully consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, or if the mix of equity and cash compensation that we offer is unattractive, it may adversely affect our ability to recruit and retain highly skilled employees. Job candidates may also be threatened with legal action byunder agreements with their existing employers if we attempt to hire them, which could have a chilling effect on hiring and result in a diversion of our time and resources. Additionally, laws and regulations, such as restrictive immigration laws, and restrictions on travel or availability of visas, may limit our ability to recruit internationally. We must also continue to retain and motivate existing employees through our compensation practices, company culture, and career development opportunities. If we fail to attract new personnel or to retain our current personnel, our business and future growth prospects could be adversely affected.
If we cannot maintain our corporate culture, we could lose the innovation, teamwork, and passion that we believe contribute to our success, and our business may be harmed.
We believe that a critical component of our success has been our corporate culture, as reflected in our core values: employees, customer service, innovation, integrity, fun, and fun.profitability. We have invested substantial time and resources in building our team. As we continue to grow, both organically and through acquisitions of employee teams, and develop the infrastructure associated with being a more mature public company, we will need to maintain our corporate culture among a larger number of employees.employees dispersed in various geographic regions. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.
The markets for financial management and HCM applications are highly competitive, with relatively low barriers to entry for some applications or services. Our primary competitors are SAP and Oracle, well-established providers of financial management and HCM applications, which have long-standing relationships with many customers. Some customers may be hesitant to switch vendors or to adopt cloud applications such as ours and may prefer to maintain their existing relationships with competitors. SAP and Oracle are larger and have greater name recognition, muchsignificantly longer operating histories, larger marketing budgets, and significantly greater resources than we do. These vendors, as well as other competitors, could offer financial management and HCM applications on a standalone basis at a low price or bundled as part of a larger product sale. In order to take advantage of customer demand for cloud applications, legacy vendors are expanding their cloud applications through acquisitions, strategic alliances, and organic development. Legacy vendors may also seek to partner with other leading cloud providers, such as the alliance between Oracle and Salesforce.com. We also face competition from custom-built software vendors and from vendors of specific applications, some of which offer cloud-based solutions. These vendors include, without limitation: The Ultimate Software Group, Inc., Automatic Data Processing, Inc., Infor, Inc., Ceridian HCM Holding Inc., Microsoft Corporation, and Infor Global Solutions. We also face competition from cloud-based vendors including providers of applications for HCM and payroll services such as Ceridian and providers of financial management applications such as NetSuite,Anaplan, Inc. We may also face competition from a variety of vendors of cloud-based and on-premise software applications that address only one or a portion of one of our applications. In addition, other companies that provide cloud applications in different target markets may develop applications or acquire companies that operate in our target markets, and some potential customers may elect to develop their own internal applications. With the introduction of new technologies and market entrants, we expect this competition to intensify in the future.
Many of our competitors are able to devote greater resources to the development, promotion, and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition. In addition, many of our competitors have established marketing relationships, access to larger customer bases, and major distribution agreements with consultants, system integrators, and resellers. Our competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their product offerings or resources. If our competitors’ products, services, or technologies become more accepted than our applications,products, if they are successful in bringing their products or services to market earlier than ours, or if their products or services are more technologically capable than ours, then our revenues could be adversely affected. In addition, some of our competitors may offer their products and services at a lower price. If we are unable to achieve our target pricing levels, our operating results would be negatively affected. Pricing pressures and increased competition could result in reduced sales, reduced margins, losses, or a failure to maintain or improve our competitive market position, any of which could adversely affect our business.
If the market for enterprise cloud computing grows more slowly than in recent years, our business could be adversely affected.
If we are not able to provide successful enhancements, new features, and modifications, our business and results of operations could be adversely affected.
If we are unable to provide enhancements and new features for our existing applications or new applications that achieve market acceptance or that keep pace with rapid technological developments, our business and results of operations could be adversely affected. For example, we are focused on enhancing the features and functionality of our applications to enhanceimprove their utility to larger customers with complex, dynamic, and global operations. The success of enhancements, new features, and applications depends on several factors, including thetheir timely completion, introduction, and market acceptance ofas well as access to the enhancements or new features or applications.technologies required to build and improve our applications, such as the datasets required to train our machine learning models. Failure in this regard may significantly impair our revenue growth. In addition, becausegrowth by negatively impacting customer renewal rates or result in an inability to attract new customers.
Our applications must integrate with or incorporate a variety of third-party technologies, and if we are unable to ensure that our solutions integrate with or incorporate such technologies, demand for our applications are designed toand our operating results could be adversely affected.
Our applications must integrate with and operate on a variety of systems,systems. Therefore, we will need to continuously modify and enhance our applications to keep pace with changes in Internet-relatedinternet-related hardware, iOS, Android, and other mobile-related technologies and other software, communication, browser, and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion. We must also appropriately balance the productapplication capability demands of our current customers with the capabilities required to address the broader market. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our product development expenses. Any failure of our applications to operate effectively with future network platforms and technologies could reduce the demand for our applications, result in customer dissatisfaction, and adversely affect our business.
If our applications fail to perform properly, our reputation could be adversely affected, our market share could decline, and we could be subject to liabilitywarranty and other claims.
Our applications are inherently complex and may contain material defects or errors. Any defects in functionality or that cause interruptions in the availability of our applications could result in:
loss or delayed market acceptance and sales;
legal claims, including breach of warranty claims;
loss of customers;
diversion of development and customer service resources; and
injury to our brand and reputation.
The costs incurred in correcting any material defects or errors might be substantial and could adversely affect our operating results.
Because of the large amount of data that we collect and process in our systems, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collectdata to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, the availability or performance of our applications could be adversely affected by a number of factors, including customers’ inability to access the Internet,internet, the failure of our network or software systems, security breaches, or variability in user traffic for our services. We may be required to issue credits or refunds for prepaid amounts related to unused services or otherwise be liable to our customers for damages they may incur resulting from certain of these events. For example, our customers access our applications through their Internetinternet service providers. If a service provider fails to provide sufficient capacity to support our applications or otherwise experiences service outages, such failure could interrupt our customers’ access to our applications, which could adversely affect their perception of our applications’ reliability and our revenues. We may be required to issue credits or refunds for prepaid amounts related to unused services or otherwise be liable to our customers for damages they may incur resulting from certain of these events. In addition to potential liability, if we experience interruptions in the availability of our applications, our reputation could be adversely affected, and we could lose customers.
Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.
Catastrophic events may disrupt our business.
Our corporate headquarters are located in Pleasanton, California, and we have data centers located in the United States, Europe, and Canada. We also rely on AWS’s and Dimension Data’s distributed computing infrastructure platforms. The west coast of the United States contains active earthquake zones and the southeast is subject to seasonal hurricanes. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted services, and sales activities. In the event of a major earthquake, hurricane, or other natural disaster or a catastrophic event such as fire, power loss, telecommunications failure, vandalism, civil unrest, cyber-attack, geopolitical instability, war, terrorist attack, or the effects of climate change (such as drought, flooding, wildfires, increased storm severity, and sea level rise), we may be unable to continue our operations and may endure system interruptions, delays in our product development, lengthy interruptions in our services, breaches of data security, and loss of critical data, all of which could cause reputational harm or otherwise have an adverse effect on our business and operating results.
Because we sell applications to manage complex operating environments of large customers, we encounter long sales cycles, which could adversely affect our operating results in a given period.
Our ability to increase revenues and achieve and maintain profitability depends, in large part, on widespread acceptance of our applications by large businesses and other organizations. As we target our salesSales efforts targeted at these large customers we faceinvolve greater costs, longer sales cycles, and less predictability in completing some of our sales. Our customers’ deployment timeframes vary based on many factors including the number and type of applications being deployed, the complexity and scale of the customers’ businesses and operations, the configuration requirements, the number of integrations with other systems, and other factors, many of which are beyond our control. In the large enterprise market, the customer’s decision to use our applications may be an enterprise-wide decision and, therefore, these types of sales require us to provide greater levels of education regarding the use and benefits of our applications. In addition, our target customers may prefer to purchase applications that are critical to their business from one of our larger, more established competitors. Our typical sales cycles are six to twelve months but can extend for eighteen months or more, and we expect that this lengthy sales cycle may continue or increaseexpand as customers increasingly adopt our applications beyond HCM. Longer sales cycles could cause our operating and financial results to suffer in a given period.
The loss of one or more of our key customers, or a failure to renew our subscription agreements with one or more of our key customers, could negatively affect our ability to market our applications.
We rely on our reputation and recommendations from key customers in order to promote subscriptions to our applications. The loss of, or failure to renew by, any of our key customers could have a significant impact on our revenues, reputation, and our ability to obtain new customers. In addition, acquisitions of our customers could lead to cancellation of our contracts with those customers or by the acquiring companies, thereby reducing the number of our existing and potential customers. Acquisitions of our partners could also result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications.
Our business could be adversely affected if our customers are not satisfied with the deployment services provided by us or our partners.
Our business depends on our ability to satisfy our customers, both with respect to our application offerings and the professional services that are performed to help our customers use features and functions that address their business needs. Professional services may be performed by our own staff, by a third party, or by a combination of the two. Our strategy is to work with third parties to increase the breadth of capability and depth of capacity for delivery of these services to our customers, and third parties provide a majority of deployment services for our deployment services.customers. If customers are not satisfied with the quality of work performed by us or a third party or with the type of professional services or applications delivered, then we could incur additional costs to address the situation, the revenue recognition of the contract could be impacted, and the dissatisfaction with our services could damage our ability to expand the applications subscribed to by our customers. We must also align our product development and professional services operations in order to ensure that customers’ evolving needs are met. Negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers.
Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and our financial results.
Sales to customers outside the United States or with international operations expose us to risks inherent in international sales andglobal operations.
A key element of our growth strategy is to expand our international operations and develop a worldwide customer base. To date, we have not realized a substantial portion of our revenues from customers headquartered outside the United States. Operating in international marketsglobally requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States. Because of our limited experience with international operations, ourOur international expansion efforts may not be successful in creating demand for our applications outside of the United States or in effectively selling subscriptions to our applications in all of the international markets we enter. In addition, we will face risks in doing business internationallyon a global scale that could adversely affect our business, including:
the need to localize and adapt our applications for specific countries, including translation into foreign languages, localization of contracts for different legal jurisdictions, and associated expenses;
the need for a go-to-market strategy that aligns productapplication management efforts and the development of supporting infrastructure;
stricter data privacy laws including requirements that customer data be stored and processed in a designated territory and obligations on us as a data processor;
difficulties in appropriately staffing and managing foreign operations and providing appropriate compensation for local markets;
difficulties in leveraging executive presence and company culture globally;
different pricing environments, longer sales cycles, and longer accounts receivabletrade receivables payment cycles, and collections issues;
new and different sources of competition;
potentially weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;rights;
laws, customs, and business practices favoring local competitors;
restrictive governmental actions focused on cross-border trade, such as import and export restrictions, duties, quotas, tariffs, trade disputes, and barriers or sanctions that may prevent us from offering certain portions of our products or services to a particular market, may increase our operating costs, or may subject us to monetary fines or penalties in case of unintentional noncompliance due to factors beyond our control;
compliance challenges related to the complexity of multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy, and data protection laws and regulations;
increased compliance costs related to government regulatory reviews or audits, including those related to international cybersecurity requirements;
increased financial accounting and reporting burdens and complexities;
restrictions on the transfer of funds;
ensuring compliance with anti-corruption laws including the Foreign Corrupt Practices Act;
the effects of currency fluctuations on our revenues and expenses and customer demand for our services;services, including any fluctuations caused by uncertainties relating to the UK leaving the EU (“Brexit”);
the cost and potential outcomes of any international claims or litigation;
adverse tax consequences and tax rulings; and
unstable economic and political conditions.
We have acquired, and may in the future acquire, other companies, employee teams, or technologies, which could divert our management’s attention, result in additional dilution to our stockholders, and otherwise disrupt our operations and adversely affect our operating results.
We have acquired, and may in the future acquire, other companies, employee teams, or technologies to complement or expand our applications, enhance our technical capabilities, obtain personnel, or otherwise offer growth opportunities. For example, during the third quarter of fiscal 2019, we acquired Adaptive Insights, Inc. (“Adaptive Insights”). The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
inability to integrate or benefit from acquisitionsan acquisition in a profitable manner;
difficulty in integrating the intellectual property, technology infrastructure, and operations of the acquired business, including difficulty in addressing security issues of the acquired business;
difficulty in integrating and retaining the personnel of the acquired business;
difficulty in leveraging the data of the acquired business if it includes personal data;
ineffective or inadequate controls, procedures, or policies at the acquired company;
multiple product lines or service offerings, as a result of our acquisitions, that are offered, priced, and supported differently;
difficulties and additional expenses associated with supporting legacy productssynchronizing product offerings, customer relationships, and hosting infrastructure ofcontract portfolio terms and conditions between Workday and the acquired business;
adverse effects on our existing business relationships with business partners and customers as a result of the acquisition;
potential write-offs of acquired assets and potential financial and credit risks associated with acquired customers;
inability to maintain relationships with key customers, suppliers, and partners of the acquired business;
difficulty in predicting and controlling the effect of integrating multiple acquisitions concurrently;
lack of experience in new markets, products, or technologies;
diversion of management’s attention from other business concerns;
use of resources that are needed in other parts of our business; and
use of substantial portions of our available cash to consummate the acquisition.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.
Acquisitions could also result in dilutive issuances of equity securities or the incurrenceissuance of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business, and financial position may suffer.
We are subject to risks associated with our equity investments including partial or complete loss of invested capital, and significant changes in the fair value of this portfolio could negatively impact our financial results.
We invest in early-to-late stage companies for strategic reasons and to support key business initiatives, and we may not realize a return on our equity investments. Many such companies generate net losses and the market for their products, services, or technologies may be slow to develop. These companies are often dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations. The financial success of our investment in any company is typically dependent on a liquidity event, such as a public offering, acquisition, or other favorable market event reflecting appreciation to the cost of our initial investment. The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have invested in could deteriorate.
Further, valuations of non-marketable equity investments are inherently complex due to the lack of readily available market data. In addition, we may experience additional volatility to our statements of operations due to changes in market prices of our marketable equity investments and the valuation and timing of observable price changes or impairments of our non-marketable equity investments. This volatility could be material to our results in any given quarter and may cause our stock price to decline.
We have a history of cumulative losses and we do not expect to be profitable on a GAAP basis for the foreseeable future.
We have incurred significant losses in each period since our inception in 2005. These losses and our accumulated deficit reflect the substantial investments we made to acquire new customers and develop our applications. We expect our operating expenses to increase in the future due to anticipated increases in sales and marketing expenses, product development expenses, operations costs, and general and administrative costs, and therefore we expect our losses on a GAAP basis to continue for the foreseeable future. Furthermore, to the extent we are successful in increasing our customer base, we will also incur increased losses in the acquisition period because costs associated with acquiring customers are generally incurred up front, while subscription services revenues are generally recognized ratably over the terms of the agreements, which are typically three years.years or longer. You should not consider our recent growth in revenues as indicative of our future performance. Accordingly, weWe cannot assure you that we will achieve GAAP profitability in the future, nor that, if we do become profitable, we will sustain profitability.
We may not receive significant revenues from our current development efforts for several years, if at all.
Developing software applications is expensive and the investment in product development often involves a long return on investment cycle. We have made and expect to continue to make significant investments in development and related product opportunities. Accelerated productapplication introductions and short productapplication life cycles require high levels of expenditures that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our development efforts to maintain our competitive position. However, we may not receive significant revenues from these investments for several years, if at all.
If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.
Our ability to forecast our future rate of growth is limited and subject to a number of uncertainties, including general economic and market conditions. We plan our expense levels and investment on estimates of future revenue and future anticipated rates of growth. We may not be able to adjust our spending quickly enough if our growth rates fall short of our expectations.
Moreover, we have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or change due to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
We may not be able to sustain our revenue growth rates in the future.
You should not consider our historical revenue growth rates as indicative of our future performance. Our revenue growth rates have declined, and may decline in future periods, as the size of our customer base increases and as we achieve higher market penetration rates. Other factors may also contribute to declines in our growth rates, including slowing demand for our services, increasing competition, a decrease in the growth of our overall market, our failure to continue to capitalize on growth opportunities, and the maturation of our business, among others. As our growth rates decline, investors’ perceptions of our business and the trading price of our securities could be adversely affected.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations, including the levels of our revenues, gross margin, core operating margin, profitability, cash flow, and unearned revenue, and remaining subscription revenue performance obligations, which we also refer to as backlog, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our securities. Factors that may cause fluctuations in our quarterly financial results include, without limitation, those listed below:
our ability to attract new customers;
the addition or loss of large customers, including through acquisitions or consolidations;
customer renewal rates;
the timing of operating expenses and recognition of revenues;
the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;
network outages or security breaches;
general economic and market conditions;
increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;
changes in our pricing policies or those of our competitors;
the mix of applications sold during a period;
seasonal variations in sales of our applications, which have historically been highest in our fiscal fourth quarter;
the timing and success of new application and service introductions by us or our competitors;
changes in the competitive dynamics of our industry, including consolidation among competitors, customers, or strategic partners;
changes in laws and regulations that impact our business; and
the timing of expenses related to acquisitions and potential future charges for impairment of goodwill.
Because we recognize subscription services revenues over the term of the contract, downturns or upturns in new sales will not be immediately reflected in our operating results and may be difficult to discern.
We generally recognize subscription services revenues from customers ratably over time as services are delivered to the termscustomer, which typically occurs over a period of their contracts, which are typically three years.years or longer. As a result, most of the subscription services revenues we report in each quarter are derived from the recognition of unearned revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscription contracts in any single quarter will likely have a minor impact on our revenue results for that quarter. However, such a decline will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our applications, and potential changes in our pricing policies or rate of renewals may not be fully reflected in our results of operations until future periods. We may be unable to adjust our cost structure to reflect the changes in revenues. In addition, a significant majority of our costs are expensed as incurred, while revenues are recognized over the life of the customer agreement. As a result, increased growth in the number of our customers could result in our recognition of more costs than revenues in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as subscription revenues from new customers generally are recognized over the applicable subscription term.
Our ability to predict the rate of customer subscription renewals or adoptions, and the impact these renewals and adoptions will have on our revenues or operating results, is limited.
As the markets for our applications mature, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically. Moreover, large customers, which are the focus of our sales efforts, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could adversely affect our revenues, gross margin, profitability, financial position, and cash flow.
In addition, our customers have no obligation to renew their subscriptions for our applications after the expiration of either the initial or renewed subscription period. Our customers may renew for fewer elements of our applications or on different pricing terms. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our pricing or our applications and their ability to continue their operations and spending levels. If our customers do not renew their subscriptions for our applications on similar pricing terms, our revenues may decline, and our business could suffer. In addition, over time the average term of our contracts could change based on renewal rates or for other reasons.
Our future success also depends in part on our ability to sell additional features or enhanced elements of our applicationsproducts to our current customers.customers, and the success rate of such endeavors is difficult to predict. This may require increasingly costly marketing and sales efforts that are targeted at senior management. Ifmanagement, and if these efforts are not successful, our business and results of operations may suffer.
Failure to adequately expand and optimize our direct sales force will impede our growth.
We will need to continue to expand and optimize our sales infrastructure, both domestically and internationally, in order to grow our customer base and our business. We plan to continue to expand our direct sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them in our sales methodology, our sales systems, and the use of our software requires significant time, expense, and attention. It can take significant time before our sales representatives are fully trained and productive. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenues. In particular, if we are unable to hire, develop, and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenues.
If we fail to develop widespread brand awareness cost-effectively, our business may suffer.
We believe that developing and maintaining widespread positive awareness of our brand is critical to achieving widespread acceptance of our applications, attracting new customers, and hiring and retaining employees. Brand promotion activities may not generate customer awareness or increase revenues, and even if they do, any increase in revenues may not offset the significant expenses we incur in building our brand. If we fail to successfully promote and maintain our brand or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our applications. In addition, if our brand is negatively impacted, it may be more difficult to hire and retain employees.
Our growth depends in part on the success of our strategic relationships with third parties.
In order to grow our business, we anticipate that we will continue to depend on relationships with third parties, such as deployment partners, and technology and content providers.providers, and other key suppliers. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our services.services, or in negotiating better rates or terms with such third parties. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications by potential customers.
If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our applications or increased revenues.
Adverse economic conditions may negatively impact our business.
Our business depends on the overall demand for enterprise software and on the economic health of our current and prospective customers. Any significant weakening of the economy in the United States or Europe and of the global economy, more limited availability of credit, a reduction in business confidence and activity, decreased government spending, economic uncertainty and other difficulties, such as rising interest rates and increased inflation, may affect one or more of the sectors or countries in which we sell our applications. In addition,Alternatively, a strong dollar could reduce demand for our productsapplications and services in countries with relatively weaker currencies.
Also, Brexit has created substantial economic and political uncertainty, including significant volatility in global financial markets and the value of foreign currencies. The impact of Brexit depends on the terms of the UK’s withdrawal from the EU and such impact may not be fully realized for several years or more. This uncertainty may cause some of our customers or potential customers to curtail spending and may ultimately result in new regulatory, operational, and cost challenges to our UK and global operations. These adverse conditions could result in reductions in sales of our applications, longer sales cycles, reductions in subscription duration and value, slower adoption of new technologies, and increased price competition. Any of these events would likely have an adverse effect on our business, operating results, and financial position.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend in part upon our intellectual property. We rely on patent, copyright, trade secret and trademark laws, trade secret protection, and confidentiality or license agreements with our employees, customers, partners, and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our applications and proprietary information. Further, these agreements do not prevent our competitors or partners from independently developing technologies that are substantially equivalent or superior to our applications.
We may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect, and enforce our intellectual property rights could seriously adversely affect our brand and our business.
We may be sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, they may claim that our applications and underlying technology infringe or violate their intellectual property rights, even if we are unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
Some of our applications utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Some of our applications include software covered by open source licenses, which may include, by way of example, GNU General Public License and the Apache License. The terms of various open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our applications. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to be impacted by an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and services. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third partythird-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could negatively affect our business.
We employ third-party licensed software for use in or with our applications and for improving our internal systems, processes, and controls, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.
Our applications incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties. In addition, integration of the software used in our applications with new third-party software may require significant work and require substantial investment of our time and resources. To the extent that our applications depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our applications, delay new application introductions, result in a failure of our applications, and injure our reputation. Our use of additional or alternative
Furthermore, we have also licensed third-party software would requireto help us improve our internal systems, processes, and controls. The support services available for such third-party technology may be negatively affected by mergers and consolidation in the software industry, and support services for such technology may not be available to us in the future. Additionally, we may experience difficulties in managing improvements to our systems, processes, and controls or in connection with third-party software, which could materially impair our ability to provide our solutions or professional services to our customers in a timely manner, cause us to enter into license agreements with third parties.lose customers, limit us to smaller deployments of our solutions, or increase our technical support costs.
Changes in laws and regulations related to the Internetinternet or changes in the Internetinternet infrastructure itself may diminish the demand for our applications and could have a negative impact on our business.
Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations relating to Internetinternet usage. Changes in these laws or regulations could require us to modify our applications in order to comply with these laws or regulations. In addition, government agencies or private organizations may begin to impose taxes, fees, or other charges for accessing the Internetinternet or commerce conducted via the Internet.internet. These laws or charges could limit the growth of Internet-relatedinternet-related commerce or communications, or negatively impact demand for Internet-basedinternet-based applications such as ours.
In addition, businesses could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internetinternet activity, security, reliability, cost, ease of use, accessibility, and quality of service. Businesses have been adversely affected by “viruses,” “worms”“worms,” and similar malicious programs and have experienced a variety of outages and other delays as a result of damage to Internetinternet infrastructure. These issues could negatively impact demand for our cloud-based applications.
We may discover weaknesses in our internal controls over financial reporting, which may adversely affect investor confidence in the accuracy and completeness of our financial reports and consequently the market price of our securities.
As a public company, we are required to design and maintain proper and effective internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting, which must be attested to by our independent registered public accounting firm. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated.
The process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 is challenging and costly. In the future, we may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our securities could be negatively affected, and we could become subject to investigations by the New York Stock Exchange (NYSE),Financial Industry Regulatory Authority, the SEC, or other regulatory authorities, which could require additional financial and management resources. In addition, because we use Workday'sWorkday’s financial management application, any problems that we experience with financial reporting and compliance could be negatively perceived by prospective or current customers, and negatively impact demand for our applications.
As of January 31, 2016,2019, we had federal and state net operating loss carryforwards due to prior period losses, which iflosses. If not utilized, will begin tothe pre-fiscal 2018 federal and the state net operating loss carryforwards expire in varying amounts between fiscal 20252020 and 2017 for2039. The federal net operating losses generated in and state purposes, respectively.after fiscal 2018 do not expire and may be carried forward indefinitely. We also have federal research tax credit carryforwards, which if not utilized will begin to expire in 2025.fiscal 2023. These net operating loss and research tax credit carryforwards could expire unused and be unavailable to reduce future income tax liabilities, which could adversely affect our profitability. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.
Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our customers, which could increase the costs of our services and adversely impact our business.
We operate and are subject to taxes in the United States and numerous foreignother jurisdictions throughout the world. Changes to federal, state, local, or international tax laws on income, sales, use, indirect, or other tax laws, statutes, rules, regulations, or ordinances on multinational corporations are currently being considered by the United States and other countries where we do business. These contemplated legislative initiatives include, but are not limited to, changes to transfer pricing policies and definitional changes to permanent establishment that could be applied solely or disproportionately to services provided over the Internet.internet. These contemplated tax initiatives, if finalized and adopted by countries, may ultimately impact our effective tax rate and could adversely affect our sales activity resulting in a negative impact on our operating results and cash flows.
In addition, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us (possibly with retroactive effect), which could require us to pay additional tax amounts, fines or penalties, and interest for past amounts. Existing tax laws, statutes, rules, regulations, or ordinances could also be interpreted, changed, modified, or applied adversely to our customers (possibly with retroactive effect), which could require our customers to pay additional tax amounts as well as require us or our customerswith respect to payservices we have provided, fines or penalties, and interest for past amounts. If we are unsuccessful in collecting such taxes from our customers, we could be held liable for such costs, thereby adversely impacting our operating results and cash flows. If our customers must pay additional fines or penalties, it could adversely affect demand for our services.
The 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. The Tax Act requires complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of information not previously required or regularly produced. As additional regulatory guidance is issued by the applicable taxing authorities and as accounting treatment is clarified, we will perform additional analysis on the application of the law and refine estimates in calculating the effect, which may produce different results and will be reflected in the period the analysis is completed.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and couldmay even affect the reporting of transactions completed before the announcement or effectiveness of a change.
We have broad discretion in the use of our cash balances and may not use them effectively.
We have broad discretion in the use of our cash balances and may not use them effectively. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. Pending their use, we may invest our cash balances in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our securities.
Risks Related to Our Class A Common Stock
Our Chairman and CEO have control over key decision making as a result of their control of a majority of our voting stock.
As of January 31, 2016,2019, our co-founder and Chairman David Duffield, together with his affiliates, held voting rights with respect to 66approximately 54 million shares of Class B common stock, and 10.8 million shares of Class A common stock. In addition, Mr. Duffield holdsstock, and less than 0.1 million RSUs,restricted stock units (“RSUs”), which will be settled in an equivalent number of shares of Class A common stock. As of January 31, 2016,2019, our co-founder and CEO Aneel Bhusri, together with his affiliates, held voting rights with respect to 7approximately 8 million shares of Class B common stock and 0.2 million shares of Class A common stock. In addition, Mr. Bhusri holds exercisable stock options to acquire 3approximately 2 million shares of Class B common stock 1 million shares of Class B restricted stock and 0.30.2 million RSUs, which will be settled in an equivalent number of shares of Class A common stock. Further, Messrs. Duffield and Bhusri have entered into a voting agreement under which each has granted a voting proxy with respect to certain Class B common stock beneficially owned by him effective upon his death or incapacity as described in our registration statement on Form S-1 filed in connection with our initial public offering.IPO. Messrs. Duffield and Bhusri have each initially designated the other as their respective proxies. Accordingly, upon the death or incapacity of either Mr. Duffield or Mr. Bhusri, the other would individually continue to control the voting of shares subject to the voting proxy. Collectively, the shares described above represent a substantial majority of the voting power of our outstanding capital stock. As a result, Messrs. Duffield and Bhusri have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, they have the ability to control the management and affairs of our company as a result of their positions as our Chairman and CEO, respectively, and their ability to control the election of our directors. AsMr. Duffield, in his capacity as a board membersmember, and officers, Messrs. DuffieldMr. Bhusri, in his capacity as a board member and Bhusriofficer, each owe a fiduciary duty to our stockholders and must act in good faith in a manner they reasonably believe to be in the best interests of our stockholders. As stockholders, even as controlling stockholders, they are entitled to vote their shares in their own interests, which may not always be in the interests of our stockholders generally.
The dual class structure of our common stock has the effect of concentrating voting control with our Chairman and CEO, and also with other executive officers, directors, and affiliates; this will limit or preclude the ability of non-affiliates to influence corporate matters.
Our Class B common stock has ten10 votes per share and our Class A common stock, which is the stock that is publicly traded, has one vote per share. Stockholders who hold shares of Class B common stock, including our executive officers, directors, and other affiliates, together hold a substantial majority of the voting power of our outstanding capital stock as of January 31, 2016.2019. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the conversion of all shares of all Class A and Class B shares to a single class of common stock on the date that is the first to occur of (i) October 11, 2032, (ii) such time as the shares of Class B common stock represent less than 9% of the outstanding Class A and Class B common stock, (iii) nine months following the death of both Mr. Duffield and Mr. Bhusri, or (iv) the date on which the holders of a majority of the shares of Class B common stock elect to convert all shares of Class A common stock and Class B common stock into a single class of common stock. This concentrated control will limit or preclude the ability of non-affiliates to influence corporate matters for the foreseeable future.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, our Chairman and CEO retain a significant portion of their holdings of Class B common stock for an extended period of time, they could, in the future, continue to control a majority of the combined voting power of our Class A common stock and Class B common stock.
Our stock price has been volatile in the past and may be subject to volatility in the future.
The trading price of our Class A common stock has been volatile historically and could be subject to wide fluctuations in response to various factors described below. These factors, as well as the volatility of our Class A common stock, could also impact the price of our convertible senior notes. The factors that may affect the trading price of our securities, some of which are beyond our control, include:
overall performance of the equity markets;
fluctuations in the valuation of companies perceived by investors to be comparable to us, such as high-growth or cloud companies, or in valuation metrics, such as our price to revenues ratio;
guidance as to our operating results that we provide to the public, differences between our guidance and market expectations, our failure to meet our guidance, or changes in recommendations by securities analysts that follow our securities;
announcements of technological innovations, new applications or enhancements to services, acquisitions, strategic alliances, or significant agreements by us or by our competitors;
disruptions in our services due to computer hardware, software, or network problems;
announcements of customer additions and customer cancellations or delays in customer purchases;
recruitment or departure of key personnel;
the economy as a whole, market conditions in our industry, and the industries of our customers;
trading activity by directors, executive officers and significant stockholders, or the perception in the market that the holders of a large number of shares intend to sell their shares;
the exercise of rights held by certain of our stockholders, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders;
the size of our market float and significant stock option exercises;
any future issuances of securities;
sales and purchases of any Class A common stock issued upon conversion of our convertible senior notes or in connection with the convertible note hedge and warrant transactions related to such convertible senior notes;
our operating performance and the performance of other similar companies; and
the sale or availability for sale of a large number of shares of our Class A common stock in the public market.
Additionally, the stock markets have at times experienced extreme price and volume fluctuations that have affected and may in the future affect the market prices of equity securities of many companies. These fluctuations have, in some cases, been unrelated or disproportionate to the operating performance of these companies. Further, the trading prices of publicly traded shares of companies in our industry have been particularly volatile and may be very volatile in the future.
In the past, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
We have substantial indebtedness in the form of convertible senior notes.notes, which may adversely affect our financial condition and operating results.
In June 2013, we completed an offering of $350 million of 0.75% convertible senior notes due July 15, 2018 (2018 Notes), and we concurrently issued an additional $250 million of 1.50% convertible senior notes due July 15, 2020 (2020 Notes)(“2020 Notes”).
In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022 (“2022 Notes”). As a result of these convertible notes offerings, we incurred $350 million principal amount of indebtedness, which we may be required to pay at maturity in 2018, and $250 million principal amount of indebtedness, which we may be required to pay at maturity in 2020, and $1.15 billion principal amount of indebtedness, which we may be required to pay at maturity in 2022, or upon the occurrence of a fundamental change (as defined in the applicable indenture). We may incur substantial additional debt in the future, some of which may be secured debt. There can be no assurance that we will be able to repay this indebtedness when due, or that we will be able to refinance this indebtedness on acceptable terms or at all. Our ability to pay cash upon conversion or repurchase of the 2020 Notes or the 2022 Notes may be limited by law, regulatory authority, or agreements governing our future indebtedness and is dependent on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Any future debt may also contain limitations on our ability to pay cash upon a conversion request or repurchase upon a fundamental change.
In addition, this indebtedness could, among other things:
make it difficult for us to pay other obligations;
make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt service requirements, or other purposes;
adversely affect our liquidity and result in a material adverse effect on our financial position upon repayment of the indebtedness;
require us to dedicate a substantial portion of our cash flow from operations to service and repay the indebtedness, reducing the amount of cash flow available for other purposes; and
limit our flexibility in planning for and reacting to changes in our business.
In connection with the sale of our offering ofconvertible notes, we entered into convertible note hedge transactions with institutions that we refer to as the 2018 Notes,option counterparties. We also entered into warrant transactions with the option counterparties pursuant to which we sold warrants to acquire up to approximately 4.2 million sharesfor the purchase of our Class A common stock at an initial strike price of $107.96, which become exercisable beginning on October 15, 2018. In connection with our offering ofstock. The convertible note hedge transactions are expected to offset the 2020 Notes, we sold warrantspotential dilution to acquire up to approximately 3.1 million shares of our Class A common stock at an initial strike price of $107.96, which become exercisable beginning on October 15, 2020. The warrants may be settled in shares or in cash. The exerciseupon any conversion of the warrantsconvertible notes. The warrant transactions could separately have a dilutive effect ifto the extent that the market price per share of our Class A common stock exceeds the strikeexercise price of the relevant warrants.
The option counterparties to the warrant transactions and noteor their respective affiliates may modify their hedge transactions relating to the 2018 Notes and the 2020 Notes are likely to enterpositions by entering into or unwindunwinding various derivative instrumentsderivatives with respect to our Class A common stock and/or purchasepurchasing or sell shares ofselling our Class A common stock or other securities linked to or referencing our Class A common stockof ours in secondary market transactions prior to the respective maturity of the 2018 Notes andconvertible notes. This activity could suppress or inflate the 2020 Notes. These activities could adversely affect the tradingmarket price of our Class A common stock.
We will also be subject to the risk that these option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If one or more of the option counterparties to one or more of our convertible note hedge transactions becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those transactions. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price of our Class A common stock during the related settlement period. In addition, upon a default by one of the option counterparties, we may suffer dilution with respect to our Class A common stock as well as adverse financial consequences.
Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class;
our dual class common stock structure, which provides our chairman and CEO with the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A and Class B common stock;
our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause;
when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock:
certain amendments to our restated certificate of incorporation or restated bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;
our stockholders will only be able to take action at a meeting of stockholders and not by written consent; and
vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;
only our chairman of the board, chief executive officer, either co-president, or a majority of our board of directors are authorized to call a special meeting of stockholders;
certain litigation against us can only be brought in Delaware;
we will have two classes of common stock until the date that is the first to occur of (i) October 11, 2032, (ii) such time as the shares of Class B common stock represent less than 9% of the outstanding Class A and Class B common stock, (iii) nine months following the death of both Mr. Duffield and Mr. Bhusri, or (iv) the date on which the holders of a majority of the shares of Class B common stock elect to convert all shares of Class A common stock and Class B common stock into a single class of common stock;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without the approval of the holders of Class A common stock; and
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
These anti-takeover defenses could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could depress the market price of our securities.
If securities or industry analysts publish inaccurate or unfavorable research about our business, or discontinue publishing research about our business, the price and trading volume of our securities could decline.
The trading market for our securities will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the price and trading volume of our securities to decline.
We do not intend to pay dividends for the foreseeable future.
We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters, which includes operations and product development facilities, is located in Pleasanton, California andCalifornia. It consists of approximately 538,172650,000 square feet of space under multiple leases.leased facilities, 677,000 square feet of owned facilities, and a 6.9 acre parcel of leased land. The land lease will expire in 2108.
In January 2014,addition, we acquired a 95 year lease for a 6.9 acre parcel of landoffice space in Pleasanton, California.various locations throughout North America, Europe, and Asia totaling approximately 937,000 square feet. We paid $10 million to acquire thealso lease data centers throughout North America and $2 million in prepaid rent through December 31, 2020. Europe.
We expect to start construction ofexpand our new development center, consisting of approximately 410,000 square feet of office space, on this propertyfacilities capacity at our corporate headquarters and in certain field locations during the first half of fiscal 2017.
2020 to support our continued growth. We believe that our existing facilities are adequate to meet current requirements, and that we will be able to obtain additional space at other locations at commercially reasonable terms to support our continuing expansion.terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are or may be involved in various legal proceedings arising from the normal course of business activities.including matters related to alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other claims. We are not presently a party to any litigation the outcome of which we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained. The resolution of legal matters could prevent us from offering one or more of our applications, services, or features to others, could require us to change our technology or business practices, pay monetary damages, or enter into short- or long-term royalty or licensing agreements, or could otherwise be material to our financial condition or cash flows, or both, or adversely affect our operating results.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our Class A common stock is listedhas traded on the Nasdaq Global Select Market under the symbol “WDAY” since September 20, 2017. Prior to that time, it traded on the New York Stock Exchange under the symbol “WDAY.”
| High | Low | ||||||
| Year ended January 31, 2016 | |||||||
| First quarter | $ | 95.17 | $ | 78.40 | |||
| Second quarter | 93.62 | 74.26 | |||||
| Third quarter | 84.84 | 65.33 | |||||
| Fourth quarter | 85.67 | 60.17 | |||||
| Year ended January 31, 2015 | |||||||
| First quarter | $ | 116.47 | $ | 64.21 | |||
| Second quarter | 92.15 | 65.75 | |||||
| Third quarter | 97.40 | 75.23 | |||||
| Fourth quarter | 97.16 | 76.36 | |||||
Our Class B common stock is not listed or traded on any stock exchange.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
Stockholders
As of January 31, 2016,February 28, 2019, there were 3723 stockholders of record of our Class A common stock, including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners, as well as 210114 stockholders of record of our Class B common stock.
Stock Performance Graph
The following shall not be deemed “soliciting material” or deemed “filed” for purposes of Section 18 of the Exchange Act or subject to Regulation 14A or 14C, other than as provided by this Item 5, or to the liabilities of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing.
This chart compares the cumulative total return on our common stock with that of the S&P 500 Index and the S&P 1500 Application Software Index. The chart assumes $100 was invested at the close of market on October 12, 2012,January 31, 2014, in the Class A common stock of Workday, Inc., the S&P 500 Index, and the S&P 1500 Application Software Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
Base Period | |||||||||||||||||||||||||||||||||||||||||||
| Company/Index | 10/12/2012 | 1/31/2013 | 1/31/2014 | 1/31/2015 | 1/31/2016 | 1/31/2014 | 1/31/2015 | 1/31/2016 | 1/31/2017 | 1/31/2018 | 1/31/2019 | ||||||||||||||||||||||||||||||||
| Workday, Inc. | $ | 100.00 | $ | 109.71 | $ | 183.90 | $ | 163.20 | $ | 129.41 | $ | 100.00 | $ | 88.74 | $ | 70.37 | $ | 92.80 | $ | 133.90 | $ | 202.74 | |||||||||||||||||||||
| S&P 500 Index | 100.00 | 105.57 | 128.26 | 146.50 | 145.51 | 100.00 | 114.21 | 113.44 | 136.17 | 172.12 | 168.12 | ||||||||||||||||||||||||||||||||
| S&P 1500 Application Software Index | 100.00 | 110.49 | 138.28 | 151.34 | 171.74 | 100.00 | 109.45 | 124.20 | 157.75 | 232.97 | 281.13 | ||||||||||||||||||||||||||||||||
Unregistered Sales of Equity Securities
During fiscal 2019, we issued 1,457,382 shares of our unregistered Class A common stock to holders of our 0.75% convertible senior notes (“2018 Notes”) upon settlement of conversion of an aggregate principal amount of $350 million of such notes. This share amount represents the conversion value of the 2018 Notes in excess of the principal amount of notes converted.
During fiscal 2019, we issued 131 shares of our unregistered Class A common stock to holders of our 1.50% convertible senior notes (“2020 Notes”) upon settlement of conversion of an aggregate principal amount of $0.03 million of such notes. This share amount represents the conversion value of the 2020 Notes in excess of the principal amount of notes converted.
During fiscal 2019, we issued 1,063,380 shares of our unregistered Class A common stock to warrant holders who exercised their warrants related to the 2018 Notes. This share amount represents the number of such warrants exercised multiplied by the difference between the exercise price of the warrants and their daily volume weighted-average stock price.
For further information regarding the above transactions, see Note 11 of the notes to consolidated financial statements. These shares of the Company’s Class A common stock were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
The table below sets forth information regarding our purchases of our Class A common stock for each month in which there was a purchase of such equity securities covered by this report:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
July 1, 2018 - July 31, 2018 (1) | 1,457,546 | $ | 132.88 | — | — | ||||||||
August 1, 2018 - August 31, 2018 (2) | 1 | $ | 132.75 | — | — | ||||||||
November 1, 2018 - November 30, 2018 (2) | 1 | $ | 130.32 | — | — | ||||||||
| Total | 1,457,548 | — | |||||||||||
(1) | The shares purchased represent the exercise of the convertible note hedges relating to the 2018 Notes. For further information, see Note 11 of the notes to consolidated financial statements. |
(2) | The share purchased represents the exercise of the convertible note hedge relating to the partial early conversion of the 2020 Notes. For further information, see Note 11 of the notes to consolidated financial statements. |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data and the consolidated balance sheets data are derived from our audited consolidated financial statements and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”,Operations,” our consolidated financial statements, and the related notes included elsewhere in this filing. Our historical results are not necessarily indicative of our results in any future period.
| Year Ended January 31, | ||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | *2015 | ||||||||||||||||||||||||||||||||||
| Year Ended January 31, | *As Adjusted | *As Adjusted | ||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||
| Subscription services | $ | 929,234 | $ | 613,328 | $ | 354,169 | $ | 190,320 | $ | 88,634 | $ | 2,385,769 | $ | 1,787,833 | $ | 1,290,733 | $ | 920,196 | $ | 613,328 | ||||||||||||||||||
| Professional services | 233,112 | 174,532 | 114,769 | 83,337 | 45,793 | 436,411 | 355,217 | 283,707 | 236,494 | 174,532 | ||||||||||||||||||||||||||||
| Total revenues | 1,162,346 | 787,860 | 468,938 | 273,657 | 134,427 | 2,822,180 | 2,143,050 | 1,574,440 | 1,156,690 | 787,860 | ||||||||||||||||||||||||||||
Costs and expenses(1): | ||||||||||||||||||||||||||||||||||||||
| Costs of subscription services | 149,869 | 102,476 | 69,195 | 39,251 | 22,342 | 379,877 | 273,461 | 213,389 | 149,869 | 102,476 | ||||||||||||||||||||||||||||
| Costs of professional services | 224,558 | 162,327 | 107,615 | 77,284 | 43,026 | 455,073 | 355,952 | 270,156 | 224,558 | 162,327 | ||||||||||||||||||||||||||||
| Product development | 469,944 | 316,868 | 182,116 | 102,665 | 62,014 | 1,211,832 | 910,584 | 680,531 | 469,944 | 316,868 | ||||||||||||||||||||||||||||
| Sales and marketing | 434,056 | 315,840 | 197,373 | 123,440 | 70,356 | 891,345 | 683,367 | 565,328 | 413,530 | 315,840 | ||||||||||||||||||||||||||||
| General and administrative | 148,578 | 106,051 | 65,921 | 48,880 | 15,133 | 347,337 | 222,909 | 198,122 | 148,578 | 106,051 | ||||||||||||||||||||||||||||
| Total costs and expenses | 1,427,005 | 1,003,562 | 622,220 | 391,520 | 212,871 | 3,285,464 | 2,446,273 | 1,927,526 | 1,406,479 | 1,003,562 | ||||||||||||||||||||||||||||
| Operating loss | (264,659 | ) | (215,702 | ) | (153,282 | ) | (117,863 | ) | (78,444 | ) | (463,284 | ) | (303,223 | ) | (353,086 | ) | (249,789 | ) | (215,702 | ) | ||||||||||||||||||
| Other expense, net | (24,242 | ) | (30,270 | ) | (17,549 | ) | (1,203 | ) | (1,018 | ) | ||||||||||||||||||||||||||||
| Loss before provision for income taxes | (288,901 | ) | (245,972 | ) | (170,831 | ) | (119,066 | ) | (79,462 | ) | ||||||||||||||||||||||||||||
| Provision for income taxes | 1,017 | 2,010 | 1,678 | 124 | 167 | |||||||||||||||||||||||||||||||||
| Other income (expense), net | 39,532 | (11,563 | ) | (32,427 | ) | (24,242 | ) | (30,270 | ) | |||||||||||||||||||||||||||||
| Loss before provision for (benefit from) income taxes | (423,752 | ) | (314,786 | ) | (385,513 | ) | (274,031 | ) | (245,972 | ) | ||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | (5,494 | ) | 6,436 | (814 | ) | 1,017 | 2,010 | |||||||||||||||||||||||||||||||
| Net loss | (289,918 | ) | (247,982 | ) | (172,509 | ) | (119,190 | ) | (79,629 | ) | $ | (418,258 | ) | $ | (321,222 | ) | $ | (384,699 | ) | $ | (275,048 | ) | $ | (247,982 | ) | |||||||||||||
| Accretion of redeemable convertible preferred stock | — | — | — | (568 | ) | (342 | ) | |||||||||||||||||||||||||||||||
| Net loss attributable to Class A and Class B common stockholders | $ | (289,918 | ) | $ | (247,982 | ) | $ | (172,509 | ) | $ | (119,758 | ) | $ | (79,971 | ) | $ | (418,258 | ) | $ | (321,222 | ) | $ | (384,699 | ) | $ | (275,048 | ) | $ | (247,982 | ) | ||||||||
| Net loss per share attributable to Class A and Class B common stockholders, basic and diluted | $ | (1.53 | ) | $ | (1.35 | ) | $ | (1.01 | ) | $ | (1.62 | ) | $ | (2.71 | ) | $ | (1.93 | ) | $ | (1.55 | ) | $ | (1.94 | ) | $ | (1.45 | ) | $ | (1.35 | ) | ||||||||
| Weighted-average shares used to compute net loss per share attributable to Class A and Class B common stockholders | 190,016 | 183,702 | 171,297 | 74,011 | 29,478 | 216,789 | 207,774 | 198,214 | 190,016 | 183,702 | ||||||||||||||||||||||||||||
(1) | Costs and expenses include share-based compensation expenses as follows (in thousands): |
| Year Ended January 31, | Year Ended January 31, | |||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||
| Costs of subscription services | $ | 12,060 | $ | 6,053 | $ | 2,408 | $ | 601 | $ | 230 | $ | 36,754 | $ | 26,280 | $ | 20,773 | $ | 12,060 | $ | 6,053 | ||||||||||||||||||
| Costs of professional services | 19,526 | 12,890 | 4,818 | 1,312 | 398 | 55,535 | 37,592 | 26,833 | 19,526 | 12,890 | ||||||||||||||||||||||||||||
| Product development | 109,362 | 63,938 | 21,644 | 3,528 | 1,124 | 320,876 | 229,819 | 166,529 | 109,362 | 63,938 | ||||||||||||||||||||||||||||
| Sales and marketing | 51,617 | 29,875 | 12,131 | 2,717 | 839 | 132,810 | 100,762 | 86,229 | 51,617 | 29,875 | ||||||||||||||||||||||||||||
| General and administrative | 57,405 | 43,292 | 20,850 | 7,170 | 1,591 | 127,443 | 83,972 | 78,265 | 57,405 | 43,292 | ||||||||||||||||||||||||||||
| As of January 31, | |||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 300,087 | $ | 298,192 | $ | 581,326 | $ | 84,158 | $ | 57,529 | |||||||||
| Marketable securities | 1,669,372 | 1,559,517 | 1,305,253 | 706,181 | 53,634 | ||||||||||||||
| Working capital | 1,439,629 | 1,467,122 | 1,601,768 | 629,528 | 37,934 | ||||||||||||||
| Property and equipment, net | 214,158 | 140,136 | 77,664 | 44,585 | 25,861 | ||||||||||||||
| Total assets | 2,730,094 | 2,350,090 | 2,165,640 | 959,080 | 232,638 | ||||||||||||||
| Total unearned revenue | 899,729 | 632,744 | 413,565 | 285,260 | 188,097 | ||||||||||||||
| Convertible senior notes, net | 507,476 | 481,958 | 457,787 | — | — | ||||||||||||||
| Total liabilities | 1,593,937 | 1,224,115 | 978,423 | 366,797 | 237,293 | ||||||||||||||
| Redeemable convertible preferred stock | — | — | — | — | 170,906 | ||||||||||||||
| Total stockholders’ equity (deficit) | 1,136,157 | 1,125,975 | 1,187,217 | 592,283 | (175,561 | ) | |||||||||||||
| Year Ended January 31, | |||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Cash Flow Data: | |||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 258,637 | $ | 102,003 | $ | 46,263 | $ | 11,214 | $ | (13,774 | ) | ||||||||
Free cash flows(2) | 124,970 | (1,643 | ) | (29,577 | ) | (23,401 | ) | (34,756 | ) | ||||||||||
| As of January 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | *2015 | |||||||||||||||
| *As Adjusted | *As Adjusted | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 638,554 | $ | 1,134,355 | $ | 539,923 | $ | 300,087 | $ | 298,192 | |||||||||
| Marketable securities | 1,139,864 | 2,133,495 | 1,456,822 | 1,669,372 | 1,559,517 | ||||||||||||||
| Working capital | 269,905 | 1,898,104 | 1,239,202 | 1,468,067 | 1,467,122 | ||||||||||||||
| Property and equipment, net | 796,907 | 546,609 | 365,877 | 214,158 | 140,136 | ||||||||||||||
| Total assets | 5,520,746 | 4,947,424 | 3,268,282 | 2,812,370 | 2,350,090 | ||||||||||||||
| Total unearned revenue | 1,949,270 | 1,537,147 | 1,221,543 | 891,882 | 632,744 | ||||||||||||||
| Convertible senior notes, net | 1,204,778 | 1,491,354 | 534,423 | 507,476 | 481,958 | ||||||||||||||
| Total liabilities | 3,562,304 | 3,367,059 | 1,991,674 | 1,586,090 | 1,224,115 | ||||||||||||||
| Total stockholders’ equity | 1,958,442 | 1,580,365 | 1,276,608 | 1,226,280 | 1,125,975 | ||||||||||||||
| Year Ended January 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | *2015 | |||||||||||||||
| *As Adjusted | *As Adjusted | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||
| Cash Flow Data: | |||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 606,658 | $ | 465,727 | $ | 350,626 | $ | 258,637 | $ | 102,003 | |||||||||
| * |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk“Risk Factors.”
Overview
Workday provides financial management, human capital management, planning, and analytics applications designed for the world'sworld’s largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer Internetinternet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers with highly adaptable, accessible, and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources.
We were founded in 2005 to deliver cloud applications to global enterprises. Our applications are designed around the way people work today – today—in an environment that is global, collaborative, fast-paced, and mobile. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our Human Capital Management (HCM)HCM application in 2006 and our Financial Management application in 2007. Since then we have continued to invest in innovation and have consistently introduced new services to our customers.
We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with three-yearcontract terms of three years or longer and with subscription fees largely based on the size of the customer’s workforce. We generally recognize revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription services revenues from subscriptions to our HCM application. We market our applications primarily through our direct sales force.
Our diverse customer base includes medium-sized and large, global companies, as well as smaller organizations that primarily use our planning product. We have achieved significant growth in a relatively short period of time. Our diverse customer base includes large, global companies and our direct sales force generally targets organizationstime with more than 1,000 workers. Aa substantial amount of our growth comescoming from new customers. Our current financial focus is on growing our revenues and expanding our customer base. While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to the significant growth of our employee population. We had approximately 5,20010,500 and approximately 3,7508,200 employees as of January 31, 20162019 and 2015,2018, respectively.
We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our applicationproduct development efforts to deliver additional compelling applications and to address customers’ evolving needs. In addition, we plan to continue to expand our ability to sell our applications globally, particularly in Europe and Asia, through investmentsby investing in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, acquiring, building andand/or leasing additional office space, and expanding our ecosystem of servicesservice partners to support local deployments. We expect to make further significant investments in our data center infrastructurecapacity as we plan for future growth. We are also investing in personnel to service our growing customer base. These
We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, and intellectual property rights in an effort to expand our product and service offerings. We expect to continue to make such acquisitions and investments in the future, and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the industry. While we remain focused on improving operating margins, these acquisitions and investments will increase our costs on an absolute basis in the near-term. Many of these investments will occur in advance of experiencing any direct benefit from them and willcould make it difficult to determine if we are allocating our resources efficiently. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs and by utilizing more of the capacity of our data centers.
Since inception, we have also invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. Additionally, we continue to expand our professional servicesservice partner ecosystem to further support our customers. We believe our investment in professional services, as well as partners building consulting practices around Workday, will drive additional customer subscriptions and continued growth in revenues. Due to our ability to leverage the expanding partner ecosystem, we will not be ramping our professional services organization atexpect that the same growth rates as we have in the past, and we expect professional services revenues and the costrate of professional services as a percentage of total revenuesrevenue growth will decline over time and continue to decline over time.be lower than subscription revenue growth.
Components of Results of Operations
Revenues
We primarily derive our revenues from subscription services fees and professional services fees.services. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include routinerelated customer support at no additional cost.support. Professional services fees include deployment services, optimization services, and training.
Subscription services revenues accounted for 80%85% of our total revenues during fiscal 20162019 and represented 97%96% of our total unearned revenue as of January 31, 2016.2019. Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the number ofspecific applications subscribed to by each customer, and the price of our applications.
The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Compared toPricing for our other offerings, our HCMapplications varies based on many factors, including the complexity and maturity of the application has been available for a longer period of time, is more establishedand its acceptance in the marketplace and has benefited from continued enhancements of the functionality over a longer period of time, all of which help us to improve our pricing for that application. However, newmarketplace. New products or services offerings by competitors in the future could also impact the mix and pricing of our offerings.
Subscription services feesrevenues are generally recognized ratablyover time as revenuesthey are delivered and consumed concurrently over the contractcontractual term, beginning on the date the applicationour service is made available to the customer, which is generally within one week of contract signing.customer. Our subscription contracts typically have a term of three years or longer and are generally non-cancelable. We generally invoice our customers annually in advance, in annual installments.advance. Amounts that have been invoiced are initially recorded as unearned revenue. Amounts that have not yet been invoiced represent backlog and are not reflected in our consolidated financial statements.
The majority of our consulting engagements are billed on a time and materials basis, and revenues are typically recognized over time as the services are performed. We offer a number of training options intended to support our customers in configuring, using and administering our services. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As Workday’sour professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription services revenues, we expect professional services revenues as a percentage of total revenues to decline over time.
Costs and Expenses
Costs of subscription services revenues. Costs of subscription services revenues consist primarily of employee-related expenses related to hosting our applications and providing customer support, the costs of data center capacity, and depreciation of computer equipment and software.
Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors, and travel. The percentage of total revenues derived from professional services was 20% in fiscal 2016. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscription services.
Product development. Product development expenses consist primarily of employee-related costs. We continue to focus our product development efforts on adding new features and applications, increasing the functionality, and enhancing the ease of use of our cloud applications.
Sales and marketing. Sales and marketing expenses consist primarily of employee-related costs, sales commissions, marketing programs, and travel. Marketing programs consist of advertising, events, corporate communications, brand building, and product marketing activities. Commissions earned by our sales force that can be associated specificallySales commissions are considered incremental costs of obtaining a contract with a non-cancelable subscription contractcustomer and are generally deferred and amortized. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the same period that revenues are recognized for the related non-cancelable contract.contractual renewal period.
General and administrative. General and administrative expenses consist of employee-related costs for finance and accounting, legal, human resources, and management information systems personnel, legal costs, professional fees, and other corporate expenses.
Results of Operations
Revenues
Our total revenues for fiscal 2016, 20152019, 2018, and 20142017 were as follows:follows (in thousands, except percentages):
| Year Ended January 31, | Year Ended January 31, | |||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2015 to 2016 % Change | 2014 to 2015 % Change | 2019 | 2018 | 2017 | 2018 to 2019 % Change | 2017 to 2018 % Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | *As Adjusted | |||||||||||||||||||||||||||||||||
| Subscription services | $ | 929,234 | $ | 613,328 | $ | 354,169 | 52 | % | 73 | % | $ | 2,385,769 | $ | 1,787,833 | $ | 1,290,733 | 33 | % | 39 | % | ||||||||||||||
| Professional services | 233,112 | 174,532 | 114,769 | 34 | % | 52 | % | 436,411 | 355,217 | 283,707 | 23 | % | 25 | % | ||||||||||||||||||||
| Total revenues | $ | 1,162,346 | $ | 787,860 | $ | 468,938 | 48 | % | 68 | % | $ | 2,822,180 | $ | 2,143,050 | $ | 1,574,440 | 32 | % | 36 | % | ||||||||||||||
| * | See Note 1 of the notes to consolidated financial statements for further information. |
GAAP operating expenses were $3.3 billion for fiscal 2019, compared to $2.4 billion for fiscal 2018, an increase of $0.9 billion, or 34%. The increase was primarily due to increases of $0.6 billion in employee-related costs driven by higher headcount and $0.1 billion in expenses related to facilities, IT, depreciation, amortization, and service contracts to expand data center capacity. These increases are partially attributable to the acquisition of Adaptive Insights and include one-time transaction and integration-related costs.
GAAP operating expenses were $2.4 billion for fiscal 2018, compared to $1.9 billion for fiscal 2017, an increase of $0.5 billion, or 27%. The increase was primarily due to increases of $0.4 billion in employee-related costs driven by higher headcount and $0.1 billion in expenses related to facilities, IT, depreciation, amortization, and service contracts to expand data center capacity.
We use the non-GAAP financial measure of corenon-GAAP operating expenses to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance and the ability of operations to generate cash.performance. We believe that corenon-GAAP operating expenses reflectsreflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as it excludesthey exclude expenses that are not reflective of ongoing operating results. We also believe that corenon-GAAP operating expenses providesprovide useful information to investors and others in understanding and evaluating our operating results and future prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
Non-GAAP operating expenses were $1.9 billion for fiscal 2018, compared to $1.5 billion for fiscal 2017, an increase of $0.4 billion, or 27%. The increase was primarily due to increases of $0.3 billion in employee-related costs driven by higher headcount and $0.1 billion in expenses related to facilities, IT, depreciation, amortization, and service contracts to expand data center capacity.
Reconciliations of our coreGAAP to non-GAAP operating expenses to the nearest GAAP measure, total operating expenses, arewere as follows:
| Year Ended January 31, 2016 | |||||||||||||||
Core Operating Expenses(1) | Share-Based Compensation Expenses | Other Operating Expenses | Total Operating Expenses | ||||||||||||
| (in thousands, except percentages) | |||||||||||||||
| Costs of subscription services | $ | 137,395 | $ | 12,060 | $ | 414 | $ | 149,869 | |||||||
| Costs of professional services | 204,264 | 19,526 | 768 | 224,558 | |||||||||||
| Product development | 353,381 | 109,362 | 7,201 | 469,944 | |||||||||||
| Sales and marketing | 380,957 | 51,617 | 1,482 | 434,056 | |||||||||||
| General and administrative | 89,078 | 57,405 | 2,095 | 148,578 | |||||||||||
| Total | $ | 1,165,075 | $ | 249,970 | $ | 11,960 | $ | 1,427,005 | |||||||
| Operating loss | $ | (2,729 | ) | $ | (249,970 | ) | $ | (11,960 | ) | $ | (264,659 | ) | |||
| Operating margin | (0.2 | )% | (21.6 | )% | (1.0 | )% | (22.8 | )% | |||||||
| Year Ended January 31, 2015 | ||||||||||||||||||||||||||||||
Core Operating Expenses(1) | Share-Based Compensation Expenses | Other Operating Expenses | Total Operating Expenses | Year Ended January 31, 2019 | ||||||||||||||||||||||||||
| (in thousands, except percentages) | GAAP Operating Expenses | Share-Based Compensation Expenses (1) | Other Operating Expenses (2) | Non-GAAP Operating Expenses (3) | ||||||||||||||||||||||||||
| Costs of subscription services | $ | 96,219 | $ | 6,053 | $ | 204 | $ | 102,476 | $ | 379,877 | $ | (36,754 | ) | $ | (31,395 | ) | $ | 311,728 | ||||||||||||
| Costs of professional services | 148,986 | 12,890 | 451 | 162,327 | 455,073 | (55,535 | ) | (3,653 | ) | 395,885 | ||||||||||||||||||||
| Product development | 249,709 | 63,938 | 3,221 | 316,868 | 1,211,832 | (320,876 | ) | (21,230 | ) | 869,726 | ||||||||||||||||||||
| Sales and marketing | 284,545 | 29,875 | 1,420 | 315,840 | 891,345 | (132,810 | ) | (19,725 | ) | 738,810 | ||||||||||||||||||||
| General and administrative | 61,557 | 43,292 | 1,202 | 106,051 | 347,337 | (127,443 | ) | (5,120 | ) | 214,774 | ||||||||||||||||||||
| Total | $ | 841,016 | $ | 156,048 | $ | 6,498 | $ | 1,003,562 | ||||||||||||||||||||||
| Operating loss | $ | (53,156 | ) | $ | (156,048 | ) | $ | (6,498 | ) | $ | (215,702 | ) | ||||||||||||||||||
| Operating margin | (6.7 | )% | (19.8 | )% | (0.9 | )% | (27.4 | )% | ||||||||||||||||||||||
| Total costs and expenses | $ | 3,285,464 | $ | (673,418 | ) | $ | (81,123 | ) | $ | 2,530,923 | ||||||||||||||||||||
| Year Ended January 31, 2014 | ||||||||||||||||||||||||||||||
Core Operating Expenses(1) | Share-Based Compensation Expenses | Other Operating Expenses | Total Operating Expenses | Year Ended January 31, 2018 | ||||||||||||||||||||||||||
| (in thousands, except percentages) | GAAP Operating Expenses | Share-Based Compensation Expenses (1) | Other Operating Expenses (2) | Non-GAAP Operating Expenses (3) | ||||||||||||||||||||||||||
| Costs of subscription services | $ | 66,770 | $ | 2,408 | $ | 17 | $ | 69,195 | $ | 273,461 | $ | (26,280 | ) | $ | (7,043 | ) | $ | 240,138 | ||||||||||||
| Costs of professional services | 102,141 | 4,818 | 656 | 107,615 | 355,952 | (37,592 | ) | (2,045 | ) | 316,315 | ||||||||||||||||||||
| Product development | 158,928 | 21,644 | 1,544 | 182,116 | 910,584 | (229,819 | ) | (23,128 | ) | 657,637 | ||||||||||||||||||||
| Sales and marketing | 184,359 | 12,131 | 883 | 197,373 | 683,367 | (100,762 | ) | (4,567 | ) | 578,038 | ||||||||||||||||||||
| General and administrative | 43,773 | 20,850 | 1,298 | 65,921 | 222,909 | (83,972 | ) | (3,614 | ) | 135,323 | ||||||||||||||||||||
| Total | $ | 555,971 | $ | 61,851 | $ | 4,398 | $ | 622,220 | ||||||||||||||||||||||
| Operating loss | $ | (87,033 | ) | $ | (61,851 | ) | $ | (4,398 | ) | $ | (153,282 | ) | ||||||||||||||||||
| Operating margin | (18.6 | )% | (13.2 | )% | (0.9 | )% | (32.7 | )% | ||||||||||||||||||||||
| Total costs and expenses | $ | 2,446,273 | $ | (478,425 | ) | $ | (40,397 | ) | $ | 1,927,451 | ||||||||||||||||||||
| Year Ended January 31, 2017 | |||||||||||||||
| GAAP Operating Expenses | Share-Based Compensation Expenses (1) | Other Operating Expenses (2) | Non-GAAP Operating Expenses (3) | ||||||||||||
| *As Adjusted | *As Adjusted | ||||||||||||||
| Costs of subscription services | $ | 213,389 | $ | (20,773 | ) | $ | (730 | ) | $ | 191,886 | |||||
| Costs of professional services | 270,156 | (26,833 | ) | (1,199 | ) | 242,124 | |||||||||
| Product development | 680,531 | (166,529 | ) | (18,533 | ) | 495,469 | |||||||||
| Sales and marketing | 565,328 | (86,229 | ) | (3,316 | ) | 475,783 | |||||||||
| General and administrative | 198,122 | (78,265 | ) | (3,302 | ) | 116,555 | |||||||||
| Total costs and expenses | $ | 1,927,526 | $ | (378,629 | ) | $ | (27,080 | ) | $ | 1,521,817 | |||||
(1) | Share-based compensation expenses were $673 million, $478 million, and $379 million for fiscal 2019, 2018, and 2017, respectively. The increase in share-based compensation expenses was primarily due to assumed Adaptive Insights awards and grants of RSUs to existing and new employees. |
(2) | Other operating expenses include employer payroll tax-related items on employee stock transactions of $32 million, $21 million, and $14 million for fiscal 2019, 2018, and 2017, respectively. In addition, other operating expenses include amortization of acquisition-related intangible assets of $49 million, $19 million, and $13 million for fiscal 2019, 2018, and 2017, respectively. |
(3) | See “Non-GAAP Financial Measures” below for further information. |
| * | See Note 1 of the notes to consolidated financial statements for further information. |
Costs of Subscription Services
GAAP operating expenses in costs of subscription services were $273 million for fiscal 2018, compared to $213 million for fiscal 2017, an increase of $60 million, or 28%. The increase was primarily due to increases of $23 million in depreciation expense related to our data centers, $7$22 million in service contracts expense to expand data center capacity,employee-related costs driven by higher headcount, and $6$10 million in facility and IT-related expenses.
Non-GAAP operating expenses in costs of subscription services were $240 million for fiscal 2018, compared to $192 million for fiscal 2017, an increase of $48 million, or 25%. The increase was primarily due to increases of $17 million in depreciation expense related to our data centers, $6$16 million in service contracts expense to expand data center capacity,employee-related costs driven by higher headcount, and $3$10 million in facility and IT-related expenses.
We expect that coreGAAP and non-GAAP operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our data center capacity and operations.
Costs of Professional Services
Non-GAAP operating expenses in facility and IT-related expenses.
Non-GAAP operating expenses in costs of professional serviceservices were $316 million for fiscal 2018, compared to $242 million for fiscal 2017, an increase of $74 million, or 31%. The increase was primarily due to increases of $59 million to staff as well as third-party supplemental staff. our deployment and integration engagements.
Going forward, we expect GAAP and non-GAAP costs of professional services as a percentage of total revenues to continue to decline as we increasinglycontinue to rely on third partiesour service partners to deploy our applications and as the number of our customers continues to grow. For fiscal 2017,2020, we anticipate GAAP and non-GAAP professional services margins to be lower than fiscal 20162019 as we invest in building our partnership ecosystem in the education and government sectors, as well as internationally.programs to ensure ongoing customer success.
Product Development
Non-GAAP operating expenses in product development were $870 million for fiscal 2019, compared to $658 million for fiscal 2018, an increase of $212 million, or 32%. The increase was primarily due to increases of $170 million in employee-related costs due to higher headcount and $26 million in facility and IT-related expenses.
Non-GAAP operating expenses in product development were $658 million for fiscal 2018, compared to $495 million for fiscal 2017, an increase of $163 million, or 33%. The increase was primarily due to increases of $113 million in employee-related costs due to higher headcount, $34 million in facility and IT-related expenses, and $15 million in third-party costs for hardware maintenance and data center capacity.
We expect that GAAP and non-GAAP product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.
Sales and Marketing
Non-GAAP operating expenses in sales and $6marketing were $739 million for fiscal 2019, compared to $578 million for fiscal 2018, an increase of $161 million, or 28%. The increase was primarily due to increases of $114 million in travel.employee-related costs due to higher headcount and higher commissionable sales volume, $20 million in advertising, marketing, and event costs, $13 million in travel, and $11 million in facility and IT-related expenses.
Non-GAAP operating expenses in sales and marketing were $578 million for fiscal 2018, compared to $476 million for fiscal 2017, an increase of $102 million, or 21%. The increase was primarily due to increases of $71 million in employee-related costs due to higher headcount and higher commissionable sales volume, $14 million in advertising, marketing, and event costs, and $11 million in facility and IT-related expenses.
We expect that GAAP and non-GAAP sales and marketing expenses will continue to increase in absolute dollars as we continue to invest in the expansion of our domestic and international selling and marketing activities to build brand awareness and attract new customers.
General and Administrative
GAAP operating expenses in general and administrative were $223 million for fiscal 2018, compared to $198 million for fiscal 2017, an increase of $25 million, or 13%. The increase was primarily due to $20 million in higher employee compensationemployee-related costs due to higher headcount, and $10$3 million in higher professional services costs including consulting, legal, and audit.
Non-GAAP operating expenses in general and administrative were $135 million for fiscal 2018, compared to $117 million for fiscal 2017, an increase of $18 million, or 15%. The increase was primarily due to $14 million in higher employee compensationemployee-related costs due to higher headcount, $4and $3 million in higher professional services costs including consulting, legal, and audit and $2 million in facility and IT-related expenses.audit.
We expect GAAP and non-GAAP general and administrative expenses will continue to increase in absolute dollars as we further invest in our infrastructure and support our global expansion.
GAAP operating margins improved from (22.4)% for fiscal 2015 compared2017 to (14.1)% for fiscal 20142018. The improvement in our GAAP operating margin was primarily due to higher subscription services revenues, higher professional services revenues, and improvements in operating leverage.
We use the non-GAAP financial measure of non-GAAP operating margins to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that non-GAAP operating margins reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude expenses that are not reflective of ongoing operating results. We also believe that non-GAAP operating margins provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
Non-GAAP operating margins are calculated using GAAP revenues and non-GAAP operating expenses. See “Non-GAAP Financial Measures” below for further information.
Non-GAAP operating margins improved from 10.1% for fiscal 2018 to 10.3% for fiscal 2019. The improvement in our non-GAAP operating margin was primarily due to higher revenues, offset by higher operating expenses related to the Adaptive Insights acquisition, including one-time transaction and integration-related costs.
Non-GAAP operating margins improved from 3.3% for fiscal 2017 to 10.1% for fiscal 2018. The improvement in our non-GAAP operating margin was primarily due to higher subscription services revenues, higher professional services revenues, and improvements in operating leverage.
Reconciliations of our GAAP to non-GAAP operating margins were as follows:
| Year Ended January 31, 2019 | |||||||||||
| GAAP Operating Expenses | Share-Based Compensation Expenses | Other Operating Expenses | Non-GAAP Operating Expenses (1) | ||||||||
| Operating margin | (16.4 | )% | 23.8 | % | 2.9 | % | 10.3 | % | |||
| Year Ended January 31, 2018 | |||||||||||
| GAAP Operating Expenses | Share-Based Compensation Expenses | Other Operating Expenses | Non-GAAP Operating Expenses (1) | ||||||||
| Operating margin | (14.1 | )% | 22.3 | % | 1.9 | % | 10.1 | % | |||
| Year Ended January 31, 2017 | |||||||||||
| GAAP Operating Expenses | Share-Based Compensation Expenses | Other Operating Expenses | Non-GAAP Operating Expenses (1) | ||||||||
| *As Adjusted | *As Adjusted | ||||||||||
| Operating margin | (22.4 | )% | 24.0 | % | 1.7 | % | 3.3 | % | |||
(1) | See “Non-GAAP Financial Measures” below for further information. |
| * | See Note 1 of the notes to consolidated financial statements for further information. |
Other Income (Expense), Net
Other income (expense), net was $40 million, $(12) million, and $(32) million for fiscal 2019, 2018, and 2017, respectively.
The increase in other income, net for fiscal 2019 compared to fiscal 2018 was caused by an increase in the numberother income of employees, as well as a change in the timing of the cycle in which we grant additional equity awards to existing employees which resulted in grants that were made earlier in the fiscal year in fiscal 2015 relative to fiscal 2014. During fiscal 2016, 2015 and 2014, the realized excess tax benefits$50 million primarily related to share-based compensation were immaterial. The next grantthe net gain from our equity investments and an increase in interest income of $17 million. This was offset by an increase in interest expense of $16 million primarily related to existing employees is planned for the first quarter of fiscal0.25% convertible senior notes issued in September 2017.
Liquidity and Capital Resources
As of January 31, 2016,2019, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $2.0$1.8 billion, which were primarily held for working capital purposes. Our cash equivalents and marketable securities are composed primarily of U.S. agency obligations, U.S. treasury securities, U.S. agency obligations, corporate securities,bonds, commercial paper, and money market funds.
We have financed our operations primarily through customer payments, sales of equity securities, customer payments, and issuance of debt. Our future capital requirements will depend on many factors, including our customer growth rate, subscription renewal activity, the timing of construction of our new development centerfacilities in Pleasanton, California and the acquisition of additional facilities, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of our services, and acquisition activities. We may enter into arrangements to acquire or invest in complementary businesses, services, and technologies, or intellectual property rights in the future. We also may choose to seek additional equity or debt financing.
Our cash flows for fiscal 2016, 20152019, 2018, and 20142017 were as follows:follows (in thousands):
| Year Ended January 31, | Year Ended January 31, | |||||||||||||||||||||
| 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||
| (in thousands) | *As Adjusted | |||||||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||||
| Operating activities | $ | 258,637 | $ | 102,003 | $ | 46,263 | $ | 606,658 | $ | 465,727 | $ | 350,626 | ||||||||||
| Investing activities | (300,147 | ) | (404,167 | ) | (682,633 | ) | (842,784 | ) | (978,980 | ) | (168,885 | ) | ||||||||||
| Financing activities | 44,109 | 19,455 | 1,133,610 | (256,711 | ) | 1,106,262 | 59,681 | |||||||||||||||
| Effect of exchange rate changes | (704 | ) | (425 | ) | (72 | ) | (614 | ) | 751 | 385 | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 1,895 | $ | (283,134 | ) | $ | 497,168 | |||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (493,451 | ) | $ | 593,760 | $ | 241,807 | |||||||||||||||
| Year Ended January 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in thousands) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 258,637 | $ | 102,003 | $ | 46,263 | |||||
| Purchases of property and equipment | (133,667 | ) | (103,646 | ) | (60,725 | ) | |||||
| Property and equipment acquired under capital leases | — | — | (115 | ) | |||||||
| Purchase of other intangible assets | — | — | (15,000 | ) | |||||||
| Free cash flows | $ | 124,970 | $ | (1,643 | ) | $ | (29,577 | ) | |||
| * | See Note 1 of the notes to consolidated financial statements for further information. |
Operating Activities
Cash provided by operating activities was $259$607 million, $102$466 million, and $46$351 million for fiscal 2016, 20152019, 2018, and 2014,2017, respectively. The improvements in cash flows provided by operating activities in both fiscal 20162019 and 20152018 compared to prior fiscal years resulted primarily from increased sales and the related cash collections, driven by growth in our customer sales contracts, partially offset by increases in our headcount related and other operational expenses.higher operating expenses driven by increased headcount.
Investing Activities
Cash used in investing activities for fiscal 2016, 20152019 was $843 million, which was primarily the result of a net cash outflow of $1.4 billion related to the Adaptive Insights acquisition, capital expenditures for data center and 2014 was $300office space projects of $203 million, $404capital expenditures related to the construction of our development center of $160 million, and $683purchases of non-marketable equity and other investments of $43 million. These payments were partially offset by the timing of purchases and maturities of marketable securities, proceeds of $950 million respectively,from the sale of marketable securities, and proceeds of $18 million from the sales and maturities of non-marketable equity and other investments. The sale of marketable securities during fiscal 2019 was primarily to fund the Adaptive Insights acquisition.
Cash used in investing activities for fiscal 2018 was $979 million, which was primarily the result of the timing of purchases and maturities of marketable securities, and capital expenditures for owned real estate projects (including construction of $134our development center) of $125 million, $104capital expenditures for data center and office space projects of $142 million, purchases of non-marketable equity and other investments of $16 million, purchases of other non-acquisition related intangible assets of $11 million, and $61a net cash outflow of $6 million respectively. During fiscal 2016, we paid $31 millionrelated to acquire new businesses and $17 million to purchase cost method investments, and we receivedan acquisition. These payments were partially offset by proceeds of $103$244 million from the sale of available-for-salemarketable securities.
Cash used in investing activities for fiscal 2017 was $169 million, which was primarily the result of the timing of purchases and maturities of marketable securities, a net cash outflow of $148 million related to acquisitions, purchases of office buildings and $4land in Pleasanton, California for $62 million, capital expenditures for owned real estate projects (including construction of our development center) of $45 million, and capital expenditures for data center and office space projects of $121 million. These payments were partially offset by proceeds of $133 million from the sale of a cost method investment. During fiscal 2015, we paid $26 million to acquire a new businessmarketable securities and $10 million to purchase a cost method investment, and received proceeds of $53$5 million from the salesales and maturities of available-for-sale securities. During fiscal 2014, we paid $10 million to purchase a leasehold interest in land in Pleasanton adjacent to our existing office spacenon-marketable equity and $5 million to acquire patents.other investments.
We expect capital expenditures excludingrelated to owned real estate projects, including construction of our development center, will be approximately $175$130 million for fiscal 2017.2020. We expect capital expenditures, excluding owned real estate projects, will be approximately $280 million for fiscal 2020. We expect that these capital outlays will largely be used to expand the infrastructure of our data centers and to build out additional office space to support our growth. We expect capital expenditures for the development center will be approximately $125 million for fiscal 2017.
Financing Activities
For fiscal 2016,2019, cash provided byused in financing activities was $44$257 million, which was primarily as a resultdue to the principal payment of $46$350 million of 0.75% convertible senior notes, offset by $94 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $3 million in principal payments on our capital lease obligations.plans.
For fiscal 2015,2018, cash provided by financing activities was $19$1.1 billion, which was primarily due to the issuance of $1.15 billion principal amount of 0.25% convertible senior notes due October 1, 2022, net of issuance costs of $18 million, primarily as a resultand the related sale of $36warrants for $81 million and purchase of note hedges for $176 million. For further information, see Note 11 of the notes to consolidated financial statements. In addition, cash flows from financing activities included $69 million of proceeds from the issuance of common stock from employee equity plans, partially offset by $10 million in principal payments on our capital lease obligations and $8 million of Class A common share repurchases for tax withholdings on vesting of restricted stock.plans.
For fiscal 2014,2017, cash provided by financing activities was $1 billion,$60 million, primarily as a result of $584$58 million in net proceeds from issuance of the Notes, $592 million in net proceeds from our follow-on offering of Class A common stock, $93 million in proceeds from the issuance of warrants related to the Notes and $24 million in proceeds from the issuance of common stock from employee equity plans. These proceeds were partially offset by $144 million to purchase convertible senior notes hedges and $12 million in principal payments on our capital lease obligations. We purchased the convertible senior notes hedges to offset potential economic dilution to our Class A common stock upon any conversion of the Notes.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of non-GAAP financial measures in Commission filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of corenon-GAAP operating expenses coreand non-GAAP operating margin and free cash flows each meet the definition of a non-GAAP financial measure.
We define corenon-GAAP operating expenses as our total operating expenses excluding the following components, which we believe are not reflective of our ongoing operational expenses. Similarly, the same components are also excluded from the calculation of non-GAAP operating margins. In each case, for the reasons set forth below, management believes that excluding the component provides useful information to investors and others in understanding and evaluating our operating results and future prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business.
Share-Based Compensation Expenses. Although share-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude share-based compensation expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. For restrictedShare-basedcompensation expenses are determined using a number of factors, including our stock unit awards, the amount ofprice, volatility, and forfeiture rates that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expenses isare not reflective of the value ultimately received by the grant recipients. Moreover, determining the fair value of certain of the share-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related share-based awards. Unlike cash compensation, the value of stock options and shares offered under the ESPP, which are elements of our ongoing share-based compensation expenses, is determined using a complex formula that incorporates factors, such as market volatility and forfeiture rates, that are beyond our control.
Other Operating Expenses.Other operating expenses includeincludes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of our ongoing operations.
Limitations on the Use of Non-GAAP Financial Measures
A limitation of our non-GAAP financial measures of corenon-GAAP operating expenses coreand non-GAAP operating margin and free cash flows is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Thus, ourFurther, the non-GAAP measuresfinancial measure of corenon-GAAP operating expenses corehas certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP financial measure of total operating margin and free cash flows should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Additionally, inexpenses. In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll tax-related items, the cash salary expense included in costs of revenues and operating expenses would be higher, which would affect our cash position. Further, the non-GAAP measure of core operating expenses has certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP measure of total operating expenses.
We compensate for these limitations by reconciling core operating expensesthe non-GAAP financial measures to the most comparable GAAP financial measure and reviewing thesemeasures. These non-GAAP financial measures should be considered in conjunctionaddition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP financial information.GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
See “ResultsResults of Operations—Core Operating Expenses”Expenses and Results of Operations—Operating Margins for a reconciliation ofreconciliations from the most directly comparable GAAP financial measures, GAAP operating expenses and GAAP operating margins, to the non-GAAP financial measure of coremeasures, non-GAAP operating expenses to the most comparable GAAP measure, “totaland non-GAAP operating expenses,”margins, for fiscal 2016, 20152019, 2018, and 2014.2017.
Contractual Obligations
The following table summarizes our consolidated principal contractual cash obligations as of January 31, 2016:2019 (in thousands):
| Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||||||||||||||||
0.75% Convertible Senior Notes due 2018(1) | $ | 350,000 | $ | — | $ | 350,000 | $ | — | $ | — | ||||||||||||||||||||||||||||
1.50% Convertible Senior Notes due 2020(1) | 250,000 | — | — | 250,000 | — | $ | 250,000 | $ | — | $ | 250,000 | $ | — | $ | — | |||||||||||||||||||||||
0.25% Convertible Senior Notes due 2022 (1) | 1,150,000 | — | — | 1,150,000 | — | |||||||||||||||||||||||||||||||||
Aggregate interest obligation(2) | 23,154 | 6,375 | 11,321 | 5,458 | — | 16,008 | 6,625 | 7,458 | 1,925 | — | ||||||||||||||||||||||||||||
| Operating lease obligations: | ||||||||||||||||||||||||||||||||||||||
Facilities space(3) | 177,165 | 44,370 | 56,437 | 37,177 | 39,181 | |||||||||||||||||||||||||||||||||
Facilities space, not including related party (3) | 273,906 | 64,364 | 95,916 | 60,173 | 53,453 | |||||||||||||||||||||||||||||||||
| Facilities space with related party | 77,315 | 7,540 | 17,951 | 18,699 | 33,125 | 90,619 | 12,972 | 32,740 | 31,297 | 13,610 | ||||||||||||||||||||||||||||
| Computing infrastructure platform obligations | 77,667 | 10,667 | 28,000 | 39,000 | — | |||||||||||||||||||||||||||||||||
| Contractual commitments | 7,083 | 7,083 | — | — | — | 77,399 | 18,479 | 25,498 | 33,422 | — | ||||||||||||||||||||||||||||
| Total | $ | 884,717 | $ | 65,368 | $ | 435,709 | $ | 311,334 | $ | 72,306 | $ | 1,935,599 | $ | 113,107 | $ | 439,612 | $ | 1,315,817 | $ | 67,063 | ||||||||||||||||||
(1) | Represents aggregate principal amount of the |
(2) | Represents estimated aggregate interest obligations for our outstanding Notes that are payable in cash. |
(3) | For the 95-year lease we entered in January |
Our contractual commitmentsobligations primarily consist of our convertible senior notes, as well as obligations under leases for office space, and co-location facilities for data center capacity.capacity, and computing infrastructure platforms for business operations. For fiscal 2017,2020, we anticipate leasing additional office space near our headquarters and in various other locations around the world to support our growth. In addition, our existing lease agreements often provide us with an option to renew. We expect our future operating lease obligations will increase as we expand our operations.
We are not required to make principal payments under the Notes prior to maturity. If the Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay $250 million in principal on July 15, 2020 and $1.15 billion in principal on October 1, 2022. We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 11 of the notes to the consolidated financial statements.
In January 2014, we entered into a 95-year lease for a 6.9 acre parcel of land in Pleasanton, California, under which we paid $2 million for base rent from commencement through December 31, 2020. Annual rent payments of $0.2 million plus increases based on increases in the consumer price indexCPI begin on January 1, 2021 and continue through the end of the lease. We expect to start construction of ourOur new development center, consisting of approximately 410,000 square feet of office space, is being constructed on this property during the first half of fiscal 2017. We have entered into anproperty. The agreement with athe contractor for the construction of the new development center however it is not included in the table above because it allows for termination without significant penalty. As noted in the Liquidity and Capital Resources section above, we expect capital expenditures related to the development center will be approximately $125 million for fiscal 2017.
Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitmentobligation amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Off-Balance Sheet Arrangements
Through January 31, 2016,2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 2 of the notes to ourthe consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We derive our revenues primarily from subscription services fees and from professional services. Revenues are recognized when control of these services fees, including training. We sell subscriptionsis transferred to our cloud applicationscustomers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through contracts that are generally three years in length. Our arrangements do not contain general rights of return. Our subscription contracts do not provide customers with the right to take possessionfollowing steps:
Identification of the software supporting the applications and, ascontract, or contracts, with a result, are accounted for as service contracts.customer
Subscription Services Revenues
Subscription services revenues areprimarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, planning, and analytics, with routine customer support. Revenue is generally recognized ratablyover time on a ratable basis over the contractualcontract term of the arrangement beginning on the date that our service is made available to the customer, assuming all other revenue recognition criteria have been met.customer. Our subscription contracts are generally three years or longer in length, billed annually in advance, and non-cancelable.
Professional Services Revenues
Professional services revenues are generally recognizedprimarily consist of fees for deployment and optimization services, as the services are rendered for time and material contracts, or on a proportional performance basis for fixed price contracts.well as training. The majority of our professional servicesconsulting contracts are billed on a time and materials basis. Training revenues arebasis and revenue is recognized over time as the services are rendered.performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.
Contracts with Multiple Deliverable ArrangementsPerformance Obligations
Some of our contracts with customers contain multiple performance obligations. For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery,these contracts, we account for each deliverableindividual performance obligations separately and revenue is recognized for the respective deliverables asif they are delivered.
basis. We determine the best estimate ofstandalone selling price for our deliverablesprices based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors. We evaluate our best estimate of selling price by reviewing historical data related to salesother factors, including the value of our deliverables, including comparing the percentages of our contract prices to our list prices. We also consider several other data points in our evaluation, including the size of our arrangements,contracts, the cloud applications sold, customer demographics, geographic locations, and the numbersnumber and types of users within our arrangements.contracts.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be direct salesfive years. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. Sales commissions when they can be associated specifically with a non-cancelable subscription contract. Direct sales commissionsfor renewal contracts are deferred when earned and then amortized on a straight-line basis over the same period that revenues are recognized for the related non-cancelable subscription contract. The commission payments are paidcontractual renewal period. Amortization expense is included in full after the customer has paid for its first year of service. During fiscal 2016, we deferred $32 million of commissions and we amortized $20 million to salesSales and marketing expenses inon the accompanying consolidated statements of operations. During fiscal 2015, we deferred $23 million of commission expenditures and we amortized $16 million to sales and marketing expenses in the accompanying consolidated statements of operations. Deferred commissions on our consolidated balance sheets totaled $51 million and $37 million at January 31, 2016 and 2015, respectively.
Convertible Senior Notes
In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 (“2018 Notes”) with a principal amount of $350 million, which were subsequently converted by note holders during the second quarter of fiscal 2019. Concurrently in June 2013, we issued 1.50% convertible senior notes due July 15, 2020 (“2020 Notes”) with a principal amount of $250 million. In September 2017, we issued 0.25% convertible senior notes due October 1, 2022 (“2022 Notes”) with a principal amount of $1.15 billion (together with the 2018 Notes and 2020 Notes, referred to as the “Notes”). In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components. The carrying amountamounts of the liability component wascomponents were calculated by measuring the fair value of a similar liabilityliabilities that doesdo not have an associated convertible feature.features. The carrying amount of the equity componentcomponents representing the conversion option waswere determined by deducting the fair value of the liability componentcomponents from the par value of the Notes as a whole. This difference represents arespective Notes. These differences represent debt discountdiscounts that isare amortized to interest expense over the respective terms of the Notes.Notes using the effective interest rate method. The equity component iscomponents are not remeasured as long as it continuesthey continue to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to the liability and equity components.components based on their relative values. Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes, andNotes. The issuance costs attributable to the equity components were netted withagainst the respective equity componentcomponents in additionalAdditional paid-in capital.
Business Combinations, Goodwill, and Acquisition-Related Intangible Assets
Accounting for business combinations requires us to make significant estimates and assumptions. We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, with the excess recorded to goodwill. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, royalty rates, and discount rates. The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.
We use estimates, assumptions, and judgments when assessing the recoverability of goodwill and acquisition-related intangible assets. We test for impairment on an annual basis, or more frequently if a significant event or circumstance indicates impairment. We also evaluate the estimated remaining useful lives of acquisition-related intangible assets for changes in circumstances that warrant a revision to the remaining periods of amortization.
Recent Accounting Pronouncements
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We transact business globally in multiple currencies. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. OurAs of January 31, 2019 and 2018, our most significant currency exposures arewere the Euro,euro, British Pound Sterlingpound, Canadian dollar, and Canadian Dollar. Australian dollar.
Due to the relative size of our international operations to date and the fact that the majority of our contracts are currently in U.S. dollars, our foreign currency exposure has been fairly limited. We anticipate that our exposure to market risks that may result from changes in foreign currency fluctuations will increase over time, and, as a result,exchange rates, we have aenter into foreign currency derivative hedging program focused on certain currencies.transactions to mitigate these risks. For fiscal 2017 and beyond, we expectfurther information, see Note 10 of the number of contracts denominated in currencies other than the U.S. dollarsnotes to increase.consolidated financial statements.
Interest Rate Sensitivity
We had cash, cash equivalents, and marketable securities totaling $2.0$1.8 billion and $3.3 billion as of January 31, 2016.2019 and 2018, respectively. Cash equivalents and marketable securities were invested primarily in U.S. agency obligations, U.S. treasury securities, U.S. agency obligations, corporate securities,bonds, commercial paper, and money market funds. The cash, cash equivalents, and marketable securities are held primarily for working capital purposes. Our investmentsinvestment portfolios are made formanaged to preserve capital preservation purposes.and meet liquidity needs. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of marketabledebt securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our marketabledebt securities as “available for sale,” no gains or losses are recognized in income due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
An immediate increase of 100-basis100 basis points in interest rates would have resulted in a $8$5 million and $10 million market value reduction in our investment portfolio as of January 31, 2016. Each of our investments earn less than 100-basis points2019 and as a result, an2018, respectively. An immediate decrease of 100-basis100 basis points in interest rates would have increased the market value by $5 million and $10 million as of January 31, 2016.2019 and 2018, respectively. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in Accumulated other comprehensive income (loss), and are realized only if we sell the underlying securities.securities before maturity.
Market Risk and Market Interest Risk
In June 2013, we issuedcompleted an offering of $350 million of 0.75% convertible senior notes due July 15, 2018, which were subsequently converted by note holders during the second quarter of fiscal 2019. In June 2013, concurrent with the 2018 Notes andoffering, we issued $250 million of 2020 Notes. 1.50% convertible senior notes due July 15, 2020. In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022.
Holders may convert the Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, holders of the Notes will receive cash, shares of Class A common stock, or a combination of cash and shares of Class A common stock, at our election.
Concurrently with the issuance of the Notes, we entered into separate note hedge and warrant transactions. These separate transactions were completed to reduce the potential economic dilution from the conversion of the Notes.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WORKDAY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Workday, Inc. (the Company) as of January 31, 20162019 and 2015, and2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows and stockholders' equity for each of the three years in the period ended January 31, 2016. These2019, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Workday, Inc.the Company at January 31, 20162019 and 2015,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2016,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Workday, Inc.’sthe Company’s internal control over financial reporting as of January 31, 2016,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 22, 201618, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
San Francisco,Jose, California
March 22, 201618, 2019
Report of Independent Registered Public Accounting Firm
Opinion on Internal Control Over Financial Reporting
We have audited Workday, Inc.’s internal control over financial reporting as of January 31, 2016,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Workday, Inc.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2019, and the related notes and our report dated March 18, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Ernst & Young LLP | |
San Francisco,Jose, California
March 22, 201618, 2019
WORKDAY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per sharepar value data)
| January 31, | January 31, | |||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 300,087 | $ | 298,192 | $ | 638,554 | $ | 1,134,355 | ||||||
| Marketable securities | 1,669,372 | 1,559,517 | 1,139,864 | 2,133,495 | ||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $1,592 and $1,262 | 293,407 | 188,357 | ||||||||||||
| Trade and other receivables, net of allowance for doubtful accounts of $5,965 and $2,212, respectively | 704,680 | 528,208 | ||||||||||||
| Deferred costs | 21,817 | 20,471 | 80,809 | 63,060 | ||||||||||
| Prepaid expenses and other current assets | 77,625 | 41,850 | 136,689 | 97,860 | ||||||||||
| Total current assets | 2,362,308 | 2,108,387 | 2,700,596 | 3,956,978 | ||||||||||
| Property and equipment, net | 214,158 | 140,136 | 796,907 | 546,609 | ||||||||||
| Deferred costs, noncurrent | 30,074 | 20,998 | 183,518 | 140,509 | ||||||||||
| Goodwill and acquisition-related intangible assets, net | 65,816 | 34,779 | ||||||||||||
| Acquisition-related intangible assets, net | 313,240 | 34,234 | ||||||||||||
| Goodwill | 1,379,125 | 159,376 | ||||||||||||
| Other assets | 57,738 | 45,790 | 147,360 | 109,718 | ||||||||||
| Total assets | $ | 2,730,094 | $ | 2,350,090 | $ | 5,520,746 | $ | 4,947,424 | ||||||
| Liabilities and stockholders’ equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 19,605 | $ | 10,623 | $ | 29,093 | $ | 20,998 | ||||||
| Accrued expenses and other current liabilities | 43,122 | 24,132 | 123,542 | 121,879 | ||||||||||
| Accrued compensation | 91,211 | 56,152 | 207,924 | 148,247 | ||||||||||
| Capital leases | — | 3,207 | ||||||||||||
| Unearned revenue | 768,741 | 547,151 | 1,837,618 | 1,426,241 | ||||||||||
| Current portion of convertible senior notes, net | 232,514 | 341,509 | ||||||||||||
| Total current liabilities | 922,679 | 641,265 | 2,430,691 | 2,058,874 | ||||||||||
| Convertible senior notes, net | 507,476 | 481,958 | 972,264 | 1,149,845 | ||||||||||
| Unearned revenue, noncurrent | 130,988 | 85,593 | 111,652 | 110,906 | ||||||||||
| Other liabilities | 32,794 | 15,299 | 47,697 | 47,434 | ||||||||||
| Total liabilities | 1,593,937 | 1,224,115 | 3,562,304 | 3,367,059 | ||||||||||
| Commitments and contingencies (Note 11) | ||||||||||||||
| Commitments and contingencies (Note 12) | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
| Preferred stock, $0.001 par value; 10 million shares authorized as of January 31, 2016 and January 31, 2015; no shares issued and outstanding as of January 31, 2016 and January 31, 2015 | — | — | ||||||||||||
| Class A common stock, $0.001 par value; 750 million shares authorized as of January 31, 2016 and January 31, 2015; 116 million and 105 million shares issued and outstanding as of January 31, 2016 and January 31, 2015 | 115 | 104 | ||||||||||||
| Class B common stock, $0.001 par value; 240 million shares authorized as of January 31, 2016 and January 31, 2015; 79 million and 83 million shares issued and outstanding as of January 31, 2016 and January 31, 2015 (including 1 million shares subject to repurchase, legally issued and outstanding as of January 31, 2016 and January 31, 2015) | 78 | 82 | ||||||||||||
| Preferred stock, $0.001 par value; 10 million shares authorized as of January 31, 2019 and 2018; no shares issued and outstanding as of January 31, 2019 and 2018 | — | — | ||||||||||||
| Class A common stock, $0.001 par value; 750 million shares authorized as of January 31, 2019 and 2018; 157 million and 142 million shares issued and outstanding as of January 31, 2019 and 2018, respectively | 157 | 142 | ||||||||||||
| Class B common stock, $0.001 par value; 240 million shares authorized as of January 31, 2019 and 2018; 65 million and 70 million shares issued and outstanding as of January 31, 2019 and 2018, respectively | 64 | 69 | ||||||||||||
| Additional paid-in capital | 2,247,454 | 1,948,300 | 4,105,334 | 3,354,423 | ||||||||||
| Accumulated other comprehensive income (loss) | 799 | (140 | ) | (809 | ) | (46,413 | ) | |||||||
| Accumulated deficit | (1,112,289 | ) | (822,371 | ) | (2,146,304 | ) | (1,727,856 | ) | ||||||
| Total stockholders’ equity | 1,136,157 | 1,125,975 | 1,958,442 | 1,580,365 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 2,730,094 | $ | 2,350,090 | $ | 5,520,746 | $ | 4,947,424 | ||||||
WORKDAY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year Ended January 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| *As Adjusted | |||||||||||
| Revenues: | |||||||||||
| Subscription services | $ | 2,385,769 | $ | 1,787,833 | $ | 1,290,733 | |||||
| Professional services | 436,411 | 355,217 | 283,707 | ||||||||
| Total revenues | 2,822,180 | 2,143,050 | 1,574,440 | ||||||||
Costs and expenses (1): | |||||||||||
| Costs of subscription services | 379,877 | 273,461 | 213,389 | ||||||||
| Costs of professional services | 455,073 | 355,952 | 270,156 | ||||||||
| Product development | 1,211,832 | 910,584 | 680,531 | ||||||||
| Sales and marketing | 891,345 | 683,367 | 565,328 | ||||||||
| General and administrative | 347,337 | 222,909 | 198,122 | ||||||||
| Total costs and expenses | 3,285,464 | 2,446,273 | 1,927,526 | ||||||||
| Operating loss | (463,284 | ) | (303,223 | ) | (353,086 | ) | |||||
| Other income (expense), net | 39,532 | (11,563 | ) | (32,427 | ) | ||||||
| Loss before provision for (benefit from) income taxes | (423,752 | ) | (314,786 | ) | (385,513 | ) | |||||
| Provision for (benefit from) income taxes | (5,494 | ) | 6,436 | (814 | ) | ||||||
| Net loss | $ | (418,258 | ) | $ | (321,222 | ) | $ | (384,699 | ) | ||
| Net loss attributable to Class A and Class B common stockholders | $ | (418,258 | ) | $ | (321,222 | ) | $ | (384,699 | ) | ||
| Net loss per share attributable to Class A and Class B common stockholders, basic and diluted | $ | (1.93 | ) | $ | (1.55 | ) | $ | (1.94 | ) | ||
| Weighted-average shares used to compute net loss per share attributable to Class A and Class B common stockholders | 216,789 | 207,774 | 198,214 | ||||||||
| Year Ended January 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| Revenues: | |||||||||||
| Subscription services | $ | 929,234 | $ | 613,328 | $ | 354,169 | |||||
| Professional services | 233,112 | 174,532 | 114,769 | ||||||||
| Total revenues | 1,162,346 | 787,860 | 468,938 | ||||||||
Costs and expenses(1): | |||||||||||
| Costs of subscription services | 149,869 | 102,476 | 69,195 | ||||||||
| Costs of professional services | 224,558 | 162,327 | 107,615 | ||||||||
| Product development | 469,944 | 316,868 | 182,116 | ||||||||
| Sales and marketing | 434,056 | 315,840 | 197,373 | ||||||||
| General and administrative | 148,578 | 106,051 | 65,921 | ||||||||
| Total costs and expenses | 1,427,005 | 1,003,562 | 622,220 | ||||||||
| Operating loss | (264,659 | ) | (215,702 | ) | (153,282 | ) | |||||
| Other expense, net | (24,242 | ) | (30,270 | ) | (17,549 | ) | |||||
| Loss before provision for income taxes | (288,901 | ) | (245,972 | ) | (170,831 | ) | |||||
| Provision for income taxes | 1,017 | 2,010 | 1,678 | ||||||||
| Net loss | (289,918 | ) | (247,982 | ) | (172,509 | ) | |||||
| Net loss attributable to Class A and Class B common stockholders | $ | (289,918 | ) | $ | (247,982 | ) | $ | (172,509 | ) | ||
| Net loss per share attributable to Class A and Class B common stockholders, basic and diluted | $ | (1.53 | ) | $ | (1.35 | ) | $ | (1.01 | ) | ||
| Weighted-average shares used to compute net loss per share attributable to Class A and Class B common stockholders | 190,016 | 183,702 | 171,297 | ||||||||
(1) | Costs and expenses include share-based compensation expenses as follows: |
| Year Ended January 31, | Year Ended January 31, | |||||||||||||||||||||
| 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||
| Costs of subscription services | $ | 12,060 | $ | 6,053 | $ | 2,408 | $ | 36,754 | $ | 26,280 | $ | 20,773 | ||||||||||
| Costs of professional services | 19,526 | 12,890 | 4,818 | 55,535 | 37,592 | 26,833 | ||||||||||||||||
| Product development | 109,362 | 63,938 | 21,644 | 320,876 | 229,819 | 166,529 | ||||||||||||||||
| Sales and marketing | 51,617 | 29,875 | 12,131 | 132,810 | 100,762 | 86,229 | ||||||||||||||||
| General and administrative | 57,405 | 43,292 | 20,850 | 127,443 | 83,972 | 78,265 | ||||||||||||||||
* For further information, see Note 1.
WORKDAY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| Year Ended January 31, | ||||||||||||||||||||||
| Year Ended January 31, | 2019 | 2018 | 2017 | |||||||||||||||||||
| 2016 | 2015 | 2014 | *As Adjusted | |||||||||||||||||||
| Net loss | $ | (289,918 | ) | $ | (247,982 | ) | $ | (172,509 | ) | $ | (418,258 | ) | $ | (321,222 | ) | $ | (384,699 | ) | ||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||
| Net change in foreign currency translation adjustment | (3,158 | ) | (525 | ) | (72 | ) | (1,635 | ) | 1,581 | 150 | ||||||||||||
| Net change in unrealized gains (losses) on available-for-sale investments | (842 | ) | 116 | 273 | ||||||||||||||||||
| Net change in market value of effective foreign currency forward exchange contracts | 4,939 | — | — | |||||||||||||||||||
| Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax provision of $660, $0, and $0, respectively | 2,534 | (2,687 | ) | (388 | ) | |||||||||||||||||
| Net change in market value of effective foreign currency forward exchange contracts, net of tax provision of $6,386, $0, and $0, respectively | 44,705 | (47,378 | ) | 1,510 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | 939 | (409 | ) | 201 | 45,604 | (48,484 | ) | 1,272 | ||||||||||||||
| Comprehensive loss | $ | (288,979 | ) | $ | (248,391 | ) | $ | (172,308 | ) | $ | (372,654 | ) | $ | (369,706 | ) | $ | (383,427 | ) | ||||
* For further information, see Note 1.
WORKDAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended January 31, | ||||||||||||||||||||||
| Year Ended January 31, | 2019 | 2018 | 2017 | |||||||||||||||||||
| 2016 | 2015 | 2014 | *As Adjusted | |||||||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||||
| Net loss | $ | (289,918 | ) | $ | (247,982 | ) | $ | (172,509 | ) | $ | (418,258 | ) | $ | (321,222 | ) | $ | (384,699 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||||||||
| Depreciation and amortization | 85,939 | 59,205 | 34,695 | 198,111 | 135,723 | 105,825 | ||||||||||||||||
| Share-based compensation expenses | 249,970 | 156,048 | 61,851 | 652,465 | 478,425 | 372,272 | ||||||||||||||||
| Amortization of deferred costs | 23,477 | 19,288 | 12,219 | 71,238 | 57,562 | 45,345 | ||||||||||||||||
| Amortization of debt discount and issuance costs | 25,518 | 24,171 | 14,395 | 59,974 | 43,916 | 26,947 | ||||||||||||||||
| Gain on sale of cost method investment | (3,220 | ) | — | — | ||||||||||||||||||
| Other | 1,047 | 2,924 | 678 | (53,195 | ) | (8,379 | ) | 23,013 | ||||||||||||||
| Changes in operating assets and liabilities, net of business combinations: | ||||||||||||||||||||||
| Accounts receivable | (105,264 | ) | (96,876 | ) | (25,037 | ) | ||||||||||||||||
| Trade and other receivables, net | (160,527 | ) | (114,613 | ) | (91,755 | ) | ||||||||||||||||
| Deferred costs | (33,899 | ) | (23,514 | ) | (21,071 | ) | (131,996 | ) | (92,552 | ) | (82,848 | ) | ||||||||||
| Prepaid expenses and other assets | (28,366 | ) | (15,524 | ) | (25,876 | ) | (16,344 | ) | (68,983 | ) | (16,794 | ) | ||||||||||
| Accounts payable | 6,824 | 1,120 | 3,547 | 5,877 | (7,249 | ) | 6,336 | |||||||||||||||
| Accrued expense and other liabilities | 59,724 | 3,964 | 35,066 | |||||||||||||||||||
| Accrued expenses and other liabilities | 54,895 | 47,515 | 23,367 | |||||||||||||||||||
| Unearned revenue | 266,805 | 219,179 | 128,305 | 344,418 | 315,584 | 323,617 | ||||||||||||||||
| Net cash provided by (used in) operating activities | 258,637 | 102,003 | 46,263 | 606,658 | 465,727 | 350,626 | ||||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||
| Purchases of marketable securities | (2,125,841 | ) | (1,737,840 | ) | (1,587,240 | ) | (1,989,868 | ) | (2,515,997 | ) | (1,917,238 | ) | ||||||||||
| Maturities of marketable securities | 1,901,858 | 1,419,454 | 983,242 | 2,090,693 | 1,591,554 | 1,986,031 | ||||||||||||||||
| Sales of available-for-sale securities | 102,711 | 53,182 | — | |||||||||||||||||||
| Sales of marketable securities | 949,970 | 243,727 | 133,292 | |||||||||||||||||||
| Business combinations, net of cash acquired | (31,436 | ) | (26,317 | ) | — | (1,474,337 | ) | (5,744 | ) | (147,879 | ) | |||||||||||
| Purchases of property and equipment | (133,667 | ) | (103,646 | ) | (60,725 | ) | ||||||||||||||||
| Purchases of cost method investments | (16,550 | ) | (10,000 | ) | (2,000 | ) | ||||||||||||||||
| Sale of cost method investment | 3,538 | — | — | |||||||||||||||||||
| Owned real estate projects | (181,180 | ) | (124,811 | ) | (106,997 | ) | ||||||||||||||||
| Capital expenditures, excluding owned real estate projects | (202,507 | ) | (141,536 | ) | (120,813 | ) | ||||||||||||||||
| Purchases of non-marketable equity and other investments | (43,016 | ) | (16,199 | ) | (300 | ) | ||||||||||||||||
| Sales and maturities of non-marketable equity and other investments | 17,911 | 1,026 | 5,315 | |||||||||||||||||||
| Purchase of other intangible assets | — | — | (15,000 | ) | (10,450 | ) | (11,000 | ) | — | |||||||||||||
| Other | (760 | ) | 1,000 | (910 | ) | — | — | (296 | ) | |||||||||||||
| Net cash provided by (used in) investing activities | (300,147 | ) | (404,167 | ) | (682,633 | ) | (842,784 | ) | (978,980 | ) | (168,885 | ) | ||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||
| Proceeds from follow-on offering, net of issuance costs | — | — | 592,241 | |||||||||||||||||||
| Proceeds from borrowings on convertible senior notes, net of issuance costs | — | — | 584,291 | — | 1,132,101 | — | ||||||||||||||||
| Proceeds from issuance of warrants | — | — | 92,708 | — | 80,805 | — | ||||||||||||||||
| Purchase of convertible senior notes hedges | — | — | (143,729 | ) | — | (175,530 | ) | — | ||||||||||||||
| Payments on convertible senior notes | (350,030 | ) | — | — | ||||||||||||||||||
| Proceeds from issuance of common stock from employee equity plans | 45,656 | 36,239 | 23,692 | 93,567 | 69,056 | 58,079 | ||||||||||||||||
| Principal payments on capital lease obligations | (3,193 | ) | (9,759 | ) | (12,129 | ) | ||||||||||||||||
| Shares repurchased for tax withholdings on vesting of restricted stock | — | (8,291 | ) | (3,806 | ) | |||||||||||||||||
| Other | 1,646 | 1,266 | 342 | (248 | ) | (170 | ) | 1,602 | ||||||||||||||
| Net cash provided by (used in) financing activities | 44,109 | 19,455 | 1,133,610 | (256,711 | ) | 1,106,262 | 59,681 | |||||||||||||||
| Effect of exchange rate changes | (704 | ) | (425 | ) | (72 | ) | (614 | ) | 751 | 385 | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 1,895 | (283,134 | ) | 497,168 | ||||||||||||||||||
| Cash and cash equivalents at the beginning of period | 298,192 | 581,326 | 84,158 | |||||||||||||||||||
| Cash and cash equivalents at the end of period | $ | 300,087 | $ | 298,192 | $ | 581,326 | ||||||||||||||||
| Supplemental cash flow data | ||||||||||||||||||||||
| Cash paid for interest | $ | 6,456 | $ | 6,869 | $ | 4,886 | ||||||||||||||||
| Cash paid for taxes | 2,124 | 943 | — | |||||||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||||
| Property and equipment acquired under capital leases | $ | — | $ | — | $ | 115 | ||||||||||||||||
| Vesting of early exercised stock options | 1,887 | 1,887 | 3,043 | |||||||||||||||||||
| Purchases of property and equipment, accrued but not paid | 14,052 | 8,776 | 1,613 | |||||||||||||||||||
| Non-cash additions to property and equipment | 7,256 | — | — | |||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (493,451 | ) | 593,760 | 241,807 | ||||||||||||||||||
| Cash, cash equivalents, and restricted cash at the beginning of period | 1,135,654 | 541,894 | 300,087 | |||||||||||||||||||
| Cash, cash equivalents, and restricted cash at the end of period | $ | 642,203 | $ | 1,135,654 | $ | 541,894 | ||||||||||||||||
| Year Ended January 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Supplemental cash flow data | |||||||||||
| Cash paid for interest, net of amounts capitalized | $ | 38 | $ | 76 | $ | 3,156 | |||||
| Cash paid for income taxes | 6,007 | 3,418 | 5,315 | ||||||||
| Non-cash investing and financing activities: | |||||||||||
| Vesting of early exercised stock options | $ | — | $ | 775 | $ | 1,803 | |||||
| Purchases of property and equipment, accrued but not paid | 56,308 | 51,545 | 27,696 | ||||||||
| Non-cash additions to property and equipment | 8,171 | 5,396 | 2,094 | ||||||||
| January 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| *As Adjusted | |||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of cash flows | |||||||||||
| Cash and cash equivalents | $ | 638,554 | $ | 1,134,355 | $ | 539,923 | |||||
| Restricted cash included in Prepaid expenses and other current assets | 3,519 | — | — | ||||||||
| Restricted cash included in Other assets | 130 | 1,299 | 1,971 | ||||||||
| Total cash, cash equivalents, and restricted cash | $ | 642,203 | $ | 1,135,654 | $ | 541,894 | |||||
* For further information, see Note 1.
WORKDAY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| Common Stock Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2013 | 166,424,872 | $ | 162 | $ | 993,933 | $ | 68 | $ | (401,880 | ) | $ | 592,283 | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | *As Adjusted | *As Adjusted | ||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2016 | 194,479,350 | $ | 193 | $ | (1,022,166 | ) | $ | 1,226,280 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee equity plans | 8,689,384 | 10 | 23,682 | — | — | 23,692 | 4,379,787 | 4 | 58,075 | — | — | — | 58,079 | |||||||||||||||||||||||||||||||||||
| Follow-on offering, net of issuance costs | 6,900,000 | 7 | 592,234 | — | — | 592,241 | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | 1 | 3,042 | — | — | 3,043 | — | 1 | 1,802 | — | — | — | 1,803 | |||||||||||||||||||||||||||||||||||
| Vested restricted stock units, net | 41,775 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for tax withholding on vesting of restricted stock | — | — | (3,806 | ) | — | — | (3,806 | ) | ||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | 4,084,268 | 4 | (4 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 61,851 | — | — | 61,851 | — | — | 372,272 | — | — | — | 372,272 | |||||||||||||||||||||||||||||||||||
| Exercise of warrants | 1,350,000 | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Excess tax benefits from share-based compensation | — | — | 342 | — | — | 342 | — | — | 1,226 | — | — | — | 1,226 | |||||||||||||||||||||||||||||||||||
| Other | — | — | 375 | — | — | — | 375 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 1,272 | — | 1,272 | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (384,699 | ) | (384,699 | ) | |||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2017 | 202,943,405 | $ | 202 | $ | 2,681,200 | $ | — | $ | 2,071 | $ | (1,406,865 | ) | $ | 1,276,608 | ||||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No. 2016-09 | — | — | — | — | — | 231 | 231 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee equity plans | 3,318,514 | 3 | 69,052 | — | — | — | 69,055 | |||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | 775 | — | — | — | 775 | |||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | 5,715,576 | 6 | (6 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 478,425 | — | — | — | 478,425 | |||||||||||||||||||||||||||||||||||||||||
| Purchase of convertible senior notes hedges | — | — | (143,729 | ) | — | — | (143,729 | ) | — | — | (175,530 | ) | — | — | — | (175,530 | ) | |||||||||||||||||||||||||||||||
| Issuance of warrants | — | — | 92,708 | — | — | 92,708 | — | — | 80,805 | — | — | — | 80,805 | |||||||||||||||||||||||||||||||||||
| Equity component of convertible senior notes | — | — | 140,899 | — | — | 140,899 | — | — | 219,702 | — | — | — | 219,702 | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 201 | — | 201 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (48,484 | ) | — | (48,484 | ) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (172,509 | ) | (172,509 | ) | — | — | — | — | — | (321,222 | ) | (321,222 | ) | |||||||||||||||||||||||||||||||
| Balances as of January 31, 2014 | 183,406,031 | $ | 181 | $ | 1,761,156 | $ | 269 | $ | (574,389 | ) | $ | 1,187,217 | ||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2018 | 211,977,495 | $ | 211 | $ | 3,354,423 | $ | — | $ | (46,413 | ) | $ | (1,727,856 | ) | $ | 1,580,365 | |||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No. 2016-16 (see Note 2) | — | — | — | — | — | 427 | 427 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee equity plans | 3,952,173 | 4 | 36,235 | — | — | 36,239 | 2,317,463 | 2 | 37,752 | 55,813 | — | — | 93,567 | |||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | 1,887 | — | — | 1,887 | ||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units, net | 1,057,851 | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for tax withholding on vesting of restricted stock | — | — | (8,292 | ) | — | — | (8,292 | ) | ||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | 6,273,733 | 6 | (6 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 156,048 | — | — | 156,048 | — | — | 652,404 | — | — | — | 652,404 | |||||||||||||||||||||||||||||||||||
| Excess tax benefits from share-based compensation | — | — | 1,175 | — | — | 1,175 | ||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | 91 | — | — | 91 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | (409 | ) | — | (409 | ) | ||||||||||||||||||||||||||||||||||||||||
| Exercise of convertible senior notes hedges | — | — | 193,680 | (193,679 | ) | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||
| Settlement of warrants | 25,990 | — | (137,245 | ) | 137,849 | — | (617 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||||||
| Settlement of convertible senior notes | 1,457,382 | 2 | (24 | ) | 17 | — | — | (5 | ) | |||||||||||||||||||||||||||||||||||||||
| Equity awards assumed in business combination | — | — | 4,350 | — | — | — | 4,350 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 45,604 | — | 45,604 | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (247,982 | ) | (247,982 | ) | — | — | — | — | — | (418,258 | ) | (418,258 | ) | |||||||||||||||||||||||||||||||
| Balances as of January 31, 2015 | 188,416,055 | $ | 186 | $ | 1,948,300 | $ | (140 | ) | $ | (822,371 | ) | $ | 1,125,975 | |||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee equity plans | 4,103,433 | 5 | 45,651 | — | — | 45,656 | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | 1,887 | — | — | 1,887 | ||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units, net | 1,959,862 | 2 | (2 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 249,970 | — | — | 249,970 | ||||||||||||||||||||||||||||||||||||||||||
| Excess tax benefits from share-based compensation | — | — | 1,646 | — | — | 1,646 | ||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | 2 | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 939 | — | 939 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (289,918 | ) | (289,918 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2016 | 194,479,350 | $ | 193 | $ | 2,247,454 | $ | 799 | $ | (1,112,289 | ) | $ | 1,136,157 | ||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2019 | 222,052,063 | $ | 221 | $ | 4,105,334 | $ | — | $ | (809 | ) | $ | (2,146,304 | ) | $ | 1,958,442 | |||||||||||||||||||||||||||||||||
* For further information, see Note 1.
Workday, Inc.
Notes to Consolidated Financial Statements
Note 1. Overview and Basis of Presentation
Company and Background
Workday provides financial management, human capital management, planning, and analytics applications designed for the world'sworld’s largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer Internetinternet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible, and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources. We were originally incorporated in March 2005 in Nevada and in June 2012, we reincorporated in Delaware.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal 2016,2019, for example, refer to the year ended January 31, 2016.2019.
Basis of Presentation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP)in the United States (“GAAP”). The consolidated financial statements include the results of Workday, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Effective February 1, 2017, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash. All amounts and disclosures set forth in this Form 10-K have been updated to comply with the new standards, as indicated by the “as adjusted” footnote.
Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation. The reclassifications, which include reclassifications related to the adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, andASU 2015-17, Balance Sheet Classification of Deferred Taxes (see Note 2 - Recently Adopted Accounting Pronouncements), were immaterial and had no effect on previously reported operating results.
Use of Estimates
The preparation of 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, the fair value of assets acquired and liabilities assumed through business combinations, the determination of the relative selling pricesperiod of benefit for our services,deferred commissions, certain assumptions used in the valuation of equity awards, and assumptions used in the fair valuevaluation of assets acquired and liabilities assumed through business combinations.non-marketable equity investments. Actual results could differ from those estimates and such differences could be material to our consolidated financial position and results of operations.
Segment Information
We operate in one operating segment, cloud applications. Operating segments are defined as components of an enterprise about whichwhere separate financial information is evaluated regularly by the chief operating decision maker, who is our chief executive officer, in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level. Since we operate in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Note 2. Accounting Standards and Significant Accounting Policies
Summary of Significant Accounting Policies
Revenue Recognition
We derive our revenues primarily from subscription services fees and from professional services. Revenues are recognized when control of these services fees, including training. We sell subscriptionsis transferred to our cloud applicationscustomers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through contracts that are generally three years in length. Our arrangements do not contain general rights of return. Our subscription contracts do not provide customers with the right to take possessionfollowing steps:
Identification of the software supporting the applications and, ascontract, or contracts, with a result, are accounted for as service contracts.customer
Subscription Services Revenues
Subscription services revenues areprimarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, planning, and analytics, with routine customer support. Revenue is generally recognized ratablyon a ratable basis over the contractualcontract term of the arrangement beginning on the date that our service is made available to the customer, assuming all revenue recognition criteria have been met.customer. Our subscription contracts are generally three years or longer in length, billed annually in advance, and non-cancelable.
Professional Services Revenues
Professional services revenues are generally recognizedprimarily consist of fees for deployment and optimization services, as the services are rendered for time and materials contracts, or on a proportional performance basis for fixed price contracts.well as training. The majority of our professional servicesconsulting contracts are billed on a time and materials basis. Training revenues arebasis and revenue is recognized over time as the services are rendered.performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.
Contracts with Multiple Deliverable ArrangementsPerformance Obligations
Some of our contracts with customers contain multiple performance obligations. For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery,these contracts, we account for each deliverableindividual performance obligations separately and revenue is recognized for the respective deliverables asif they are delivered.
basis. We determine the best estimate ofstandalone selling price for our deliverablesprices based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors. We evaluate our best estimate of selling price by reviewing historical data related to salesother factors, including the value of our deliverables, including comparing the percentages of our contract prices to our list prices. We also consider several other data points in our evaluation, including the size of our arrangements,contracts, the cloud applications sold, customer demographics, geographic locations, and the numbersnumber and types of users within our arrangements.contracts.
Fair Value Measurement
We measure our cash equivalents, marketable securities and foreign currency derivative contracts at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs that are supported by little or no market activity.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the time of purchase. Our cash equivalents generallyprimarily consist of investments in U.S. treasury securities, U.S. agency obligations, U.S. treasury securities,corporate bonds, commercial paper, and money market funds. Cash and cash equivalents are stated at fair value.
Our marketabledebt securities primarily consist of U.S. agency obligations,investments in U.S. treasury securities, U.S. agency obligations, corporate securities,bonds, and commercial paper. We classify our marketabledebt securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We may sell theseconsider all debt securities at any timeas available for use in current operations, or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, weincluding those with maturity dates beyond one year, and therefore classify our investments, includingthese securities with maturities beyond twelve months, as current assets in the accompanying consolidated balance sheets.
All marketabledebt securities are recorded at their estimated fair value. Unrealized gains and losses foron available-for-sale debt securities are recorded in Accumulated other comprehensive income (loss) (“OCI”). We evaluate our investments to assess whether those within unrealized loss positions are other-than-temporarily impaired. We consider impairments to be other than temporaryother-than-temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other expense,Other income (expense), net inon the consolidated statements of operations.
If quoted prices for identical instruments are available in an active market, debt securities are classified within Level 1 of the fair value hierarchy. If quoted prices for identical instruments in active markets are not available, fair values are estimated using quoted prices of similar instruments and Allowanceare classified within Level 2 of the fair value hierarchy. To date, all of our debt securities can be valued using one of these two methodologies.
Equity Investments
We hold marketable and non-marketable equity investments, over which we do not have a controlling interest or significant influence. Marketable equity investments are measured using quoted prices in active markets with changes recorded in Other income (expense), net on the consolidated statements of operations. Non-marketable equity investments have no readily determinable fair values and are measured using the measurement alternative, which is defined as cost, less impairment, adjusted for Doubtful Accountsobservable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments are recorded in Other income (expense), net on the consolidated statements of operations.
We assess our non-marketable equity investments quarterly for impairment. Our impairment analysis encompasses an assessment of the severity and duration of the impairment and a qualitative and quantitative analysis of other key factors including the investee’s financial metrics, market acceptance of the investee’s product or technology, other competitive products or technology in the market, general market conditions, and the rate at which the investee is using its cash. If our investment is considered to be impaired, we will record an impairment in Other income (expense), net on the consolidated statements of operations and establish a new carrying value for the investment.
Trade and Other Receivables
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoicedinvoice amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts, which is based on our assessment of the collectability of accounts. We regularly review the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, the collection history of each customernot material. Other receivables represent unbilled receivables related to subscription and other relevant factors to determine the appropriate amount of our allowance. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. For all periods presented, the allowance for doubtful accounts activity was not significant.professional services contracts.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be direct salesfive years. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. Sales commissions when they can be associated specifically with a non-cancelable subscription contract. Direct sales commissionsfor renewal contracts are deferred when earned and then amortized on a straight-line basis over the same period that revenues are recognized for the related non-cancelable subscription contract. The commission payments are paid in full after the customer has paid for its first year of service.
contractual renewal period. Amortization of deferred commissionsexpense is included in the Sales and marketing line inexpenses on the accompanying consolidated statements of operations.
Derivative Financial Instruments and Hedging Activities
We use derivative financial instruments to manage foreign currency risks (see Note 9). We account for theserisks. Derivative instruments in accordance with ASC 815, Derivativesare carried at fair value and Hedging (ASC 815), which requires that every derivative instrument be recorded on the consolidated balance sheets as either an asset or liability measured at its fair value as ofon the reporting date.
consolidated balance sheets. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. For foreign currency forward contracts not designated as hedging instruments, which we use to hedge a portion of our net outstanding monetary assets and liabilities, the gains or losses are recognizedrecorded in earningsOther income (expense), net on the consolidated statements of operations in the period of change. For a derivative instrument designated as a cash flow hedge, which we use to hedge certain customer contracts denominated in foreign currencies, the change in fair value on the effective portion is recorded to Accumulated other comprehensive income (loss) inOCI on our consolidated balance sheets each reporting period. The balance in Accumulated other comprehensive income (loss)OCI is subsequently reclassified to the related revenue line item inon the consolidated statements of operations in the same period that the underlying revenues are earned.
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the related lease term. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Business Combinations
We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill.
In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Goodwill and Acquisition-Related Intangible Assets
Acquisition-related intangible assets with a finite lifelives are typically amortized over their estimated useful lives of three to four years.lives. Goodwill isamounts are not amortized. Acquisition-related intangible assets and goodwill are tested for impairment at least annually, and more frequently upon the occurrence of certain events. We completed our annual impairment test in our fourth quarter, which did not result in any impairment of the goodwill balance.
Unearned Revenue
Unearned revenue primarily consists of customer billings in advance of revenues being recognized from our subscription contracts. We generally invoice our customers annually in advance for our subscription contracts in annual installments.services. Our typical payment terms provide that customers pay a portion of the total arrangement fee within 30 days of the contract date. Unearned revenue that is anticipated to be recognized during the succeeding twelve-month period is recorded as current unearned revenue and the remaining portion is recorded as noncurrent.
Convertible Senior Notes
In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 (2018 Notes)(“2018 Notes”) with a principal amount of $350 million.million, which were subsequently converted by note holders during the second quarter of fiscal 2019. Concurrently in June 2013, we issued 1.50% convertible senior notes due July 15, 2020 (2020 Notes)(“2020 Notes”) with a principal amount of $250 millionmillion. In September 2017, we issued 0.25% convertible senior notes due October 1, 2022 (“2022 Notes”) with a principal amount of $1.15 billion (together with the 2018 Notes and 2020 Notes, referred to as the Notes)“Notes”). In accounting for the issuance of the Notes, we separated themeach of the Notes into liability and equity components. The carrying amountamounts of the liability components were calculated by measuring the fair value of a similar liabilityliabilities that doesdo not have an associated convertible feature.features. The carrying amount of the equity components representing the conversion optionsoption were determined by deducting the fair value of the liability componentcomponents from the par value of the Notes as a whole.respective Notes. These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes.Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to the liability and equity components.components based on their relative values. Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes, andNotes. The issuance costs attributable to the equity components were netted withagainst the respective equity componentcomponents in additionalAdditional paid-in capital.
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was $31$51 million, $20$43 million, and $9$35 million for fiscal 2016, 20152019, 2018, and 2014,2017, respectively.
Share-Based Compensation
For RSUs and shares issued under our employee stock purchase plan using the Black-Scholes option-pricing model. For restricted stock awards and units and performance-based restricted stock units,PRSUs, fair value is based on the closing price of our common stock on the grant date. Compensation expense, net of estimated forfeitures, is generally recognized on a straight-line basis over the vesting period of the applicable award using the straight-line method.
For stock options assumed, fair value is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight-line basis over the requisite service period. We determine the assumptions for the option-pricing model as follows:
Volatility. The volatility is based on a blend of Contentshistorical volatility and implied volatility of our common stock. Implied volatility is based on market traded options of our common stock.
Dividend Yield. The dividend yield is assumed to be zero as we have not paid and do not expect to pay dividends.
For shares issued under the ESPP, fair value is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight-line basis over the offering period. We determine the assumptions for the option-pricing model as follows:
Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date closest to the grant date for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the ESPP purchase rights.
Expected Term. The expected term represents the period that our ESPP is expected to be outstanding. The expected term for the ESPP approximates the offering period.
Volatility. The volatility is based on a blend of historical volatility and implied volatility of our common stock. Implied volatility is based on market traded options of our common stock.
Dividend Yield. The dividend yield is assumed to be zero as we have not paid and do not expect to pay dividends.
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items, as a result, our unrecognized tax benefits will likely increase in the future. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related net interest and penalties.
Warranties and Indemnification
Our cloud applications are generally warranted to perform materially in accordance with our online help documentation under normal use and circumstances. Additionally, our contracts generally include provisions for indemnifying customers against liabilities if use of our cloud applications contracts infringe a third party’s intellectual property rights, and werights. We may also incur liabilities if we breach the security, privacy and/or confidentiality obligations in our contracts. To date, we have not incurred any material costs, and we have not accrued any liabilities in the accompanying consolidated financial statements, as a result of these obligations.
We have entered into service-level agreements with a majority of our customers warrantingcommitting to defined levels of uptime reliabilityservice availability and performance and permitting those customers to receive credits or refunds for prepaid amounts related to unused subscription services or to terminate their agreements in the event that we fail to meet those levels. To date, we have not experienced any significant failures to meet defined levels of reliabilityavailability and performance as a result of those agreements and, as a result, we have not accrued any liabilities related to these agreements inon the consolidated financial statements.
Foreign Currency Exchange
The functional currency for certain of our foreign subsidiaries is the U.S. dollar, while others use local currencies. We translate the foreign functional currency financial statements to U.SU.S. dollars for those entities that do not have U.S. dollars as their functional currency using the exchange rates at the balance sheet date for assets and liabilities, the period average exchange rates for revenues and expenses, and the historical exchange rates for equity transactions. The effects of foreign currency translation adjustments are recorded in Accumulated other comprehensive income (loss)OCI as a component of stockholders'stockholders’ equity and related periodic movements are summarized as a line item in our consolidated statements of comprehensive income.loss. Foreign currency transaction gains and losses are included in Other expense,income (expense), net on the consolidated statements of operations for the period.operations.
Concentrations of Risk and Significant Customers
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketabledebt securities, and accounts receivable.trade and other receivables. Our deposits exceed federally insured limits.
No single customer represented over 10% of accounts receivable intrade and other receivables on the consolidated financial statements as of January 31, 20162019 or 2015.2018. No single customer represented over 10% of total revenues for any of the periods inon the consolidated financial statements.
In order to reduce the risk of down-time of our cloud applications, we have established data centers in various geographic regions. We have internal procedures to restore services in the event of disaster at one of our current data center facilities. We serve our customers and users from data center facilities operated by third parties, located in Ashburn, Virginia; Atlanta, Georgia; Portland, Oregon; Dublin, Ireland;the United States, Europe, and Amsterdam, the Netherlands.Canada. 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 onupon third-party hosted infrastructure partners globally, including Amazon Web Services (AWS), which provides a distributed computing infrastructure platform for business operations,and Dimension Data, to serve customers and operate certain aspects of our services, such as environments for development testing, training, sales demonstrations, and sales demonstrations. Anyproduction usage. Given this, any disruption of or interference withat our use of AWShosted infrastructure partners would impact our operations.operations and our business could be adversely impacted.
Recently Adopted Accounting Pronouncements
ASU No. 2016-01
Marketable equity investments (readily determinable fair values): We are now required to account for changes in fair value of our equity investments previously classified as available-for-sale equity investments in the consolidated statements of operations. We have applied the modified retrospective transition method upon adoption, resulting in no impact to our consolidated financial statements as of February 1, 2018.
Non-marketable equity investments (no readily determinable fair values): We now measure our equity investments previously classified as cost method investments at fair value or the measurement alternative, unless they qualify for the net asset value practical expedient. The measurement alternative is defined as cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments resulting from impairment, fair value, or observable price changes are accounted for in the consolidated statements of operations. We adopted the guidance prospectively effective February 1, 2018, and there was no impact to our consolidated financial statements.
Going forward, the impact of this new standard could result in volatility in the consolidated statements of operations.
ASU No. 2016-16
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to carry all investments in equity securities at fair value through net income. Therecognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior to the issuance of this ASU, existing guidance isprohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. We adopted this new standard effective for our fiscal year beginning February 1, 2018. Early adoption is permitted. We are currently evaluating2018 using the accounting,modified retrospective transition and disclosure requirementsmethod, resulting in a $0.4 million cumulative-effect adjustment to Accumulated deficit as of the standard and cannot currently estimate the financial statement impact of adoption.February 1, 2018.
Recently Issued Accounting Pronouncements
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line item as the respective hedged item. The standard also modifies certain disclosure requirements. The guidance is effective for our fiscal year beginning February 1, 2019 and must be applied using a modified retrospective approach. We plan to adopt this new standard in the first quarter of our fiscal 2020. We are evaluating the accounting, transition, and disclosure requirements of thethis standard and cannot currently estimate the financial statement impact of adoption.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides entities the option to reclassify tax effects stranded in OCI as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”) to retained earnings. The guidance is effective for our fiscal year beginning February 1, 2019 and must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We plan to adopt the new standard in the first quarter of our fiscal 2020 and do not expect it to have a material impact on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, with certain exceptions. The guidance is effective for our fiscal year beginning February 1, 2019. We plan to adopt this new standard in the first quarter of our fiscal 2020 and do not expect it to have a material impact on our consolidated financial statements.
Note 3. MarketableInvestments
Debt Securities
Amortized Cost | Unrealized Gains | Unrealized Losses | Aggregate Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Aggregate Fair Value | |||||||||||||||||||||||
| U.S. treasury securities | $ | 396,347 | $ | 61 | $ | (178 | ) | $ | 396,230 | |||||||||||||||||||||
| U.S. agency obligations | $ | 1,018,513 | $ | 127 | $ | (405 | ) | $ | 1,018,235 | 241,914 | 73 | (151 | ) | 241,836 | ||||||||||||||||
| U.S. treasury securities | 338,736 | 70 | (141 | ) | 338,665 | |||||||||||||||||||||||||
| U.S. corporate securities | 135,065 | 36 | (18 | ) | 135,083 | |||||||||||||||||||||||||
| Corporate bonds | 419,784 | 336 | (352 | ) | 419,768 | |||||||||||||||||||||||||
| Commercial paper | 177,390 | — | (1 | ) | 177,389 | 254,175 | — | (2 | ) | 254,173 | ||||||||||||||||||||
| Money market funds | 148,961 | — | — | 148,961 | ||||||||||||||||||||||||||
| $ | 1,818,665 | $ | 233 | $ | (565 | ) | $ | 1,818,333 | $ | 1,312,220 | $ | 470 | $ | (683 | ) | $ | 1,312,007 | |||||||||||||
| Included in cash and cash equivalents | $ | 148,961 | $ | — | $ | — | $ | 148,961 | $ | 216,270 | $ | — | $ | — | $ | 216,270 | ||||||||||||||
| Included in marketable securities | $ | 1,669,704 | $ | 233 | $ | (565 | ) | $ | 1,669,372 | $ | 1,095,950 | $ | 470 | $ | (683 | ) | $ | 1,095,737 | ||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Aggregate Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Aggregate Fair Value | |||||||||||||||||||||||
| U.S. treasury securities | $ | 797,977 | $ | — | $ | (1,142 | ) | $ | 796,835 | |||||||||||||||||||||
| U.S. agency obligations | $ | 1,303,829 | $ | 422 | $ | (16 | ) | $ | 1,304,235 | 683,551 | — | (1,127 | ) | 682,424 | ||||||||||||||||
| U.S. treasury securities | 180,559 | 91 | (1 | ) | 180,649 | |||||||||||||||||||||||||
| U.S. corporate securities | 99,618 | 27 | (13 | ) | 99,632 | |||||||||||||||||||||||||
| Corporate bonds | 470,259 | 16 | (1,154 | ) | 469,121 | |||||||||||||||||||||||||
| Commercial paper | 89,984 | — | — | 89,984 | 602,727 | — | — | 602,727 | ||||||||||||||||||||||
| Money market funds | 142,137 | — | — | 142,137 | ||||||||||||||||||||||||||
| $ | 1,816,127 | $ | 540 | $ | (30 | ) | $ | 1,816,637 | $ | 2,554,514 | $ | 16 | $ | (3,423 | ) | $ | 2,551,107 | |||||||||||||
| Included in cash and cash equivalents | $ | 257,120 | $ | — | $ | — | $ | 257,120 | $ | 417,613 | $ | — | $ | (1 | ) | $ | 417,612 | |||||||||||||
| Included in marketable securities | $ | 1,559,007 | $ | 540 | $ | (30 | ) | $ | 1,559,517 | $ | 2,136,901 | $ | 16 | $ | (3,422 | ) | $ | 2,133,495 | ||||||||||||
We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence which includes our intent to hold these investments to maturity as of January 31, 2016. No marketable2019, which includes an assessment of whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. The unrealized losses on debt securities heldthat have been in a net loss position for 12 months or more were not material as of January 31, 2016 have been in a continuous unrealized loss position for more than 12 months. During fiscal 2016, we2019. We sold $103$950 million, $244 million, and $133 million of our available-for-saledebt securities during fiscal 2019, 2018, and 2017, respectively, and the realized gaingains and losses from the sale issales were immaterial.
Equity investments consisted of the following (in thousands):
| January 31, | |||||||
| 2016 | 2015 | ||||||
| Current: | |||||||
| Deferred professional service costs | $ | 895 | $ | 3,606 | |||
| Deferred sales commissions | 20,922 | 16,865 | |||||
| Total | $ | 21,817 | $ | 20,471 | |||
| Noncurrent: | |||||||
| Deferred professional service costs | $ | 360 | $ | 1,254 | |||
| Deferred sales commissions | 29,714 | 19,744 | |||||
| Total | $ | 30,074 | $ | 20,998 | |||
| January 31, | |||||||||
| Consolidated Balance Sheets Location | 2019 | 2018 | |||||||
| Money market funds | Cash and cash equivalents | $ | 237,071 | $ | 551,804 | ||||
| Marketable equity investments | Marketable securities | 44,127 | — | ||||||
| Non-marketable equity investments | Other assets | 36,925 | 28,005 | ||||||
| $ | 318,123 | $ | 579,809 | ||||||
There were no adjustments made to the carrying value of the non-marketable equity investments as measured under the measurement alternative during fiscal 2019. Realized and Equipment, Net
| January 31, | |||||||
| 2016 | 2015 | ||||||
| Computers, equipment and software | $ | 230,705 | $ | 139,569 | |||
| Computers, equipment and software acquired under capital leases | 24,400 | 34,112 | |||||
| Furniture and fixtures | 18,894 | 13,082 | |||||
| Leasehold improvements | 90,562 | 47,496 | |||||
| 364,561 | 234,259 | ||||||
| Less accumulated depreciation and amortization | (150,403 | ) | (94,123 | ) | |||
| Property and equipment, net | $ | 214,158 | $ | 140,136 | |||
| Year Ended January 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net realized gains (losses) recognized on equity investments sold | $ | 8,333 | $ | 720 | $ | 65 | |||||
| Net unrealized gains (losses) recognized on equity investments held | 32,127 | (692 | ) | (15,000 | ) | ||||||
| Total net gains (losses) recognized in other income (expense), net | $ | 40,460 | $ | 28 | $ | (14,935 | ) | ||||
Note 4. Fair Value Measurements
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 January 31, 2019 (in thousands):
| Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| U.S. treasury securities | $ | 396,230 | $ | — | $ | — | $ | 396,230 | ||||||||
| U.S. agency obligations | — | 241,836 | — | 241,836 | ||||||||||||
| Corporate bonds | — | 419,768 | — | 419,768 | ||||||||||||
| Commercial paper | — | 254,173 | — | 254,173 | ||||||||||||
| Money market funds | 237,071 | — | — | 237,071 | ||||||||||||
| Marketable equity investments | 44,127 | — | — | 44,127 | ||||||||||||
| Foreign currency derivative assets | — | 22,570 | — | 22,570 | ||||||||||||
| Total assets | $ | 677,428 | $ | 938,347 | $ | — | $ | 1,615,775 | ||||||||
| Foreign currency derivative liabilities | $ | — | $ | 3,135 | $ | — | $ | 3,135 | ||||||||
| Total liabilities | $ | — | $ | 3,135 | $ | — | $ | 3,135 | ||||||||
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, 2018 (in thousands):
| Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| U.S. treasury securities | $ | 796,835 | $ | — | $ | — | $ | 796,835 | ||||||||
| U.S. agency obligations | — | 682,424 | — | 682,424 | ||||||||||||
| Corporate bonds | — | 469,121 | — | 469,121 | ||||||||||||
| Commercial paper | — | 602,727 | — | 602,727 | ||||||||||||
| Money market funds | 551,804 | — | — | 551,804 | ||||||||||||
| Foreign currency derivative assets | — | 98 | — | 98 | ||||||||||||
| Total assets | $ | 1,348,639 | $ | 1,754,370 | $ | — | $ | 3,103,009 | ||||||||
| Foreign currency derivative liabilities | $ | — | $ | 32,912 | $ | — | $ | 32,912 | ||||||||
| Total liabilities | $ | — | $ | 32,912 | $ | — | $ | 32,912 | ||||||||
Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the consolidated balance sheets (in thousands):
| January 31, 2019 | January 31, 2018 | ||||||||||||||
| Net Carrying Amount | Estimated Fair Value | Net Carrying Amount | Estimated Fair Value | ||||||||||||
| 0.75% Convertible senior notes | $ | — | $ | — | $ | 341,509 | $ | 504,994 | |||||||
| 1.50% Convertible senior notes | 232,514 | 557,074 | 221,378 | 385,550 | |||||||||||
| 0.25% Convertible senior notes | 972,264 | 1,560,228 | 928,467 | 1,200,577 | |||||||||||
The estimated fair values of the Notes, which we have classified as Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of fiscal 2019 and 2018. The if-converted values of the 2020 and 2022 Notes exceeded the principal amounts by $305 million and $269 million, respectively. The if-converted values were determined based on the closing price of our common stock of $181.53 on January 31, 2019. For further information, see Note 11.
Note 5. Deferred Costs
Deferred costs, which primarily consist of deferred sales commissions, were $264 million and $204 million as of January 31, 2019 and 2018, respectively. Amortization expense for the deferred costs was $71 million, $46$58 million, and $29$45 million for fiscal 2016, 20152019, 2018, and 2014,2017, respectively. These amounts include depreciation of assets recorded under capital leases of $3 million, $9 million and $12 millionThere was no impairment loss in relation to the costs capitalized for fiscal 2016, 2015 and 2014, respectively. the periods presented.
Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| January 31, | |||||||
| 2019 | 2018 | ||||||
| Land | $ | 22,694 | $ | 8,451 | |||
| Buildings | 433,863 | 255,093 | |||||
| Computers, equipment, and software | 539,090 | 425,025 | |||||
| Furniture and fixtures | 38,840 | 34,809 | |||||
| Leasehold improvements | 162,657 | 132,209 | |||||
Property and equipment, gross (1) | 1,197,144 | 855,587 | |||||
| Less accumulated depreciation and amortization | (400,237 | ) | (308,978 | ) | |||
| Property and equipment, net | $ | 796,907 | $ | 546,609 | |||
(1) | Property and equipment, gross included construction-in-progress for owned real estate projects of $355 million and $177 million that had not yet been placed in service as of January 31, 2019 and 2018, respectively. |
Depreciation expense totaled $147 million, $115 million, and $92 million for fiscal 2019, 2018, and 2017, respectively. Interest costs capitalized to property and equipment totaled $11 million, $8 million, and $3 million for fiscal 2019, 2018, and 2017, respectively.
Note 7. Business Combinations
Fiscal 2019
Acquisition of Adaptive Insights
On August 1, 2018, we acquired all outstanding stock of Adaptive Insights, Inc. (“Adaptive Insights”) for $1.5 billion. The acquisition of Adaptive Insights, a cloud-based provider of business planning software, strengthens our product portfolio and will enable our customers to better plan, execute, and analyze in one system.
The purchase consideration transferred consisted of the following (in thousands):
| Purchase Consideration | ||||
| Cash paid to common and preferred stockholders, warrant holders, and vested option holders | $ | 1,408,422 | ||
| Debt repaid by Workday on behalf of Adaptive Insights | 53,696 | |||
| Transaction costs paid by Workday on behalf of Adaptive Insights | 23,375 | |||
Fair value of assumed Adaptive Insights awards attributable to pre-combination services (1) | 5,424 | |||
| Total purchase consideration | $ | 1,490,917 | ||
(1) | The assumed awards were primarily options, which were valued based upon the Black-Scholes option-pricing model. |
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 as shown below. The fair values of assets acquired and liabilities assumed may change over the measurement period as additional information is received. The primary areas that are subject to change include current income taxes payable and deferred taxes. The measurement period will end no later than one year from the acquisition date.
The preliminary purchase consideration allocation, which includes measurement period adjustments, was as follows (in thousands):
| Assets acquired: | ||||
| Cash and cash equivalents | $ | 37,892 | ||
| Trade and other receivables, net | 23,042 | |||
| Prepaid expenses and other current assets and other assets | 3,183 | |||
| Property and equipment, net | 2,246 | |||
| Acquisition-related intangible assets, net | 316,000 | |||
| Total assets acquired | $ | 382,363 | ||
| Liabilities assumed: | ||||
| Accounts payable | $ | 3,115 | ||
| Accrued expenses and other current liabilities | 9,092 | |||
| Accrued compensation | 13,545 | |||
Unearned revenue (1) | 67,754 | |||
| Other liabilities | 1,919 | |||
| Total liabilities assumed | 95,425 | |||
| Net assets acquired, excluding goodwill | 286,938 | |||
| Total purchase consideration | 1,490,917 | |||
| Estimated goodwill | $ | 1,203,979 | ||
(1) | The cost build-up method was used to determine the fair value of unearned revenue. |
The goodwill recognized was primarily attributable to the value of the acquired workforce, the opportunity to expand our customer base, and the ability to add breadth and depth to our product portfolio by accelerating our financial planning roadmap. The goodwill is not deductible for U.S. federal income tax purposes.
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated useful lives are as follows (in thousands, except years):
| Estimated Fair Values | Estimated Useful Lives | ||||
| Trade name | $ | 12,000 | 1.5 | ||
| Developed technology | 105,000 | 5.0 | |||
| Customer relationships | 188,000 | 9.0 - 10.0 | |||
| Backlog | 11,000 | 2.0 | |||
| Total acquisition-related intangible assets | $ | 316,000 | |||
The fair values of the trade name and developed technology were determined utilizing the relief-from-royalty method, and the multi-period excess earnings method was utilized to fair value customer relationships and backlog. The valuation model inputs required the application of considerable judgment by management. The acquired finite-lived intangible assets have a total weighted-average amortization period of 7.6 years. The weighted-average amortization period of customer relationships is 9.7 years.
We have included the financial results of Adaptive Insights in our consolidated financial statements from the date of acquisition. One-time acquisition related transaction costs of $25 million were expensed as incurred during fiscal 2019 and were recorded within general and administrative expense in our consolidated statements of operations.
The pro forma financial information shown below summarizes the combined results of operations for Workday and Adaptive Insights as if the closing of the acquisition had occurred on February 1, 2017, the first day of our fiscal year 2018. The pro forma financial information includes adjustments that are directly attributable to the business combination and are factually supportable. The adjustments primarily reflect the amortization of acquired intangible assets, share-based compensation expense for replacement awards, as well as the pro forma tax impact for such adjustments. The pro forma financial information reflects $67 million of nonrecurring expenses related to acquisition costs and certain compensation expenses.
| Year Ended January 31, | |||||||
| 2019 | 2018 | ||||||
| (in thousands, except per share data) | |||||||
| Total revenues | $ | 2,886,057 | $ | 2,228,917 | |||
| Net loss | (425,604 | ) | (529,404 | ) | |||
| Net loss per share, basic and diluted | $ | (1.96 | ) | $ | (2.55 | ) | |
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had taken place on February 1, 2017.
Other Fiscal 2019 Acquisitions
In the second quarter of fiscal 2019, we completed two acquisitions resulting in an increase of $12 million and $16 million in developed technology and goodwill, respectively.
Fiscal 2018
In the fourth quarter of fiscal 2018, we completed an acquisition resulting in an increase of $5 million and $1 million in developed technology and goodwill, respectively.
Fiscal 2017
In fiscal 20162017, we acquired two businesses in order to expand our product and service offerings. We have included the financial results of the acquired businesses in our consolidated financial statements from the respective acquisition dates. The consideration paid for these acquisitions was $31$148 million, net of cash acquired.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed for allin the business combinations during the year ended January 31, 2016fiscal 2017 (in thousands):
| Cash | $ | 2,143 | ||||
| Cash and cash equivalents | $ | 3,390 | ||||
| Other tangible assets | 3,466 | |||||
| Developed technology | 17,660 | 45,039 | ||||
| Deferred revenue | (214 | ) | ||||
| Net deferred tax liability | (3,796 | ) | ||||
| Net liabilities assumed | (1,195 | ) | ||||
| Customer relationships | 1,000 | |||||
| Accounts payable and other liabilities | (3,256 | ) | ||||
| Unearned revenue | (6,000 | ) | ||||
| Net assets acquired | 14,598 | 43,639 | ||||
| Goodwill | 18,981 | 107,658 | ||||
| Total purchase consideration | $ | 33,579 | $ | 151,297 | ||
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes, and identifiable intangible assets may be subject to change as additional information is received and certain tax returns are finalized. We expect to finalize the allocation of purchase consideration as soon as practicable and no later than one year from the acquisition date.
Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in aggregate.
Note 7. Goodwill and8. Acquisition-related Intangible Assets, Net
| January 31, | |||||||
| 2016 | 2015 | ||||||
| Acquired developed technology | $ | 20,461 | $ | 4,200 | |||
| Customer relationship assets | 338 | 338 | |||||
| 20,799 | 4,538 | ||||||
| Less accumulated amortization | (5,308 | ) | (2,071 | ) | |||
| Acquisition-related intangible assets, net | 15,491 | 2,467 | |||||
| Goodwill | 50,325 | 32,312 | |||||
| Goodwill and acquisition-related intangible assets, net | $ | 65,816 | $ | 34,779 | |||
| January 31, | |||||||
| 2019 | 2018 | ||||||
| Developed technology | $ | 186,800 | $ | 69,700 | |||
| Customer relationships | 189,000 | 1,000 | |||||
| Trade name | 12,000 | — | |||||
| Backlog | 11,000 | — | |||||
| 398,800 | 70,700 | ||||||
| Less accumulated amortization | (85,560 | ) | (36,466 | ) | |||
| Acquisition-related intangible assets, net | $ | 313,240 | $ | 34,234 | |||
As of January 31, 2016,2019, our future estimated amortization expense related to the acquired developed technologyacquisition-related intangible assets is as follows (in thousands):
| Fiscal Period: | ||||||
| 2017 | $ | 5,326 | ||||
| 2018 | 4,193 | |||||
| 2019 | 3,811 | |||||
| 2020 | 2,161 | $ | 68,856 | |||
| 2021 | 48,142 | |||||
| 2022 | 43,733 | |||||
| 2023 | 41,009 | |||||
| 2024 | 29,833 | |||||
| Thereafter | 81,667 | |||||
| Total | $ | 15,491 | $ | 313,240 | ||
Note 8.9. Other Assets
Other assets consisted of the following (in thousands):
| January 31, | January 31, | |||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||
| Cost method investment | $ | 28,742 | $ | 12,910 | ||||||||||
| Non-marketable equity and other investments | $ | 50,546 | $ | 29,205 | ||||||||||
| Prepayments for computing infrastructure platforms | 16,976 | 13,588 | ||||||||||||
| Technology patents, net | 19,416 | 11,217 | ||||||||||||
| Acquired land leasehold interest, net | 9,781 | 9,886 | 9,465 | 9,570 | ||||||||||
| Technology patents, net | 3,020 | 3,942 | ||||||||||||
| Deposits | 4,383 | 4,492 | ||||||||||||
| Net deferred tax assets | 4,544 | 1,884 | ||||||||||||
| Other | 16,195 | 19,052 | 42,030 | 39,762 | ||||||||||
| Total | $ | 57,738 | $ | 45,790 | $ | 147,360 | $ | 109,718 | ||||||
their useful lives. As of January 31, 2016, our2019, the future estimated amortization expense related to the acquired land leasehold interest and technology patents areis as follows (in thousands):
| Fiscal Period: | ||||||
| 2017 | $ | 1,027 | ||||
| 2018 | 889 | |||||
| 2019 | 520 | |||||
| 2020 | 463 | $ | 3,360 | |||
| 2021 | 301 | 3,031 | ||||
| 2022 | 2,617 | |||||
| 2023 | 2,351 | |||||
| 2024 | 2,049 | |||||
| Thereafter | 9,601 | 16,392 | ||||
| Total | $ | 12,801 | $ | 29,800 | ||
Note 9. Fair Value Measurements
| Fair Value Measurements as of January 31, 2016 | ||||||||||||
| Description | Level 1 | Level 2 | Total | |||||||||
| U.S. agency obligations | $ | — | $ | 1,018,235 | 1,018,235 | |||||||
| U.S. treasury securities | 338,665 | — | 338,665 | |||||||||
| U.S. corporate securities | — | 135,083 | 135,083 | |||||||||
| Commercial paper | — | 177,389 | 177,389 | |||||||||
| Money market funds | 148,961 | — | 148,961 | |||||||||
| $ | 487,626 | $ | 1,330,707 | $ | 1,818,333 | |||||||
| Included in cash and cash equivalents | $ | 148,961 | ||||||||||
| Included in marketable securities | $ | 1,669,372 | ||||||||||
| Fair Value Measurements as of January 31, 2015 | ||||||||||||
| Description | Level 1 | Level 2 | Total | |||||||||
| U.S. agency obligations | $ | — | $ | 1,304,235 | $ | 1,304,235 | ||||||
| U.S. treasury securities | 180,649 | — | 180,649 | |||||||||
| U.S. corporate securities | — | 99,632 | 99,632 | |||||||||
| Commercial paper | — | 89,984 | 89,984 | |||||||||
| Money market funds | 142,137 | — | 142,137 | |||||||||
| $ | 322,786 | $ | 1,493,851 | $ | 1,816,637 | |||||||
| Included in cash and cash equivalents | $ | 257,120 | ||||||||||
| Included in marketable securities | $ | 1,559,517 | ||||||||||
| January 31, 2016 | January 31, 2015 | ||||||||||||||
| Net Carrying Amount before unamortized debt issuance costs | Estimated Fair Value | Net Carrying Amount before unamortized debt issuance costs | Estimated Fair Value | ||||||||||||
| 0.75% Convertible senior notes | $ | 310,013 | $ | 362,250 | $ | 295,276 | $ | 407,750 | |||||||
| 1.50% Convertible senior notes | 203,923 | 264,063 | 195,225 | 299,063 | |||||||||||
10. Derivative Financial Instruments
We conduct business on a global basis in multiple foreign currencies, subjecting Workday to foreign currency risk. To mitigate this risk, we utilize hedging contracts as described below. We do not enter into any derivatives for trading or speculative purposes.
Cash Flow Hedges
We are exposed to foreign currency fluctuations resulting from customer contracts denominated in foreign currencies. We initiatedhave a hedging program in fiscal 2016 by enteringwhich we enter into foreign currency forward contracts related to certain customer contracts. We designate these forward contracts as cash flow hedging instruments as the accounting criteria for such designation have been met. The effective portion of the gains or losses resulting from changes in the fair value of these hedges is recorded in Accumulated other comprehensive income (loss)OCI on the consolidated balance sheets and will be subsequently reclassified to the related revenue line item inon the consolidated statements of operations in the same period that the underlying revenues are earned. The changes in value of these contracts resulting from changes in forward points on our forward contracts are excluded from the assessment of hedge effectiveness and are recorded as incurred in Other expense,income (expense), net inon the consolidated statements of operations. Cash flows from such forward contracts are classified as operating activities.
As of January 31, 2016,2019 and 2018, we had 65 outstanding foreign currency forward contracts designeddesignated as cash flow hedges with a total notional valuevalues of $133$717 million which hadand $549 million, respectively. All such contracts have maturities not greater than 1536 months. The notional value represents the amount that will be bought or sold upon maturity of the forward contract.
Foreign Currency Forward Contracts not Designated as Hedges
We also enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets and liabilities. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are recorded in Other expense,income (expense), net in ouron the consolidated statements of operations. These forward contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities. Cash flows from such forward contracts are classified as operating activities.
As of January 31, 20162019 and 2015,2018, we had 21 and 7 outstanding forward contracts not designated as hedges with total notional values of $22$198 million and $10$75 million, respectively. All contracts have maturities not greater than 15 months.
The fair values of outstanding derivative instruments were as follows (in thousands):
| January 31, | Consolidated Balance Sheets Location | January 31, | ||||||||||||||||||
| Consolidated Balance Sheets Location | 2016 | 2015 | 2019 | 2018 | ||||||||||||||||
| Derivative Assets: | ||||||||||||||||||||
| Foreign currency forward contracts designated as cash flow hedges | Prepaid expenses and other current assets | $ | 4,695 | $ | — | Prepaid expenses and other current assets | $ | 12,076 | $ | 15 | ||||||||||
| Foreign currency forward contracts designated as cash flow hedges | Other assets | 10,015 | 4 | |||||||||||||||||
| Foreign currency forward contracts not designated as hedges | Prepaid expenses and other current assets | 605 | 371 | Prepaid expenses and other current assets | 459 | 79 | ||||||||||||||
| Foreign currency forward contracts not designated as hedges | Other assets | 20 | — | |||||||||||||||||
| Total Derivative Assets | $ | 22,570 | $ | 98 | ||||||||||||||||
| Derivative Liabilities: | ||||||||||||||||||||
| Foreign currency forward contracts designated as cash flow hedges | Accrued expenses and other current liabilities | $ | 98 | $ | — | Accrued expenses and other current liabilities | $ | 983 | $ | 18,355 | ||||||||||
| Foreign currency forward contracts designated as cash flow hedges | Other liabilities | 706 | 11,650 | |||||||||||||||||
| Foreign currency forward contracts not designated as hedges | Accrued expenses and other current liabilities | 56 | 5 | Accrued expenses and other current liabilities | 1,446 | 2,805 | ||||||||||||||
| Foreign currency forward contracts not designated as hedges | Other liabilities | — | 102 | |||||||||||||||||
| Total Derivative Liabilities | $ | 3,135 | $ | 32,912 | ||||||||||||||||
Gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):
| January 31, | Consolidated Statements of Operations and Statements of Comprehensive Loss Locations | Year Ended January 31, | ||||||||||||||||||||||||||
| Consolidated Statements of Operations Location | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | ||||||||||||||||||||||
Gains (losses) recognized in OCI (effective portion) (1) | Accumulated other comprehensive income (loss) | $ | 4,939 | $ | — | $ | — | Net change in market value of effective foreign currency forward exchange contracts | $ | 44,079 | $ | (45,869 | ) | $ | 2,145 | |||||||||||||
| Gains (losses) reclassified from OCI into income (effective portion) | Revenues | 3 | — | — | Revenues | (7,012 | ) | 1,509 | 635 | |||||||||||||||||||
| Gains (losses) recognized in income (amount excluded from effectiveness testing and ineffective portion) | Other expense, net | 148 | — | — | Other income (expense), net | 13,868 | 1,607 | 1,386 | ||||||||||||||||||||
(1) | Of the total effective portion of foreign currency forward contracts designated as cash flow hedges as of January 31, |
Gains (losses) associated with foreign currency forward contracts not designated as cash flow hedges were as follows (in thousands):
| January 31, | Consolidated Statements of Operations Location | Year Ended January 31, | ||||||||||||||||||||||||||
| Derivative Type | Consolidated Statements of Operations Location | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||||
| Foreign currency forward contracts not designated as hedges | Other expense, net | $ | 876 | $ | 441 | $ | — | Other income (expense), net | $ | 4,706 | $ | (5,641 | ) | $ | 662 | |||||||||||||