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TMCNet:  Workday Announces Fiscal 2015 Second Quarter Financial Results

[August 27, 2014]

Workday Announces Fiscal 2015 Second Quarter Financial Results

(Marketwire Via Acquire Media NewsEdge) 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 WorkdayWorkday 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 MeasuresReconciliations 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 StatementsThis 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 MeasuresTo 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 Source: Workday, Inc.

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