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Workday Announces Fiscal 2015 Second Quarter Financial Results

Total Revenue of $186.8 Million, up 74% Year Over Year; Subscription Revenue of $143.7 Million, up 77% Year Over Year

PLEASANTON, CA -- (Marketwired) -- 08/27/14 -- Workday, Inc. (NYSE: WDAY), a leader in enterprise cloud applications for human resources and finance, today announced results for the fiscal second quarter ended July 31, 2014.

  • Total revenues were $186.8 million, an increase of 74% from the second quarter of fiscal 2014. Subscription revenues were $143.7 million, an increase of 77% from same period last year.

  • Operating loss was $61.8 million, or negative 33.1% of revenues, compared to an operating loss of $32.3 million, or negative 30.0% of revenues, in the same period last year. Non-GAAP operating loss for the second quarter was $19.1 million, or negative 10.2% of revenues, compared to a non-GAAP operating loss of $21.7 million last year, or negative 20.1% of revenues.(1)

  • Net loss per basic and diluted share was $0.38, compared to a net loss per basic and diluted share of $0.21 in the second quarter of fiscal 2014. The non-GAAP net loss per basic and diluted share was $0.11, compared to a non-GAAP net loss per basic and diluted share of $0.13 during the same period last year.(1)

  • Operating cash flows were negative $9.0 million and free cash flows were negative $37.4 million. For the trailing twelve months, operating cash flows were $54.6 million and free cash flows were a negative $27.8 million.(2)

  • Cash, cash equivalents and marketable securities were approximately $1.8 billion as of July 31, 2014. Unearned revenue was $481.5 million, a 48% increase from last year.

"We had a solid second quarter and continued to make strong progress with our investments in Workday Financial Management and our growth outside the U.S.," said Aneel Bhusri, co-founder and CEO, Workday. "As we execute on the second half of our fiscal year, we see significant momentum as customers continue to make the switch to the cloud for their HR and finance applications, and we remain tightly focused on delivering rapid product innovation with high levels of customer satisfaction to help them transform their businesses for the future."

"We are very pleased with our strong results for the second quarter of fiscal 2015," said Mark Peek, chief financial officer, Workday. "We generated record quarterly revenues and trailing twelve month operating cash flows. Looking ahead, we anticipate a strong second half of fiscal 2015 with third quarter revenues expected to be within a range of $200 and $205 million, or growth of 56% to 60% as compared to the prior year. Total revenues for the year are anticipated to be in the range of $760 and $770 million, or growth of 62% to 64%."

Recent Highlights

  • Workday appointed former IBM executive Randy Hendricks as president of the company's Education and Government (E&G) business, responsible for sales, services, and strategy of HR, finance, and student applications.

  • The company announced plans to create 200 new positions in Ireland over the next three years to continue its European expansion and to bring on new talent for key roles in product and technology development, customer support, services, data center operations, and sales.

  • Two Workday customers, HP and CSC, joined the company's services partner ecosystem to help more customers make the transition to cloud applications for human resources (HR) and gain the full business value from Workday Human Capital Management (HCM).

Workday plans to host a conference call today to review its second quarter financial results and to discuss its financial outlook. The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via webcast or through the company's Investor Relations website at www.workday.com/investorrelations. The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 45 days.

(1) Non-GAAP operating loss and net loss per share for the fiscal second quarters of 2015 and 2014 exclude share-based compensation, employer payroll taxes on employee stock transactions and debt discount and issuance costs associated with convertible notes, and for the fiscal second quarter of 2015, also exclude amortization expense for acquisition-related intangible assets. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.
(2) Free cash flows are defined as operating cash flows minus capital expenditures, assets acquired under a capital lease and purchased other intangible assets. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

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

Use of Non-GAAP Financial Measures
Reconciliations of non-GAAP financial measures to Workday's financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled "About Non-GAAP Financial Measures."

Forward-Looking Statements
This press release contains forward-looking statements including, among other things, statements regarding Workday's third quarter and full year fiscal 2015 revenue projections. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. Risks include, but are not limited to: (i) breaches in our security measures, unauthorized access to our customers' data or disruptions in our data center operations; (ii) our ability to manage our growth effectively; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors and new applications and marketing initiatives by our competitors; (iv) the development of the market for enterprise cloud services; (v) acceptance of our applications and services by customers; (vi) adverse changes in general economic or market conditions; (vii) delays or reductions in information technology spending; (viii) our limited operating history, which makes it difficult to predict future results; and (ix) changes in sales may not be immediately reflected in our results due to our subscription model. Further information on risks that could affect Workday's results is included in our filings with the Securities and Exchange Commission (SEC), including our Form 10-Q for the quarter ended April 30, 2014 and our future reports that we may file with the SEC from time to time, which could cause actual results to vary from expectations. Workday assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

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

© 2014. Workday, Inc. All rights reserved. Workday and the Workday logo are registered trademarks of Workday, Inc. All other brand and product names are trademarks or registered trademarks of their respective holders.



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

                                                   July 31,     January 31,
                                                     2014         2014(1)
                                                 ------------  ------------
Assets
Current assets:
    Cash and cash equivalents                    $    262,634  $    581,326
    Marketable securities                           1,559,748     1,305,253
    Accounts receivable, net                          100,534        92,184
    Deferred costs                                     20,064        16,446
    Prepaid expenses and other current assets          37,830        28,449
                                                 ------------  ------------
Total current assets                                1,980,810     2,023,658
Property and equipment, net                           105,855        77,664
Deferred costs, noncurrent                             18,702        20,797
Goodwill and acquisition-related intangible
 assets, net                                           35,379         8,488
Other assets                                           54,152        45,658
                                                 ------------  ------------
Total assets                                     $  2,194,898  $  2,176,265
                                                 ============  ============
Liabilities and stockholders' equity
Current liabilities:
    Accounts payable                             $      6,561  $      6,212
    Accrued expenses and other current
     liabilities                                       30,180        17,999
    Accrued compensation                               38,565        55,620
    Capital leases                                      5,133         9,377
    Unearned revenue                                  409,026       332,682
                                                 ------------  ------------
Total current liabilities                             489,465       421,890
Convertible senior notes, net                         479,293       468,412
Capital leases, noncurrent                                671         3,589
Unearned revenue, noncurrent                           72,447        80,883
Other liabilities                                      14,181        14,274
                                                 ------------  ------------
Total liabilities                                   1,056,057       989,048
Stockholders' equity:
    Common stock                                          183           181
    Additional paid-in capital                      1,841,688     1,761,156
    Accumulated other comprehensive income                (37)          269
    Accumulated deficit                              (702,993)     (574,389)
                                                 ------------  ------------
Total stockholders' equity                          1,138,841     1,187,217
                                                 ------------  ------------
Total liabilities and stockholders' equity       $  2,194,898  $  2,176,265
                                                 ============  ============

(1) Amounts as of January 31, 2014 were derived from the January 31, 2014
    audited financial statements.



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

                                  Three Months Ended     Six Months Ended
                                       July 31,              July 31,
                                 --------------------  --------------------
                                    2014       2013       2014       2013
                                 ---------  ---------  ---------  ---------
Revenues:
    Subscription services        $ 143,652  $  81,111  $ 267,059  $ 149,529
    Professional services           43,128     26,444     79,458     49,671
                                 ---------  ---------  ---------  ---------
Total revenues                     186,780    107,555    346,517    199,200
                                 ---------  ---------  ---------  ---------
Costs and expenses(1):
    Costs of subscription
     services                       24,373     16,327     45,832     31,257
    Costs of professional
     services                       41,267     24,427     77,227     46,196
    Product development             77,464     41,168    142,635     77,450
    Sales and marketing             78,523     44,150    146,690     82,514
    General and administrative      26,922     13,766     47,985     26,690
                                 ---------  ---------  ---------  ---------
Total costs and expenses           248,549    139,838    460,369    264,107
                                 ---------  ---------  ---------  ---------
Operating loss                     (61,769)   (32,283)  (113,852)   (64,907)
Other expense, net                  (6,953)    (3,479)   (13,952)    (3,735)
                                 ---------  ---------  ---------  ---------
Loss before provision for income
 taxes                             (68,722)   (35,762)  (127,804)   (68,642)
Provision for income taxes             493        216        800        351
                                 ---------  ---------  ---------  ---------
Net loss                         $ (69,215) $ (35,978) $(128,604) $ (68,993)
                                 =========  =========  =========  =========
Net loss per share, basic and
 diluted                         $   (0.38) $   (0.21) $   (0.70) $   (0.40)
                                 =========  =========  =========  =========
Weighted-average shares used to
 compute net loss per share,
 basic and diluted                 184,319    173,375    183,733    170,617
                                 =========  =========  =========  =========

(1) Costs and expenses include
 share-based compensation as
 follows:
      Costs of subscription
       services                  $   1,608  $     401  $   2,663  $     663
      Costs of professional
       services                      3,519        801      5,717      1,276
      Product development           16,737      3,465     27,605      5,372
      Sales and marketing            7,377      1,805     14,129      2,848
      General and administrative    11,541      3,311     19,542      7,040



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

                                Three Months Ended      Six Months Ended
                                     July 31,               July 31,
                               --------------------  ----------------------
                                  2014       2013        2014        2013
                               ---------  ---------  -----------  ---------
Cash flows from operating
 activities
Net loss                       $ (69,215) $ (35,978) $  (128,604) $ (68,993)
Adjustments to reconcile net
 loss to net cash provided by
 (used in) operating
 activities:
Depreciation and amortization     14,474      8,051       26,997     14,620
Share-based compensation
 expenses                         40,782      9,783       69,656     17,199
Amortization of deferred costs     4,421      2,756        8,373      5,238
Amortization of debt discount
 and issuance costs                6,002      2,790       11,922      2,790
Other                                242        196          846        170
Changes in operating assets
 and liabilities, net of
 business combinations:
    Accounts receivable           (1,441)    (6,808)      (8,454)       323
    Deferred costs                (6,433)    (3,867)      (9,896)    (7,103)
    Prepaid expenses and other
     assets                       (2,748)    (6,579)     (10,098)   (10,142)
    Accounts payable                 (23)     1,251       (2,453)     3,672
    Accrued expense and other
     liabilities                 (14,602)    (9,191)     (13,511)     6,262
    Unearned revenue              19,530     24,680       67,908     40,358
                               ---------  ---------  -----------  ---------
Net cash provided by (used in)
 operating activities             (9,011)   (12,916)      12,686      4,394
Cash flows from investing
 activities
Purchases of marketable
 securities                     (365,779)  (441,860)  (1,036,185)  (729,701)
Maturities of marketable
 securities                      414,242    170,159      767,472    576,867
Sales of available-for-sale
 securities                        8,138          -        8,138          -
Business combinations, net of
 cash acquired                         -          -      (26,317)         -
Purchases of property and
 equipment                       (28,409)   (29,732)     (38,282)   (31,627)
Purchase of cost method
 investment                      (10,000)         -      (10,000)         -
Other                                  -          -        1,000         90
                               ---------  ---------  -----------  ---------
Net cash provided by (used in)
 investing activities             18,192   (301,433)    (334,174)  (184,371)
Cash flows from financing
 activities
Proceeds from borrowings on
 convertible senior notes, net
 of issuance costs                     -    584,291            -    584,291
Proceeds from issuance of
 warrants                              -     92,708            -     92,708
Purchase of convertible senior
 notes hedges                          -   (143,729)           -   (143,729)
Proceeds from issuance of
 common stock from employee
 equity plans                     15,169      2,110       18,165      6,675
Principal payments on capital
 lease obligations                (4,418)    (2,935)      (7,162)    (6,688)
Shares repurchased for tax
 withholdings on vesting of
 restricted stock                 (3,284)         -       (8,291)         -
Other                                  -         72           60         80
                               ---------  ---------  -----------  ---------
Net cash provided by financing
 activities                        7,467    532,517        2,772    533,337
Effect of exchange rate
 changes                             (15)         -           24        (86)
                               ---------  ---------  -----------  ---------
Net increase (decrease) in
 cash and cash equivalents        16,633    218,168     (318,692)   353,274
Cash and cash equivalents at
 the beginning of period         246,001    219,264      581,326     84,158
                               ---------  ---------  -----------  ---------
Cash and cash equivalents at
 the end of period             $ 262,634  $ 437,432  $   262,634  $ 437,432
                               =========  =========  ===========  =========



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                      Three Months Ended July 31, 2014
                   (in thousands, except per share data)
                                (unaudited)

                                                      Amortization
                                            Other       of Debt
                                          Operating   Discount and
                             Share-Based   Expenses     Issuance
                    GAAP    Compensation     (2)         Costs     Non-GAAP
                  --------  ------------  ---------  ------------- --------
Costs and
 expenses:
Costs of
 subscription
 services         $ 24,373  $     (1,608) $     (42) $           - $ 22,723
Costs of
 professional
 services           41,267        (3,519)       (46)             -   37,702
Product
 development        77,464       (16,737)      (788)             -   59,939
Sales and
 marketing          78,523        (7,377)      (238)             -   70,908
General and
 administrative     26,922       (11,541)      (767)             -   14,614
Operating loss     (61,769)       40,782      1,881              -  (19,106)
Operating margin     -33.1%         21.9%       1.0%             -    -10.2%
Other expense, net  (6,953)            -          -          6,002     (951)
Loss before
 provision for
 income taxes      (68,722)       40,782      1,881          6,002  (20,057)
Provision for
 income taxes          493             -          -              -      493
Net loss          $(69,215) $     40,782  $   1,881  $       6,002 $(20,550)
Net loss per
 share, basic and
 diluted(1)       $  (0.38) $       0.22  $    0.01  $        0.04 $  (0.11)

(1) Calculated based upon 184,319 basic and diluted weighted-average shares
    of common stock.
(2) Other operating expenses include employer payroll taxes on employee
    stock transactions and amortization of acquisition-related intangible
    assets.



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                      Three Months Ended July 31, 2013
                   (in thousands, except per share data)
                                (unaudited)

                                                      Amortization
                                            Other       of Debt
                                          Operating   Discount and
                             Share-Based   Expenses     Issuance
                    GAAP    Compensation     (2)         costs     Non-GAAP
                  --------  ------------  ---------  ------------- --------
Costs and
 expenses:
Costs of
 subscription
 services         $ 16,327  $       (401) $       -  $           - $ 15,926
Costs of
 professional
 services           24,427          (801)       (54)             -   23,572
Product
 development        41,168        (3,465)      (318)             -   37,385
Sales and
 marketing          44,150        (1,805)      (292)             -   42,053
General and
 administrative     13,766        (3,311)      (172)             -   10,283
Operating loss     (32,283)        9,783        836              -  (21,664)
Operating margin     -30.0%          9.1%       0.8%             -    -20.1%
Other expense, net  (3,479)            -          -          2,790     (689)
Loss before
 provision for
 income taxes      (35,762)        9,783        836          2,790  (22,353)
Provision for
 income taxes          216             -          -              -      216
Net loss          $(35,978) $      9,783  $     836  $       2,790 $(22,569)
Net loss per
 share, basic and
 diluted(1)       $  (0.21) $       0.06  $       -  $        0.02 $  (0.13)

(1) Calculated based upon 173,375 basic and diluted weighted-average shares
    of common stock.
(2) Other operating expenses include employer payroll taxes on employee
    stock transactions.



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                       Six Months Ended July 31, 2014
                   (in thousands, except per share data)
                                (unaudited)

                                                      Amortization
                                            Other       of Debt
                                          Operating   Discount and
                             Share-Based   Expenses     Issuance
                    GAAP    Compensation     (2)         costs     Non-GAAP
                 ---------  ------------  ---------  ------------- --------
Costs and
 expenses:
Costs of
 subscription
 services        $  45,832  $     (2,663) $     (88) $           - $ 43,081
Costs of
 professional
 services           77,227        (5,717)      (135)             -   71,375
Product
 development       142,635       (27,605)    (1,470)             -  113,560
Sales and
 marketing         146,690       (14,129)      (511)             -  132,050
General and
 administrative     47,985       (19,542)      (358)             -   28,085
Operating loss    (113,852)       69,656      2,562              -  (41,634)
Operating margin     -32.9%         20.1%       0.8%             -    -12.0%
Other expense,
 net               (13,952)            -          -         11,922   (2,030)
Loss before
 provision for
 income taxes     (127,804)       69,656      2,562         11,922  (43,664)
Provision for
 income taxes          800             -          -              -      800
Net loss         $(128,604) $     69,656  $   2,562  $      11,922 $(44,464)
Net loss per
 share, basic and
 diluted(1)      $   (0.70) $       0.38  $    0.01  $        0.07 $  (0.24)

(1) Calculated based upon 183,733 basic and diluted weighted-average shares
    of common stock.
(2) Other operating expenses include employer payroll taxes on employee
    stock transactions and amortization of acquisition-related intangible
    assets.



                               Workday, Inc.
                  Reconciliation of GAAP to Non-GAAP Data
                       Six Months Ended July 31, 2013
                   (in thousands, except per share data)
                                (unaudited)

                                                      Amortization
                                            Other       of Debt
                                          Operating   Discount and
                             Share-Based   Expenses     Issuance
                    GAAP    Compensation     (2)         costs     Non-GAAP
                  --------  ------------  ---------  ------------- --------
Costs and
 expenses:
Costs of
 subscription
 services         $ 31,257  $       (663) $      (8) $           - $ 30,586
Costs of
 professional
 services           46,196        (1,276)      (347)             -   44,573
Product
 development        77,450        (5,372)      (550)             -   71,528
Sales and
 marketing          82,514        (2,848)      (383)             -   79,283
General and
 administrative     26,690        (7,040)      (225)             -   19,425
Operating loss     (64,907)       17,199      1,513              -  (46,195)
Operating margin     -32.6%          8.6%       0.8%             -    -23.2%
Other expense, net  (3,735)            -          -          2,790     (945)
Loss before
 provision for
 income taxes      (68,642)       17,199      1,513          2,790  (47,140)
Provision for
 income taxes          351             -          -              -      351
Net loss          $(68,993) $     17,199  $   1,513  $       2,790 $(47,491)
Net loss per
 share, basic and
 diluted(1)       $  (0.40) $       0.10  $    0.01  $        0.01 $  (0.28)

(1) Calculated based upon 170,617 basic and diluted weighted-average shares
    of common stock.
(2) Other operating expenses include employer payroll taxes on employee
    stock transactions.



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

                                  Three Months Ended     Six Months Ended
                                       July 31,              July 31,
                                 --------------------  --------------------
                                    2014       2013       2014       2013
                                 ---------  ---------  ---------  ---------
GAAP cash flows from operating
 activities                      $  (9,011) $ (12,916) $  12,686  $   4,394
Capital expenditures               (28,409)   (29,732)   (38,282)   (31,627)
Property and equipment acquired
 under capital lease                     -          -          -       (115)
                                 ---------  ---------  ---------  ---------
    Free cash flows              $ (37,420) $ (42,648) $ (25,596) $ (27,348)
                                 =========  =========  =========  =========

                                    Trailing Twelve
                                     Months Ended
                                       July 31,
                                 --------------------
                                    2014       2013
                                 ---------  ---------
GAAP cash flows from operating
 activities                      $  54,555  $     976
Capital expenditures               (67,380)   (41,523)
Property and equipment acquired
 under capital lease                     -    (14,608)
Purchase of other intangible
 assets                            (15,000)         -
                                 ---------  ---------
    Free cash flows              $ (27,825) $ (55,155)
                                 =========  =========


About Non-GAAP Financial Measures
To provide investors and others with additional information regarding Workday's results, we have disclosed the following non-GAAP financial measures: non-GAAP operating loss, non-GAAP net loss per share and free cash flows. Workday has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. The non-GAAP financial measures non-GAAP operating loss and non-GAAP net loss per share differ from GAAP in that they exclude share-based compensation, employer payroll taxes on employee stock transactions, amortization of acquisition-related intangible assets and non-cash interest expense related to our convertible senior notes, as applicable. Free cash flows differ from GAAP cash flows from operating activities in that it treats capital expenditures, assets acquired under a capital lease and purchased other (non-acquisition related) intangible assets as a reduction to cash flows.

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

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

  • Share-based compensation. 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 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 restricted share awards, the amount of share-based compensation expenses is 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 the Employee Stock Purchase Plan, which is an element 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 included employer payroll taxes on employee stock transactions for the three and six months ended July 31, 2014 and 2013 and amortization of acquisition-related intangible assets for the three and six months ended July 31, 2014. The amount of employer payroll taxes on share-based compensation 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 the ongoing operations.

  • Amortization of debt discount and issuance costs. Under GAAP, we are required to separately account for liability (debt) and equity (conversion option) components of the convertible senior notes that were issued in private placements in June 2013. Accordingly, for GAAP purposes we are required to recognize the effective interest expense on our convertible senior notes and amortize the issuance costs over the term of the notes. The difference between the effective interest expense and the contractual interest expense and the amortization expense of issuance costs are excluded from management's assessment of our operating performance because management believes that these non-cash expenses are not indicative of ongoing operating performance. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the company's operational performance.

Additionally, we believe that the non-GAAP financial measure, free cash flows, is meaningful to investors because we review cash flows generated from or used in operations after deducting capital expenditures, whether purchased or leased, and purchased other intangible assets, due to the fact that these expenditures are considered to be an ongoing operational component of our business. This provides an enhanced view of cash available to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures.

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

Investor Relations Contact:
Michael Haase
(925) 951-9005
Michael.Haase@Workday.com

Media Contact:
Eric Glass
(415) 432-3056
Eric.Glass@Workday.com

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