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Workday Announces Fourth Quarter and Full Year Fiscal 2017 Financial Results

PLEASANTON, CA--(Marketwired - Feb 27, 2017) - Workday, Inc. ( NYSE : WDAY ), a leader in enterprise cloud applications for finance and human resources, today announced results for the fourth quarter and fiscal year ended January 31, 2017.

Fiscal Fourth Quarter Results

  • Total revenues were $436.7 million, an increase of 35% from the fourth quarter of fiscal 2016. Subscription revenue was $365.2 million, an increase of 39% from the same period last year.

  • Operating loss was $106.2 million, or negative 24.3% of revenues, compared to an operating loss of $73.4 million, or negative 22.7% of revenues, in the same period last year. Non-GAAP operating profit for the fourth quarter was $8.0 million, or 1.8% of revenues, compared to a non-GAAP operating loss of $0.8 million, or negative 0.2% of revenues, in the same period last year.1

  • Net loss per basic and diluted share was $0.52, compared to a net loss per basic and diluted share of $0.42 in the fourth quarter of fiscal 2016. Non-GAAP net income per diluted share was $0.07, compared to a non-GAAP net loss per basic and diluted share of $0.01 for the same period last year.1

Fiscal Year 2017 Results

  • Total revenues were $1.57 billion, an increase of 35% from fiscal 2016. Subscription revenue was $1.29 billion, an increase of 39% from the prior year.

  • Operating loss was $376.7 million, or negative 24% of revenues, compared to an operating loss of $264.7 million, or negative 22.8% of revenues, in fiscal 2016. Non-GAAP operating profit was $29.0 million, or 1.9% of revenues, compared to a non-GAAP operating loss of $2.7 million, or negative 0.2% of revenues, last year.1

  • Net loss per basic and diluted share was $2.06, compared to a net loss per basic and diluted share of $1.53 in fiscal 2016. Non-GAAP net income per diluted share was $0.12, compared to a non-GAAP net loss per basic and diluted share of $0.01 last year.1

  • Operating cash flows were $348.7 million and free cash flows were $227.8 million.2

  • Cash, cash equivalents and marketable securities were approximately $2.00 billion as of January 31, 2017. Unearned revenues were $1.23 million, a 37% increase from last year.

"In Q4, we delivered the best quarter in company history to close out a very successful fiscal 2017," said Aneel Bhusri, co-founder and CEO, Workday. "Our strong performance was driven by a combination of our industry-leading products and technology, continued high levels of customer satisfaction, and our dedicated Workday team. We believe these are the right areas of focus to achieve another great year for Workday in the year ahead."

"We finished a very strong fiscal 2017 with an excellent fourth quarter. We generated record revenues, and our subscription revenue growth accelerated in the fourth quarter," said Robynne Sisco, chief financial officer, Workday. "As we look ahead to fiscal 2018, we estimate that total revenues will be $2.005 to $2.025 billion or growth of 27-29%, putting us on track to be only the second true cloud company to reach this significant milestone."

Recent Highlights

  • Workday held its third annual customer conference in Europe, Workday Rising Europe, bringing together members of the Workday community for education and collaboration in Barcelona.

  • Workday selected Amazon Web Services (AWS) as its preferred public cloud infrastructure provider for customer production workloads. Through this partnership, Workday will offer customers the option to run its full suite of applications in the public cloud.

  • Workday joined more than 100 companies in signing the White House Equal Pay Pledge as part of Workday's ongoing commitment to close the gender wage gap.

Workday plans to host a conference call today to review its fourth quarter and full year fiscal 2017 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 Workday's Investor Relations site. The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 45 days.

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

1 Non-GAAP operating profit (loss) and non-GAAP net income (loss) per share exclude share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization expense for acquisition-related intangible assets, and debt discount and issuance costs associated with convertible notes. 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 (excluding owned real estate projects). See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

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

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

Forward-Looking Statements
This press release contains forward-looking statements including, among other things, statements regarding Workday's fiscal year revenue projections. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "plans," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. Risks include, but are not limited to: (i) 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 October 31, 2016 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.

© 2017. 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)
 
    January 31,  
    2017     2016  
Assets            
Current assets:            
  Cash and cash equivalents   $ 539,923     $ 300,087  
  Marketable securities     1,456,822       1,669,372  
  Accounts receivable, net     383,908       293,407  
  Deferred costs     27,537       21,817  
  Prepaid expenses and other current assets     88,336       77,625  
Total current assets     2,496,526       2,362,308  
Property and equipment, net     365,877       214,158  
Deferred costs, noncurrent     43,310       30,074  
Acquisition-related intangible assets, net     48,787       15,491  
Goodwill     158,354       50,325  
Other assets     53,570       57,738  
Total assets   $ 3,166,424     $ 2,730,094  
Liabilities and stockholders' equity                
Current liabilities:                
  Accounts payable   $ 26,824     $ 19,605  
  Accrued expenses and other current liabilities     61,582       43,122  
  Accrued compensation     110,625       91,211  
  Unearned revenue     1,097,417       768,741  
Total current liabilities     1,296,448       922,679  
Convertible senior notes, net     534,423       507,476  
Unearned revenue, noncurrent     135,970       130,988  
Other liabilities     36,677       32,794  
Total liabilities     2,003,518       1,593,937  
Stockholders' equity:                
  Common stock     202       193  
  Additional paid-in capital     2,681,200       2,247,454  
  Accumulated other comprehensive income     2,071       799  
  Accumulated deficit     (1,520,567 )     (1,112,289 )
Total stockholders' equity     1,162,906       1,136,157  
Total liabilities and stockholders' equity   $ 3,166,424     $ 2,730,094  
 
 
Workday, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
    Three Months Ended January 31,     Year Ended January 31,  
    2017     2016     2017     2016  
Revenues:                        
  Subscription services   $ 365,151     $ 261,799     $ 1,287,104     $ 929,234  
  Professional services     71,521       61,628       282,303       233,112  
Total revenues     436,672       323,427       1,569,407       1,162,346  
Costs and expenses(1):                                
  Costs of subscription services     58,165       43,009       213,389       149,869  
  Costs of professional services     72,016       59,671       270,156       224,558  
  Product development     191,556       131,244       680,531       469,944  
  Sales and marketing     167,657       121,073       583,874       434,056  
  General and administrative     53,513       41,871       198,122       148,578  
Total costs and expenses     542,907       396,868       1,946,072       1,427,005  
Operating loss     (106,235 )     (73,441 )     (376,665 )     (264,659 )
Other expense, net     (2,291 )     (6,505 )     (32,427 )     (24,242 )
Loss before provision for (benefit from) income taxes     (108,526 )     (79,946 )     (409,092 )     (288,901 )
Provision for (benefit from) income taxes     (2,961 )     1,182       (814 )     1,017  
Net loss   $ (105,565 )   $ (81,128 )   $ (408,278 )   $ (289,918 )
Net loss per share, basic and diluted   $ (0.52 )   $ (0.42 )   $ (2.06 )   $ (1.53 )
Weighted-average shares used to compute net loss per share, basic and diluted     201,530       192,485       198,214       190,016  
                                 
(1) Costs and expenses include share-based compensation as follows:                                
    Costs of subscription services   $ 5,936     $ 3,636     $ 20,773     $ 12,060  
    Costs of professional services     8,135       5,504       26,833       19,526  
    Product development     49,279       30,372       166,529       109,362  
    Sales and marketing     23,786       14,709       86,229       51,617  
    General and administrative     18,581       15,052       78,265       57,405  
 
 
Workday, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
    Three Months Ended January 31,     Year Ended January 31,  
    2017     2016     2017     2016  
Cash flows from operating activities                        
Net loss   $ (105,565 )   $ (81,128 )   $ (408,278 )   $ (289,918 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                
  Depreciation and amortization     32,646       25,222       115,885       85,939  
  Share-based compensation expenses     105,717       69,273       372,272       249,970  
  Amortization of deferred costs     7,057       5,728       25,577       23,477  
  Amortization of debt discount and issuance costs     6,876       6,510       26,947       25,518  
  Gain on sale of cost method investment     --       --       (65 )     (3,220 )
  Impairment of cost method investment     --       --       15,000       --  
  Other     (3,660 )     2,381       (1,982 )     1,047  
  Changes in operating assets and liabilities, net of business combinations:                                
    Accounts receivable     (113,334 )     (122,684 )     (88,639 )     (105,264 )
    Deferred costs     (21,286 )     (14,572 )     (44,533 )     (33,899 )
    Prepaid expenses and other assets     (6,744 )     (3,368 )     (20,847 )     (28,366 )
    Accounts payable     4,256       6,363       6,336       6,824  
    Accrued expense and other liabilities     (6,252 )     23,024       23,367       59,724  
    Unearned revenue     209,761       181,742       327,615       266,805  
Net cash provided by (used in) operating activities     109,472       98,491       348,655       258,637  
Cash flows from investing activities                                
Purchases of marketable securities     (345,482 )     (640,419 )     (1,917,238 )     (2,125,841 )
Maturities of marketable securities     371,536       639,995       1,986,031       1,901,858  
Sales of available-for-sale securities     41,100       4,000       133,292       102,711  
Business combinations, net of cash acquired     --       --       (147,879 )     (31,436 )
Owned real estate projects     (21,518 )     --       (106,997 )     --  
Capital expenditures, excluding owned real estate projects     (32,278 )     (41,985 )     (120,813 )     (133,667 )
Purchases of cost method investments     --       (100 )     (300 )     (16,550 )
Sales and maturities of cost method investments     5,000       --       5,315       3,538  
Change in restricted cash     100       --       --       --  
Other     --       (760 )     (296 )     (760 )
Net cash provided by (used in) investing activities     18,458       (39,269 )     (168,885 )     (300,147 )
Cash flows from financing activities                                
Proceeds from issuance of common stock from employee equity plans     24,812       20,560       58,079       45,656  
Principal payments on capital lease obligations     --       (66 )     --       (3,193 )
Other     596       621       1,602       1,646  
Net cash provided by (used in) financing activities     25,408       21,115       59,681       44,109  
Effect of exchange rate changes     28       (143 )     385       (704 )
Net increase (decrease) in cash and cash equivalents     153,366       80,194       239,836       1,895  
Cash and cash equivalents at the beginning of period     386,557       219,893       300,087       298,192  
Cash and cash equivalents at the end of period   $ 539,923     $ 300,087     $ 539,923     $ 300,087  
Supplemental cash flow data                                
Cash paid for interest   $ 3,191     $ 3,204     $ 6,484     $ 6,456  
Cash paid for taxes     513       472       5,315       2,124  
Non-cash investing and financing activities:                                
  Vesting of early exercised stock options   $ 437     $ 471     $ 1,802     $ 1,887  
  Purchases of property and equipment, accrued but not paid     27,696       14,052       27,696       14,052  
  Non-cash additions to property and equipment     1,112       765       2,094       7,256  
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended January 31, 2017
(in thousands, except per share data)
(unaudited)
 
    GAAP    Share-Based
Compensation Expenses
 
  Other
Operating
Expenses
(2) 
  Amortization
of Debt
Discount and
Issuance Costs
 
  Non-GAAP  
Costs and expenses:                              
Costs of subscription services   $ 58,165     $ (5,936 )   $ (160 )   $ --     $ 52,069  
Costs of professional services     72,016       (8,135 )     (312 )     --       63,569  
Product development     191,556       (49,279 )     (6,381 )     --       135,896  
Sales and marketing     167,657       (23,786 )     (858 )     --       143,013  
General and administrative     53,513       (18,581 )     (853 )     --       34,079  
Operating income (loss)     (106,235 )     105,717       8,564       --       8,046  
Operating margin     (24.3 )%     24.2 %     1.9 %     -- %     1.8 %
Other income (expense), net     (2,291 )     --       --       6,876       4,585  
Income (loss) before provision for (benefit from) income taxes     (108,526 )     105,717       8,564       6,876       12,631  
Provision for (benefit from) income taxes     (2,961 )     --       --       --       (2,961 )
Net income (loss)   $ (105,565 )   $ 105,717     $ 8,564     $ 6,876     $ 15,592  
Net income (loss) per share (1)   $ (0.52 )   $ 0.52     $ 0.04     $ 0.03     $ 0.07  
(1) GAAP net loss per share calculated based upon 201,530 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 210,846 diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $3.5 million, and amortization of acquisition-related intangible assets of $5.1 million recorded as part of product development and sales and marketing expenses.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Three Months Ended January 31, 2016
(in thousands, except per share data)
(unaudited)
 
    GAAP    Share-Based
Compensation
 
  Other
Operating
Expenses
(2) 
  Amortization
of Debt
Discount and
Issuance Costs
 
  Non-GAAP  
Costs and expenses:                              
Costs of subscription services   $ 43,009     $ (3,636 )   $ (88 )   $ --     $ 39,285  
Costs of professional services     59,671       (5,504 )     (137 )     --       54,030  
Product development     131,244       (30,372 )     (2,226 )     --       98,646  
Sales and marketing     121,073       (14,709 )     (328 )     --       106,036  
General and administrative     41,871       (15,052 )     (596 )     --       26,223  
Operating income (loss)     (73,441 )     69,273       3,375       --       (793 )
Operating margin     (22.7 )%     21.5 %     1.0 %     -- %     (0.2 )%
Other income (expense), net     (6,505 )     --       --       6,510       5  
Income (loss) before provision for (benefit from) income taxes     (79,946 )     69,273       3,375       6,510       (788 )
Provision for (benefit from) income taxes     1,182       --       --       --       1,182  
Net income (loss)   $ (81,128 )   $ 69,273     $ 3,375     $ 6,510     $ (1,970 )
Net income (loss) per share (1)   $ (0.42 )   $ 0.36     $ 0.02     $ 0.03     $ (0.01 )
(1) Calculated based upon 192,485 basic and diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $2.0 million, and amortization of acquisition-related intangible assets of $1.4 million recorded as part of product development expenses.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Year Ended January 31, 2017
(in thousands, except per share data)
(unaudited)
 
    GAAP    Share-Based
Compensation
 
  Other
Operating
Expenses
(2) 
  Amortization
of Debt
Discount and
Issuance Costs
 
  Non-GAAP  
Costs and expenses:                              
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     583,874       (86,229 )     (3,316 )     --       494,329  
General and administrative     198,122       (78,265 )     (3,302 )     --       116,555  
Operating income (loss)     (376,665 )     378,629       27,080       --       29,044  
Operating margin     (24.0 )%     24.1 %     1.8 %     -- %     1.9 %
Other income (expense), net     (32,427 )     --       --       26,947       (5,480 )
Income (loss) before provision for (benefit from) income taxes     (409,092 )     378,629       27,080       26,947       23,564  
Provision for (benefit from) income taxes     (814 )     --       --       --       (814 )
Net income (loss)   $ (408,278 )   $ 378,629     $ 27,080     $ 26,947     $ 24,378  
Net income (loss) per share (1)   $ (2.06 )   $ 1.91     $ 0.14     $ 0.13     $ 0.12  
(1) GAAP net loss per share calculated based upon 198,214 basic and diluted weighted-average shares of common stock. Non-GAAP net income per share calculated based upon 208,453 diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $14.3 million, and amortization of acquisition-related intangible assets of $12.7 million recorded as part of product development and sales and marketing expenses.
 
 
Workday, Inc.
Reconciliation of GAAP to Non-GAAP Data
Year Ended January 31, 2016
(in thousands, except per share data)
(unaudited)
 
    GAAP    Share-Based
Compensation
 
  Other
Operating
Expenses
(2) 
  Amortization
of Debt
Discount and
Issuance Costs
 
  Non-GAAP  
Costs and expenses:                              
Costs of subscription services   $ 149,869     $ (12,060 )   $ (414 )   $ --     $ 137,395  
Costs of professional services     224,558       (19,526 )     (768 )     --       204,264  
Product development     469,944       (109,362 )     (7,201 )     --       353,381  
Sales and marketing     434,056       (51,617 )     (1,482 )     --       380,957  
General and administrative     148,578       (57,405 )     (2,095 )     --       89,078  
Operating income (loss)     (264,659 )     249,970       11,960       --       (2,729 )
Operating margin     (22.8 )%     21.6 %     1.0 %     -- %     (0.2 )%
Other income (expense), net     (24,242 )     --       --       25,518       1,276  
Income (loss) before provision for (benefit from) income taxes     (288,901 )     249,970       11,960       25,518       (1,453 )
Provision for (benefit from) income taxes     1,017       --       --       --       1,017  
Net income (loss)   $ (289,918 )   $ 249,970     $ 11,960     $ 25,518     $ (2,470 )
Net income (loss) per share (1)   $ (1.53 )   $ 1.32     $ 0.06     $ 0.14     $ (0.01 )
(1) Calculated based upon 190,016 basic and diluted weighted-average shares of common stock.
(2) Other operating expenses include total employer payroll tax-related items on employee stock transactions of $8.8 million, and amortization of acquisition-related intangible assets of $3.2 million recorded as part of product development expenses.
 
 
Workday, Inc.
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(A Non-GAAP Financial Measure)
(in thousands)
(unaudited)
 
    Three Months Ended January 31,     Year Ended January 31,  
    2017     2016     2017     2016  
Net cash provided by (used in) operating activities   $ 109,472     $ 98,491     $ 348,655     $ 258,637  
Capital expenditures, excluding owned real estate projects     (32,278 )     (41,985 )     (120,813 )     (133,667 )
  Free cash flows   $ 77,194     $ 56,506     $ 227,842     $ 124,970  
                                   

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

Workday's management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate Workday's financial performance and the ability of operations to generate cash. Management believes these non-GAAP financial measures reflect Workday's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in Workday's business, as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Workday's operating results and 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 flows generated by normal recurring activities to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures, after our owned real estate projects.

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 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 restricted stock unit 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 shares offered under our Employee Stock Purchase Plan, 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 includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of ongoing operations.

  • Amortization of debt discount and issuance costs. Under GAAP, we are required to separately account for liability (debt) and equity (conversion option) components of the convertible senior notes that were issued in private placements in June 2013. 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 certain capital expenditures that are considered to be an ongoing operational component of our business. Capital expenditures deducted from cash flows from operations do not include purchases of land and buildings, and construction costs of our new development center and of other owned buildings. We exclude these owned real estate projects as they are infrequent, non-recurring in nature and distinctly separate from our ongoing business operations. This provides an enhanced view of cash available to make strategic acquisitions and investments, to fund ongoing operations and to fund other capital expenditures, after our owned real estate projects.

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