Workday Announces Fiscal 2014 Third Quarter Financial Results

PLEASANTON, CA--(Marketwired - Nov 25, 2013) - Workday, Inc. (NYSE: WDAY), a leader in enterprise cloud applications for human resources and finance, today announced financial results for the fiscal third quarter ended October 31, 2013.

• Total revenues for the third quarter were $127.9 million, an increase of 76% from the third quarter of fiscal 2013. Subscription revenues were $93.9 million, an increase of 82% from same period last year.
  
  

• Operating loss for the third quarter was $40.4 million, compared to an operating loss of $40.9 million in the same period last year. Non-GAAP operating loss for the third quarter was $19.9 million, compared to a non-GAAP operating loss of $23.5 million last year.¹
  
  

• Net loss per basic and diluted share for the third quarter was $0.27, compared to a net loss per basic and diluted share of $0.67 in the third quarter of fiscal 2013. The third quarter non-GAAP net loss per basic and diluted share was $0.12, compared to a non-GAAP net loss per basic and diluted share of $0.39 during the same period last year.¹
  
  

• Operating cash flows were $7.1 million in the third quarter. Free cash flows were a negative $9.7 million in the third quarter.²
  
  

• Cash, cash equivalents and marketable securities were approximately $1.3 billion as of October 31, 2013. Unearned revenue was $351.8 million, a 40% increase from last year.
  
  

"We continue to innovate rapidly across all initiatives," said Aneel Bhusri, chairman, co-founder, and co-CEO, Workday. "In the third quarter, we announced the availability of Workday Big Data Analytics, confirmed that Workday Recruiting is progressing well and on schedule, and we continued our investment in Workday Financial Management, broadening the scope and scale for the world's largest organizations."

"We had a solid third quarter, and we continue to be pleased with our progress as we build for the long term," said Mark Peek, chief financial officer, Workday. "We generated record quarterly revenues and continued our march toward profitability. We also continue to execute well as we expand our operations globally. Looking ahead to the fourth quarter, we expect total revenues to be in the range of $133 to $138 million, or growth of 63% to 69% as compared to the prior year period."

Recent Highlights

• Workday held its seventh annual customer conference, Workday Rising, bringing together more than 3,500 attendees from the Workday community for education and collaboration in San Francisco.
  
  

• Workday unveiled plans to build Workday Student, an end-to-end student application for the needs of modern-day higher education institutions.
  
  

• The company also announced the availability of Workday Big Data Analytics, a new application that redefines how organizations unify diverse sources, sizes, and structures of data with Workday data to deliver insights business leaders need for critical workforce and financial decisions.
  
  

Workday plans to host a conference call today to review its third 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 third quarters of 2013 and 2014 exclude share-based compensation, and for the fiscal third quarter of 2014, also exclude employer payroll taxes on employee stock transactions and amortization expense for the debt discount and issuance costs associated with convertible notes. The fiscal third quarter of 2013 non-GAAP operating loss and net loss per share also exclude a one-time charge related to our contribution of 500,000 shares of common stock to the Workday Foundation. 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 and property and equipment acquired under capital lease. 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 organizations. Hundreds of companies, 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 fourth quarter fiscal 2014 revenue projections, and our expectations for future applications. 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) adverse changes in general economic or market conditions; (ii) delays or reductions in information technology spending; (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) our ability to manage our growth effectively; (v) our limited operating history, which makes it difficult to predict future results; (vi) the development of the market for enterprise cloud services; (vii) acceptance of our applications and services by customers; (viii) breaches in our security measures or unauthorized access to our customers' data; 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 July 31, 2013 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.

© 2013. 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)
		October 31,				January 31,
		2013				2013(1)
Assets
Current assets:
	Cash and cash equivalents	$	183,460			$	84,158
	Marketable securities		1,099,235				706,181
	Accounts receivable, net		86,961				67,437
	Deferred costs		14,352				9,816
	Prepaid expenses and other current assets		21,594				16,710
Total current assets			1,405,602				884,302
Property and equipment, net			73,960				44,585
Deferred costs, noncurrent			18,039				18,575
Goodwill and intangible assets, net			8,488				8,488
Other assets			22,096				3,130
Total assets		$	1,528,185			$	959,080
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable	$	8,228			$	2,665
	Accrued expenses and other current liabilities		17,890				13,558
	Accrued compensation		46,250				27,203
	Capital leases		10,044				12,008
	Unearned revenue		279,290				199,340
Total current liabilities			361,702				254,774
Convertible senior notes, net			463,092				-
Capital leases, noncurrent			5,546				12,972
Unearned revenue, noncurrent			72,479				85,920
Other liabilities			11,964				13,131
Total liabilities			914,783				366,797
Stockholders' equity:
	Common stock		172				162
	Additional paid-in capital		1,131,453				993,933
	Accumulated other comprehensive income		184				68
	Accumulated deficit		(518,407	)			(401,880	)
Total stockholders' equity			613,402				592,283
Total liabilities and stockholders' equity		$	1,528,185			$	959,080

(1)	Amounts as of January 31, 2013 were derived from the January 31, 2013 audited financial statements.

Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
			Three Months Ended								Nine Months Ended
			October 31,								October 31,
			2013				2012				2013				2012
Revenues			$	127,872			$	72,618			$	327,072			$	192,138
Costs and expenses(1):
	Costs of revenues			48,591				30,194				126,044				83,549
	Research and development			49,349				28,075				126,799				72,413
	Sales and marketing			54,051				32,584				136,565				87,051
	General and administrative			16,280				22,633				42,970				36,310
Total costs and expenses				168,271				113,486				432,378				279,323
Operating loss				(40,399	)			(40,868	)			(105,306	)			(87,185	)
Other expense, net				(6,893	)			(364	)			(10,628	)			(1,036	)
Loss before provision for income taxes				(47,292	)			(41,232	)			(115,934	)			(88,221	)
Provision for income taxes				242				78				593				25
Net loss				(47,534	)			(41,310	)			(116,527	)			(88,246	)
Accretion of redeemable convertible preferred stock				-				(161	)			-				(568	)
Net loss attributable to common stockholders			$	(47,534	)		$	(41,471	)		$	(116,527	)		$	(88,814	)
Net loss per share attributable to common stockholders, basic and diluted			$	(0.27	)		$	(0.67	)		$	(0.68	)		$	(2.06	)
Weighted-average shares used to compute net loss per share attributable to common stockholders				174,385				61,960				171,269				43,053
	(1) Costs and expenses include share-based compensation as follows:
		Costs of revenues	$	2,342			$	609			$	4,281			$	1,101
		Research and development		7,032				1,300				12,404				2,227
		Sales and marketing		4,583				970				7,431				1,838
		General and administrative		5,726				3,273				12,766				4,714

Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
				Three Months Ended								Nine Months Ended
				October 31,								October 31,
				2013				2012				2013				2012
Cash flows from operating activities
Net loss				$	(47,534	)		$	(41,310	)		$	(116,527	)		$	(88,246	)
	Adjustments to reconcile net loss to cash provided by (used in) operating activities:
	Depreciation and amortization				9,361				4,461				23,981				11,938
	Share-based compensation expense				19,683				6,152				36,882				9,880
	Amortization of deferred costs				3,211				2,750				8,449				8,336
	Amortization of debt discount and issuance costs				5,764				-				8,554				-
	Donation of common stock to Workday Foundation				-				11,250				-				11,250
	Other				86				11				256				41
	Changes in operating assets and liabilities:
		Accounts receivable			(19,997	)			7,382				(19,674	)			(6,632	)
		Deferred costs			(5,346	)			(4,673	)			(12,449	)			(11,426	)
		Prepaid expenses and other assets			(2,652	)			(3,395	)			(12,794	)			(7,744	)
		Accounts payable			1,891				(253	)			5,563				73
		Accrued expenses and other liabilities			16,458				3,575				22,720				13,738
		Unearned revenue			26,151				4,692				66,509				64,066
Net cash provided by (used in) operating activities					7,076				(9,358	)			11,470				5,274
Cash flows from investing activities
Purchases of marketable securities					(499,787	)			(288,659	)			(1,229,488	)			(374,599	)
Maturities of marketable securities					256,240				19,845				833,107				72,785
Purchases of property and equipment					(16,757	)			(801	)			(48,384	)			(6,803	)
Other					-				-				90				-
Net cash used in investing activities					(260,304	)			(269,615	)			(444,675	)			(308,617	)
Cash flows from financing activities
Proceeds of initial public offering, net of issuances costs					-				684,620				-				684,620
Proceeds from borrowings on convertible senior notes, net of issuance costs					-				-				584,291				-
Proceeds from issuance of warrants					-				-				92,708				-
Purchase of convertible senior notes hedges					-				-				(143,729	)			-
Proceeds from exercise of stock options					2,637				2,955				9,312				10,085
Principal payments on capital lease obligations					(2,817	)			(2,369	)			(9,505	)			(5,912	)
Other					(596	)			-				(516	)			-
Net cash provided by (used in) financing activities					(776	)			685,206				532,561				688,793
Effect of exchange rate changes					32				6				(54	)			1
Net increase (decrease) in cash and cash equivalents					(253,972	)			406,239				99,302				385,451
Cash and cash equivalents at the beginning of period					437,432				36,741				84,158				57,529
Cash and cash equivalents at the end of period				$	183,460			$	442,980			$	183,460			$	442,980

Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended October 31, 2013
(in thousands, except per share data)
(unaudited)
		GAAP				Share-Based Compensation				Employer Payroll Taxes on Employee Stock Transactions				Amortization of Debt Discount and Issuance Costs			Non-GAAP
Costs and expenses:
Costs of revenues:
	Subscription services	$	18,076			$	(783	)		$	-			$	-		$	17,293
	Professional services		30,515				(1,559	)			(164	)			-			28,792
Total costs of revenues			48,591				(2,342	)			(164	)			-			46,085
Research and development			49,349				(7,032	)			(390	)			-			41,927
Sales and marketing			54,051				(4,583	)			(87	)			-			49,381
General and administrative			16,280				(5,726	)			(188	)			-			10,366
Operating loss			(40,399	)			19,683				829				-			(19,887	)
Operating margin			-31.6	%			15.4	%			0.6	%			-			-15.6	%
Other expense, net			(6,893	)			-				-				5,764			(1,129	)
Loss before provision for income taxes			(47,292	)			19,683				829				5,764			(21,016	)
Provision for income taxes			242				-				-							242
Net loss		$	(47,534	)		$	19,683			$	829			$	5,764		$	(21,258	)
Net loss per share attributable to common stockholders, basic and diluted (1)		$	(0.27	)		$	0.11			$	0.00			$	0.04		$	(0.12	)

(1)	Calculated based upon 174,385 basic and diluted weighted-average shares of common stock.

Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended October 31, 2012
(in thousands, except per share data)
(unaudited)
		GAAP				Share-Based Compensation				Equity Grant to Workday Foundation				Non-GAAP
Costs and expenses:
Costs of revenues:
	Subscription services	$	10,179			$	(224	)		$	-			$	9,955
	Professional services		20,015				(385	)			-				19,630
Total costs of revenues			30,194				(609	)			-				29,585
Research and development			28,075				(1,300	)			-				26,775
Sales and marketing			32,584				(970	)			-				31,614
General and administrative			22,633				(3,273	)			(11,250	)			8,110
Operating loss			(40,868	)			6,152				11,250				(23,466	)
Operating margin			-56.2	%			8.4	%			15.5	%			-32.3	%
Loss before provision for income taxes			(41,232	)			6,152				11,250				(23,830	)
Provision for income taxes			78				-				-				78
Net loss		$	(41,310	)		$	6,152			$	11,250			$	(23,908	)
Net loss per share attributable to common stockholders, basic and diluted (1)		$	(0.67	)		$	0.10			$	0.18			$	(0.39	)

(1)	Calculated based upon 61,960 basic and diluted weighted-average shares of common stock.

Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Nine Months Ended October 31, 2013
(in thousands, except per share data)
(unaudited)
		GAAP				Share-Based Compensation				Employer Payroll Taxes on Employee Stock Transactions				Amortization of Debt Discount and Issuance Costs			Non-GAAP
Costs and expenses:
Costs of revenues:
	Subscription services	$	49,333			$	(1,446	)		$	(8	)		$	-		$	47,879
	Professional services		76,711				(2,835	)			(511	)			-			73,365
Total costs of revenues			126,044				(4,281	)			(519	)			-			121,244
Research and development			126,799				(12,404	)			(940	)			-			113,455
Sales and marketing			136,565				(7,431	)			(470	)			-			128,664
General and administrative			42,970				(12,766	)			(413	)			-			29,791
Operating loss			(105,306	)			36,882				2,342				-			(66,082	)
Operating margin			-32.2	%			11.3	%			0.7	%			-			-20.2	%
Other expense, net			(10,628	)			-				-				8,554			(2,074	)
Loss before provision for income taxes			(115,934	)			36,882				2,342				8,554			(68,156	)
Provision for income taxes			593				-				-				-			593
Net loss		$	(116,527	)		$	36,882			$	2,342			$	8,554		$	(68,749	)
Net loss per share attributable to common stockholders, basic and diluted (1)		$	(0.68	)		$	0.22			$	0.01			$	0.05		$	(0.40	)

(1)	Calculated based upon 171,269 basic and diluted weighted-average shares of common stock.

Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Nine Months Ended October 31, 2012
(in thousands, except per share data)
(unaudited)
		GAAP				Share-Based Compensation				Equity Grant to Workday Foundation				Non-GAAP
Costs and expenses:
Costs of revenues:
	Subscription services	$	26,767			$	(401	)		$	-			$	26,366
	Professional services		56,782				(700	)			-				56,082
Total costs of revenues			83,549				(1,101	)			-				82,448
Research and development			72,413				(2,227	)			-				70,186
Sales and marketing			87,051				(1,838	)			-				85,213
General and administrative			36,310				(4,714	)			(11,250	)			20,346
Operating loss			(87,185	)			9,880				11,250				(66,055	)
Operating margin			-45.4	%			5.1	%			5.9	%			-34.4	%
Loss before provision for income taxes			(88,221	)			9,880				11,250				(67,091	)
Provision for income taxes			25				-				-				25
Net loss		$	(88,246	)		$	9,880			$	11,250			$	(67,116	)
Net loss per share attributable to common stockholders, basic and diluted (1)		$	(2.06	)		$	0.23			$	0.26			$	(1.57	)

(1)	Calculated based upon 43,053 basic and diluted weighted-average shares of common stock.

Workday, Inc.
Revenue by Type
(in thousands)
(unaudited)
		Three Months Ended								Nine Months Ended
		October 31,								October 31,
		2013				2012				2013				2012
Revenues:
Subscription services		$	93,925			$	51,576			$	243,454			$	130,698
Professional services			33,947				21,042				83,618				61,440
	Total revenues	$	127,872			$	72,618			$	327,072			$	192,138
Revenues:
Subscription services			73.5	%			71.0	%			74.4	%			68.0	%
Professional services			26.5	%			29.0	%			25.6	%			32.0	%
	Total revenues		100.0	%			100.0	%			100.0	%			100.0	%

Workday, Inc.
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(A Non-GAAP Financial Measure)
(in thousands)
(unaudited)
		Three Months Ended								Nine Months Ended
		October 31,								October 31,
		2013				2012				2013				2012
GAAP cash flows from operating activities		$	7,076			$	(9,358	)		$	11,470			$	5,274
Capital expenditures			(16,757	)			(801	)			(48,384	)			(6,803	)
Property and equipment acquired under capital lease			-				(13,663	)			(115	)			(17,887	)
	Free cash flows	$	(9,681	)		$	(23,822	)		$	(37,029	)		$	(19,416	)

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. These non-GAAP financial measures, other than free cash flows, differ from GAAP in that they exclude share-based compensation, employer payroll taxes on employee stock transactions, a one-time charge related to our contribution of 500,000 shares of common stock to the Workday Foundation 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 and assets acquired under a capital lease 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 these non-GAAP financial measures are 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 Workday's 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. 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, which is an element of our ongoing share-based compensation expense, is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control.
  
  

• Employer payroll taxes on employee stock transactions. The amount of employer payroll taxes on employee stock transactions is dependent on Workday's stock price and other factors that are beyond our control and do not correlate to the operation of the business.
  
  

• 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.
  
  

• Equity Grant to Workday Foundation. During the third quarter of fiscal 2013, Workday granted 500,000 shares of common stock to the Workday Foundation. The Workday Foundation is a non-profit organization established to provide grants, humanitarian relief and employee matching contributions and support volunteerism and social development projects. This grant resulted in a one-time charge of $11.3 million, which was recorded to the General and administrative expenses line of the statement of operation. Management does not expect to make future grants of shares to the Foundation and therefore considers this charge non-recurring. As such, management believes it is useful to exclude this one-time charge in order to better understand the ongoing expenses of our core business and to facilitate comparison of our results across periods.
  
  

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, due to the fact that these expenditures are considered to be an ongoing operational component of our business.

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