Workday, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Workday, Inc. Condensed Consolidated Balance Sheets (in thousands) (unaudited) October 31, 2020 January 31, 2020 Assets Current assets: Cash and cash equivalents $ 1,067,038 $ 731,141 Marketable securities 1,880,772 1,213,432 Trade and other receivables, net 742,744 877,578 Deferred costs 110,024 100,459 Prepaid expenses and other current assets 157,664 172,012 Total current assets 3,958,242 3,094,622 Property and equipment, net 976,610 936,179 Operating lease right-of-use assets 415,547 290,902 Deferred costs, noncurrent 232,413 222,395 Acquisition-related intangible assets, net 262,603 308,401 Goodwill 1,819,625 1,819,261 Other assets 179,987 144,605 Total assets $ 7,845,027 $ 6,816,365 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 54,949 $ 57,556 Accrued expenses and other current liabilities 129,794 130,050 Accrued compensation 264,443 248,154 Unearned revenue 2,000,417 2,223,178 Operating lease liabilities 84,552 66,147 Debt, current 1,091,050 244,319 Total current liabilities 3,625,205 2,969,404 Debt, noncurrent 701,178 1,017,967 Unearned revenue, noncurrent 68,874 86,025 Operating lease liabilities, noncurrent 352,900 241,425 Other liabilities 18,816 14,993 Total liabilities 4,766,973 4,329,814 Stockholders’ equity: Common stock 240 231 Additional paid-in capital 6,184,070 5,090,187 Treasury stock ( 269,083 ) — Accumulated other comprehensive income (loss) 1,110 23,492 Accumulated deficit ( 2,838,283 ) ( 2,627,359 ) Total stockholders’ equity 3,078,054 2,486,551 Total liabilities and stockholders’ equity $ 7,845,027 $ 6,816,365 See Notes to Condensed Consolidated Financial Statements 3 Table of Contents Workday, Inc. Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Revenues: Subscription services $ 968,547 $ 798,516 $ 2,782,201 $ 2,256,695 Professional services 137,413 139,584 404,111 394,212 Total revenues 1,105,960 938,100 3,186,312 2,650,907 Costs and expenses (1) : Costs of subscription services 152,396 122,305 442,666 355,935 Costs of professional services 142,785 148,625 442,422 424,548 Product development 419,962 401,742 1,282,127 1,127,695 Sales and marketing 302,870 286,794 897,924 839,930 General and administrative 102,024 88,884 296,461 258,932 Total costs and expenses 1,120,037 1,048,350 3,361,600 3,007,040 Operating income (loss) ( 14,077 ) ( 110,250 ) ( 175,288 ) ( 356,133 ) Other income (expense), net ( 8,846 ) ( 4,136 ) ( 31,272 ) 2,899 Loss before provision for (benefit from) income taxes ( 22,923 ) ( 114,386 ) ( 206,560 ) ( 353,234 ) Provision for (benefit from) income taxes 1,417 1,343 4,164 ( 518 ) Net loss $ ( 24,340 ) $ ( 115,729 ) $ ( 210,724 ) $ ( 352,716 ) Net loss per share, basic and diluted $ ( 0.10 ) $ ( 0.51 ) $ ( 0.89 ) $ ( 1.56 ) Weighted-average shares used to compute net loss per share, basic and diluted 238,059 228,461 235,685 226,071 (1) Costs and expenses include share-based compensation expenses as follows: Costs of subscription services $ 16,767 $ 13,634 $ 45,484 $ 36,050 Costs of professional services 27,349 22,249 74,467 57,390 Product development 128,423 118,215 378,950 315,210 Sales and marketing 54,077 47,142 150,881 128,686 General and administrative 33,216 29,762 97,958 88,122 See Notes to Condensed Consolidated Financial Statements 4 Table of Contents Workday, Inc. Condensed Consolidated Statements of Comprehensive Loss (in thousands) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Net loss $ ( 24,340 ) $ ( 115,729 ) $ ( 210,724 ) $ ( 352,716 ) Other comprehensive (loss) income, net of tax: Net change in foreign currency translation adjustment ( 2 ) 173 435 ( 420 ) Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax provision of $ 0 , $ 444 , $ 0 , and $ 875 , respectively ( 2,578 ) 1,194 ( 332 ) 2,786 Net change in market value of effective foreign currency forward exchange contracts, net of tax provision of $ 0 , $( 1,315 ), $ 0 , and $ 3,295 , respectively 3,044 ( 9,206 ) ( 22,485 ) 23,062 Other comprehensive (loss) income, net of tax 464 ( 7,839 ) ( 22,382 ) 25,428 Comprehensive loss $ ( 23,876 ) $ ( 123,568 ) $ ( 233,106 ) $ ( 327,288 ) See Notes to Condensed Consolidated Financial Statements 5 Table of Contents Workday, Inc. Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share data) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Common stock: Balance, beginning of period $ 238 $ 227 $ 231 $ 221 Issuance of common stock under employee equity plans 2 2 7 8 Settlement of convertible senior notes — — 2 — Balance, end of period 240 229 240 229 Additional paid-in capital: Balance, beginning of period 5,954,738 4,561,272 5,090,187 4,105,334 Issuance of common stock under employee equity plans 3,648 1,778 78,160 63,312 Share-based compensation 259,802 230,682 746,643 624,705 Settlement of warrants ( 34,118 ) — ( 34,118 ) — Exercise of convertible senior notes hedges — — 303,202 — Settlement of convertible senior notes — — ( 4 ) — Cumulative-effect of accounting changes — — — 381 Balance, end of period 6,184,070 4,793,732 6,184,070 4,793,732 Treasury stock: Balance, beginning of period ( 303,201 ) — — — Exercise of convertible senior notes hedges — — ( 303,201 ) — Settlement of warrants 34,118 — 34,118 — Balance, end of period ( 269,083 ) — ( 269,083 ) — Accumulated other comprehensive income (loss): Balance, beginning of period 646 32,458 23,492 ( 809 ) Other comprehensive (loss) income 464 ( 7,839 ) ( 22,382 ) 25,428 Balance, end of period 1,110 24,619 1,110 24,619 Accumulated deficit: Balance, beginning of period ( 2,813,943 ) ( 2,383,672 ) ( 2,627,359 ) ( 2,146,304 ) Net loss ( 24,340 ) ( 115,729 ) ( 210,724 ) ( 352,716 ) Cumulative-effect of accounting changes — — ( 200 ) ( 381 ) Balance, end of period ( 2,838,283 ) ( 2,499,401 ) ( 2,838,283 ) ( 2,499,401 ) Total stockholders’ equity $ 3,078,054 $ 2,319,179 $ 3,078,054 $ 2,319,179 Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Common stock (in shares): Balance, beginning of period 237,160,715 227,607,594 231,708,391 222,052,063 Issuance of common stock under employee equity plans 1,935,725 1,931,916 7,388,498 7,487,250 Settlement of warrants ( 186,202 ) — ( 186,202 ) — Settlement of convertible senior notes — 20 1,654,308 217 Purchase of treasury stock from the exercise of convertible senior notes hedges — — ( 1,654,757 ) — Balance, end of period 238,910,238 229,539,530 238,910,238 229,539,530 See Notes to Condensed Consolidated Financial Statements 6 Table of Contents Workday, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Cash flows from operating activities: Net loss $ ( 24,340 ) $ ( 115,729 ) $ ( 210,724 ) $ ( 352,716 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 73,864 72,233 218,556 201,152 Share-based compensation expenses 259,832 231,002 747,740 625,149 Amortization of deferred costs 28,732 23,015 82,141 65,897 Amortization of debt discount and issuance costs 12,098 13,512 41,466 39,400 Non-cash lease expense 22,141 17,081 60,389 49,155 Other ( 8,760 ) 2,744 8,040 ( 8,953 ) Changes in operating assets and liabilities, net of business combinations: Trade and other receivables, net ( 53,923 ) 2,197 127,663 86,139 Deferred costs ( 41,823 ) ( 34,415 ) ( 101,724 ) ( 81,107 ) Prepaid expenses and other assets 25,898 7,463 36,738 677 Accounts payable 3,762 1,938 ( 9,313 ) 4,488 Accrued expenses and other liabilities ( 5,037 ) 41,716 ( 46,378 ) 6,595 Unearned revenue 1,358 ( 4,755 ) ( 239,899 ) ( 68,392 ) Net cash provided by (used in) operating activities 293,802 258,002 714,695 567,484 Cash flows from investing activities: Purchases of marketable securities ( 806,713 ) ( 375,144 ) ( 1,963,244 ) ( 1,429,046 ) Maturities of marketable securities 427,910 494,023 1,282,324 1,339,830 Sales of marketable securities — — 5,279 55,499 Owned real estate projects ( 1,072 ) ( 21,832 ) ( 5,323 ) ( 95,615 ) Capital expenditures, excluding owned real estate projects ( 78,197 ) ( 55,163 ) ( 204,692 ) ( 196,274 ) Business combinations, net of cash acquired — — — ( 12,885 ) Purchases of non-marketable equity and other investments ( 4,618 ) ( 9,577 ) ( 63,218 ) ( 17,293 ) Sales and maturities of non-marketable equity and other investments 24 252 6,223 252 Other — — — ( 9 ) Net cash provided by (used in) investing activities ( 462,666 ) 32,559 ( 942,651 ) ( 355,541 ) Cash flows from financing activities: Proceeds from borrowings on term loan, net — — 747,795 — Payments on convertible senior notes — ( 3 ) ( 249,946 ) ( 30 ) Payments on term loan ( 9,375 ) — ( 9,375 ) — Proceeds from issuance of common stock from employee equity plans 3,650 1,780 78,167 63,320 Other ( 181 ) ( 175 ) ( 2,436 ) ( 375 ) Net cash provided by (used in) financing activities ( 5,906 ) 1,602 564,205 62,915 Effect of exchange rate changes 40 48 546 ( 204 ) Net increase (decrease) in cash, cash equivalents, and restricted cash ( 174,730 ) 292,211 336,795 274,654 Cash, cash equivalents, and restricted cash at the beginning of period 1,246,246 624,646 734,721 642,203 Cash, cash equivalents, and restricted cash at the end of period $ 1,071,516 $ 916,857 $ 1,071,516 $ 916,857 See Notes to Condensed Consolidated Financial Statements 7 Table of Contents Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Supplemental cash flow data: Cash paid for interest, net of amounts capitalized $ 5,309 $ 959 $ 11,686 $ 1,431 Cash paid for income taxes 2,598 1,415 7,239 7,418 Non-cash investing and financing activities: Purchases of property and equipment, accrued but not paid 49,098 33,155 49,098 33,155 As of October 31, 2020 2019 Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of cash flows: Cash and cash equivalents $ 1,067,038 $ 912,748 Restricted cash included in Prepaid expenses and other current assets 4,351 3,984 Restricted cash included in Other assets 127 125 Total cash, cash equivalents, and restricted cash $ 1,071,516 $ 916,857 See Notes to Condensed Consolidated Financial Statements 8 Table of Contents Workday, Inc. Notes to Condensed Consolidated Financial Statements Note 1. Overview and Basis of Presentation Company and Background Workday delivers financial management, human resources, planning, spend management, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies. We offer innovative and adaptable technology focused on the consumer internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible, and reliable applications to manage critical business functions that help enable them to optimize their financial and human resources. We were originally incorporated in March 2005 in Nevada, and in June 2012, we reincorporated in Delaware. As used in this report, the terms “Workday,” “registrant,” “we,” “us,” and “our” mean Workday, Inc. and its subsidiaries unless the context indicates otherwise. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements include the results of Workday, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the information contained herein reflects all adjustments necessary for a fair presentation of Workday’s financial position, results of operations, stockholders’ equity, and cash flows. All such adjustments are of a normal, recurring nature. The results of operations for the quarter ended October 31, 2020, shown in this report are not necessarily indicative of the results to be expected for the full year ending January 31, 2021. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, filed with the SEC on March 3, 2020. There have been no material changes in our significant accounting policies as described in our Annual Report on Form 10-K for the year ended January 31, 2020, other than the adoption of accounting pronouncements as described in Note 2, Accounting Standards. Certain prior period amounts reported in our condensed consolidated financial statements have been reclassified to conform to current period presentation. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. These estimates, judgments, and assumptions include, but are not limited to the fair value of assets acquired and liabilities assumed through business combinations, the determination of the period of benefit for deferred commissions, certain assumptions used in the valuation of equity awards, and assumptions used in the valuation of non-marketable equity investments. Actual results could differ from those estimates and such differences could be material to our condensed consolidated financial statements. Segment Information We operate in one operating segment, cloud applications. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by chief operating decision makers, who are our co-chief executive officers, in deciding how to allocate resources and assessing performance. Our chief operating decision makers allocate resources and assess performance based upon discrete financial information at the consolidated level. 9 Table of Contents Note 2. Accounting Standards Recently Adopted Accounting Pronouncements ASU No. 2016-13 In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We adopted this standard effective February 1, 2020, using a modified retrospective approach, which resulted in a cumulative-effect adjustment of $ 0.2 million to Accumulated deficit. Under the new standard, we assess our allowance for credit losses on trade receivables by taking into consideration forecasts of future economic conditions, information about past events, such as our historical trend of write-offs, and customer-specific circumstances, such as bankruptcies and disputes. The allowance for credit losses on trade receivables is recorded in operating expenses on our condensed consolidated statements of operations. With respect to available-for-sale debt securities, when the fair value of the security is below its amortized cost, the amortized cost should be written down to its fair value if i) it is more likely than not that management is required to sell the impaired security before recovery of its amortized basis or ii) management has the intention to sell the security. If neither of the conditions are met, we must determine whether the impairment is due to credit losses. To determine the amount of credit losses, we compare the present value of the expected cash flows of the security, derived by taking into account the issuers’ credit ratings and remaining payment terms, with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in Other income (expense), net on our condensed consolidated statements of operations. Non-credit related impairment losses are recorded in Other comprehensive income (loss) (“OCI”). ASU No. 2018-15 In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. We adopted this standard effective February 1, 2020, using a prospective approach. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements. Subsequent impact on our condensed consolidated financial statements will depend on the magnitude of implementation costs to be incurred. Implementation costs capitalized subsequent to adoption will be recognized in operating expenses on our condensed consolidated statements of operations over the noncancelable period of the hosting arrangement plus any renewal periods reasonably certain to be taken. ASU No. 2019-12 In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which simplifies accounting guidance for certain tax matters including franchise taxes, certain transactions that result in a step-up in tax basis of goodwill, and enacted changes in tax laws in interim periods. In addition, it eliminates a company’s need to evaluate certain exceptions relating to the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. We adopted this standard effective February 1, 2020. We adopted the amendments in this update on a retrospective basis for the provision related to franchise taxes and prospectively for all other applicable amendments. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements. 10 Table of Contents Recently Issued Accounting Pronouncements ASU No. 2020-04 In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional expedients and exceptions to GAAP guidance on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates. We may elect to apply the amendments prospectively through December 31, 2022. The impact on our condensed consolidated financial statements from the adoption of this standard is expected to be immaterial. ASU No. 2020-06 In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity , which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. This new standard is effective for our interim and annual periods beginning February 1, 2022, and earlier adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements. Note 3. Investments Debt Securities As of October 31, 2020, debt securities consisted of the following (in thousands): Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value U.S. treasury securities $ 930,774 $ 274 $ ( 26 ) $ 931,022 U.S. agency obligations 542,942 144 ( 136 ) 542,950 Corporate bonds 355,847 2,442 ( 12 ) 358,277 Commercial paper 367,413 — — 367,413 $ 2,196,976 $ 2,860 $ ( 174 ) $ 2,199,662 Included in Cash and cash equivalents $ 329,586 $ 1 $ ( 1 ) $ 329,586 Included in Marketable securities $ 1,867,390 $ 2,859 $ ( 173 ) $ 1,870,076 As of January 31, 2020, debt securities consisted of the following (in thousands): Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value U.S. treasury securities $ 312,183 $ 492 $ ( 5 ) $ 312,670 U.S. agency obligations 169,613 99 ( 44 ) 169,668 Corporate bonds 504,434 2,476 — 506,910 Commercial paper 364,701 — — 364,701 $ 1,350,931 $ 3,067 $ ( 49 ) $ 1,353,949 Included in Cash and cash equivalents $ 140,517 $ — $ — $ 140,517 Included in Marketable securities $ 1,210,414 $ 3,067 $ ( 49 ) $ 1,213,432 We classify our debt securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We consider all debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets on the condensed consolidated balance sheets. Debt securities included in Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase greater than three months, and the remainder of the securities is included in Cash and cash equivalents. The unrealized losses associated with our debt securities were immaterial as of October 31, 2020, and January 31, 2020, and we did not recognize any credit losses related to our debt securities during the three and nine months ended October 31, 2020. 11 Table of Contents There were no sales of debt securities during the three months ended October 31, 2020, and 2019. We sold $ 5 million of debt securities during the nine months ended October 31, 2020, and 2019. The realized gains and losses from the sales were immaterial. Equity Investments Equity investments consisted of the following (in thousands): Condensed Consolidated Balance Sheets Location October 31, 2020 January 31, 2020 Money market funds (1) Cash and cash equivalents $ 517,031 $ 386,909 Marketable equity investments (1) Marketable securities 10,696 — Equity investments accounted for under the equity method Other assets 48,181 — Non-marketable equity investments measured using the measurement alternative (2) Other assets 62,741 59,026 $ 638,649 $ 445,935 (1) Investments with readily determinable fair values. (2) Investments in privately held companies without readily determinable fair values. Total realized and unrealized gains and losses associated with our equity investments consisted of the following (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Net realized gains (losses) recognized on equity investments sold $ — $ 102 $ 1,591 $ 6,946 Net unrealized gains (losses) recognized on equity investments held 3,830 — 1,643 2,169 Total net gains (losses) recognized in Other income (expense), net $ 3,830 $ 102 $ 3,234 $ 9,115 We determine at the inception of each arrangement whether an investment or other interest is considered a variable interest entity (“VIE”). If the investment or other interest is determined to be a VIE, we must evaluate whether we are considered the primary beneficiary. For investments in VIEs in which we are considered the primary beneficiary, the assets, liabilities, and results of operations of the VIE are consolidated in our condensed consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to direct the activities that most significantly impact the VIE’s economic performance; and (2) has the obligation to absorb losses or the right to receive benefits from the VIE. As of October 31, 2020, there were no VIEs for which we were the primary beneficiary. Equity Investments Accounted for Under the Equity Method Investments in VIEs for which we are not the primary beneficiary or do not own a controlling interest but can exercise significant influence over the investee are accounted for under the equity method of accounting. These investments are measured at cost, less any impairment, plus or minus our share of earnings and losses and are included in Other assets on the condensed consolidated balance sheets. Our share of earnings and losses are recorded in Other income (expense), net, on the condensed consolidated statements of operations. During the first quarter of fiscal 2021, we made an equity investment of $ 50 million in a limited partnership, which represents an ownership interest of approximately 6 %. We determined that the limited partnership is a VIE because the at-risk equity holders, as a group, lack the characteristics of a controlling financial interest. We do not have majority voting rights nor the power to direct the activities of this entity, and therefore, we are not the primary beneficiary. The investment is accounted for under the equity method of accounting as it is considered to be more than minor and we have the ability to exercise significant influence over the entity. The carrying value was $ 48 million as of October 31, 2020. There was no impairment loss recorded on this investment during the three and nine months ended October 31, 2020. 12 Table of Contents Non-Marketable Equity Investments Measured Using the Measurement Alternative Non-marketable equity investments measured using the measurement alternative include investments in privately held companies without readily determinable fair values in which we do not own a controlling interest or have significant influence. We adjust the carrying values of non-marketable equity investments based on observable price changes from orderly transactions for identical or similar investments of the same issuer. No material adjustments were made to the carrying value of the non-marketable equity investments as measured under the measurement alternative during the three and nine months ended October 31, 2020, and 2019. Additionally, we assess our non-marketable equity investments quarterly for impairment. Our impairment analysis encompasses an assessment of the severity and duration of the impairment and a qualitative and quantitative analysis of other key factors including the investee’s financial metrics, market acceptance of the investee’s product or technology, other competitive products or technology in the market, general market conditions, and the rate at which the investee is using its cash. We also have considered the impacts of the coronavirus pandemic (“COVID-19 pandemic”) in our impairment analysis. These factors require significant judgment. We did no t record any impairment losses on non-marketable equity investments for the three months ended October 31, 2020, and we recorded $ 3 million of impairment losses for the nine months ended October 31, 2020. We did no t record any such impairment losses during the three and nine months ended October 31, 2019. Non-marketable equity investments that have been remeasured during the period due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold. Marketable Equity Investments Marketable equity investments were $ 11 million as of October 31, 2020. We did not have any marketable equity investments as of January 31, 2020. There were no sales of marketable equity investments during the three and nine months ended October 31, 2020, or the three months ended October 31, 2019. We sold $ 51 million of marketable equity investments during the nine months ended October 31, 2019, with a corresponding gain recognized of $ 7 million. Note 4. Fair Value Measurements We measure our cash equivalents, marketable securities, and foreign currency derivative contracts at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value: Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 — Other inputs that are directly or indirectly observable in the marketplace. Level 3 — Unobservable inputs that are supported by little or no market activity. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of October 31, 2020 (in thousands): Level 1 Level 2 Level 3 Total U.S. treasury securities $ 931,022 $ — $ — $ 931,022 U.S. agency obligations — 542,950 — 542,950 Corporate bonds — 358,277 — 358,277 Commercial paper — 367,413 — 367,413 Money market funds 517,031 — — 517,031 Marketable equity investments 10,696 — — 10,696 Foreign currency derivative assets — 20,478 — 20,478 Total assets $ 1,458,749 $ 1,289,118 $ — $ 2,747,867 Foreign currency derivative liabilities $ — $ 13,787 $ — $ 13,787 Total liabilities $ — $ 13,787 $ — $ 13,787 13 Table of Contents The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of January 31, 2020 (in thousands): Level 1 Level 2 Level 3 Total U.S. treasury securities $ 312,670 $ — $ — $ 312,670 U.S. agency obligations — 169,668 — 169,668 Corporate bonds — 506,910 — 506,910 Commercial paper — 364,701 — 364,701 Money market funds 386,909 — — 386,909 Foreign currency derivative assets — 33,274 — 33,274 Total assets $ 699,579 $ 1,074,553 $ — $ 1,774,132 Foreign currency derivative liabilities $ — $ 3,996 $ — $ 3,996 Total liabilities $ — $ 3,996 $ — $ 3,996 Fair Value Measurements of Other Financial Instruments The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands): October 31, 2020 January 31, 2020 Net Carrying Amount Estimated Fair Value Net Carrying Amount Estimated Fair Value 1.50 % Convertible senior notes $ — $ — $ 244,319 $ 571,057 0.25 % Convertible senior notes 1,053,550 1,732,671 1,017,967 1,587,978 In June 2013, we completed an offering of $ 250 million of 1.50 % convertible senior notes due July 15, 2020 (“2020 Notes”), which were subsequently converted during the second quarter of fiscal 2021. In September 2017, we completed an offering of $ 1.15 billion of 0.25 % convertible senior notes due October 1, 2022 (“2022 Notes” and together with the 2020 Notes, the “Notes”). The carrying amounts of the Notes represent the liability components of the principal balances as of October 31, 2020, and January 31, 2020. The estimated fair values of the Notes, which we have classified as Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of each reporting period. The if-converted value of the 2022 Notes exceeded the principal amount by $ 493 million. The if-converted value was determined based on the closing price of our common stock of $ 210.12 on October 31, 2020. For further information, see Note 10, Debt. In April 2020, we entered into a credit agreement (“Credit Agreement”) pursuant to which the lenders would extend to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million (“Term Loan,”) and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million (“Revolving Credit Facility”). As of October 31, 2020, the carrying value of the Term Loan was $ 739 million, and there were no outstanding borrowings under the Revolving Credit Facility. The estimated fair value of the Term Loan, which we have classified as a Level 2 financial instrument, approximates its carrying value because it is a floating rate facility. For further information, see Note 10, Debt. Note 5. Deferred Costs Deferred costs, which consist of deferred sales commissions, were $ 342 million and $ 323 million as of October 31, 2020, and January 31, 2020, respectively. Amortization expense for the deferred costs was $ 29 million and $ 23 million for the three months ended October 31, 2020, and 2019, respectively, and $ 82 million and $ 66 million for the nine months ended October 31, 2020, and 2019, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 14 Table of Contents Note 6. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): October 31, 2020 January 31, 2020 Land and land improvements $ 37,065 $ 38,737 Buildings 493,757 489,028 Computers, equipment, and software 894,031 723,482 Furniture and fixtures 54,952 51,917 Leasehold improvements 200,807 189,668 Property and equipment, gross 1,680,612 1,492,832 Less accumulated depreciation and amortization ( 704,002 ) ( 556,653 ) Property and equipment, net $ 976,610 $ 936,179 Depreciation expense totaled $ 58 million and $ 55 million for the three months ended October 31, 2020, and 2019, respectively, and $ 170 million and $ 144 million for the nine months ended October 31, 2020, and 2019, respectively. No interest costs were capitalized to Property and equipment, net during the three and nine months ended October 31, 2020, or the three months ended October 31, 2019. Interest costs capitalized to Property and equipment, net totaled $ 6 million for the nine months ended October 31, 2019 . Note 7. Acquisition-Related Intangible Assets, Net Acquisition-related intangible assets, net consisted of the following (in thousands): October 31, 2020 January 31, 2020 Developed technology $ 218,400 $ 218,400 Customer relationships 224,000 224,000 Trade name 12,400 12,400 Backlog 11,000 11,000 Acquisition-related intangible assets, gross 465,800 465,800 Less accumulated amortization ( 203,197 ) ( 157,399 ) Acquisition-related intangible assets, net $ 262,603 $ 308,401 Amortization expense related to acquisition-related intangible assets was $ 14 million and $ 16 million for the three months ended October 31, 2020, and 2019, respectively, and $ 46 million and $ 55 million for the nine months ended October 31, 2020, and 2019, respectively. As of October 31, 2020, our future estimated amortization expense related to acquisition-related intangible assets is as follows (in thousands): Fiscal Period: Remainder of 2021 $ 13,977 2022 52,833 2023 50,109 2024 38,933 2025 27,500 Thereafter 79,251 Total $ 262,603 15 Table of Contents Note 8. Other Assets Other assets consisted of the following (in thousands): October 31, 2020 January 31, 2020 Non-marketable equity and other investments (1) $ 76,155 $ 75,004 Equity investments accounted for under the equity method 48,181 — Prepayments for goods and services 20,219 27,928 Technology patents and other intangible assets, net 15,564 17,898 Net deferred tax assets 7,180 6,912 Deposits 5,869 6,335 Derivative assets 5,037 9,529 Other 1,782 999 Total $ 179,987 $ 144,605 (1) Included in non-marketable equity and other investments are investments in loan receivables of privately held companies, which are carried at amortized cost. The carrying values of these loan receivables were $ 13 million and $ 16 million as of October 31, 2020, and January 31, 2020, respectively. As of October 31, 2020, the allowance for credit losses on this balance was immaterial. Technology patents and other intangible assets with estimable useful lives are amortized on a straight-line basis. As of October 31, 2020, the future estimated amortization expense is as follows (in thousands): Fiscal Period: Remainder of 2021 $ 719 2022 2,620 2023 2,348 2024 2,040 2025 1,569 Thereafter 6,268 Total $ 15,564 Note 9. Derivative Instruments We conduct business on a global basis in multiple foreign currencies, subjecting Workday to foreign currency risk. To mitigate this risk, we utilize hedging contracts as described below. We do not enter into any derivatives for trading or speculative purposes. Our foreign currency contracts are classified within Level 2 of the fair value hierarchy because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates. Foreign Currency Forward Contracts Designated as Cash Flow Hedges We are exposed to foreign currency fluctuations resulting from customer contracts denominated in foreign currencies. We have a hedging program in which we enter into foreign currency forward contracts related to certain customer contracts. We designate these forward contracts as cash flow hedging instruments since the accounting criteria for such designation have been met. Foreign currency forward contracts designated as cash flow hedges are recorded on the condensed consolidated balance sheets at fair value. Cash flows from such forward contracts are classified as operating activities. Gains or losses resulting from changes in the fair value of these hedges are recorded in Accumulated other comprehensive income (loss) (“AOCI”) on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the condensed consolidated statements of operations in the same period that the underlying revenues are earned. As of October 31, 2020, we estimate that $ 8 million of net gains recorded in AOCI related to our foreign currency forward contracts designated as cash flow hedges will be reclassified into income within the next 12 months. As of October 31, 2020, and January 31, 2020, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $ 1.2 billion and $ 908 million, respectively. The notional value represents the amount that will be bought or sold upon maturity of the forward contract. All such contracts have maturities not greater than 48 months. 16 Table of Contents Foreign Currency Forward Contracts Not Designated as Hedges We also enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets and liabilities. These forward contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities and are recorded on the condensed consolidated balance sheets at fair value. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of these forward contracts are recorded in Other income (expense), net on the condensed consolidated statements of operations. Cash flows from such forward contracts are classified as operating activities. As of October 31, 2020, and January 31, 2020, we had outstanding forward contracts not designated as hedges with total notional values of $ 115 million and $ 246 million, respectively. The fair values of outstanding derivative instruments were as follows (in thousands): Condensed Consolidated Balance Sheets Location October 31, 2020 January 31, 2020 Derivative assets: Foreign currency forward contracts designated as cash flow hedges Prepaid expenses and other current assets $ 14,830 $ 20,944 Foreign currency forward contracts designated as cash flow hedges Other assets 5,024 9,529 Foreign currency forward contracts not designated as hedges Prepaid expenses and other current assets 611 2,801 Foreign currency forward contracts not designated as hedges Other assets 13 — Total derivative assets $ 20,478 $ 33,274 Derivative liabilities: Foreign currency forward contracts designated as cash flow hedges Accrued expenses and other current liabilities $ 6,072 $ 1,211 Foreign currency forward contracts designated as cash flow hedges Other liabilities 7,049 1,809 Foreign currency forward contracts not designated as hedges Accrued expenses and other current liabilities 643 976 Foreign currency forward contracts not designated as hedges Other liabilities 23 — Total derivative liabilities $ 13,787 $ 3,996 The effect of foreign currency forward contracts designated as cash flow hedges on the condensed consolidated statements of operations was as follows (in thousands): Condensed Consolidated Statements of Operations Location Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Total revenues Revenues $ 1,105,960 $ 938,100 $ 3,186,312 $ 2,650,907 Amount of gains (losses) related to foreign currency forward contracts designated as cash flow hedges Revenues 5,568 1,914 15,332 2,826 17 Table of Contents Pre-tax gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands): Condensed Consolidated Statements of Operations and Statements of Comprehensive Loss Locations Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Gains (losses) recognized in OCI Net change in market value of effective foreign currency forward exchange contracts $ 8,612 $ ( 8,607 ) $ ( 7,153 ) $ 29,183 Gains (losses) reclassified from AOCI into income (effective portion) Revenues 5,568 1,914 15,332 2,826 Gains (losses) associated with foreign currency forward contracts not designated as hedges were as follows (in thousands): Condensed Consolidated Statements of Operations Location Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Foreign currency forward contracts not designated as hedges Other income (expense), net $ 151 $ ( 1,727 ) $ 1,524 $ 2,900 We are subject to master netting agreements with certain counterparties of the foreign exchange contracts, under which we are permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is our policy to present the derivatives gross on the condensed consolidated balance sheets. Our foreign currency forward contracts are not subject to any credit contingent features or collateral requirements. We manage our exposure to counterparty risk by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions. As of October 31, 2020, information related to these offsetting arrangements was as follows (in thousands): Gross Amounts of Recognized Assets Gross Amounts Offset on the Condensed Consolidated Balance Sheets Net Amounts of Assets Presented on the Condensed Consolidated Balance Sheets Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets Net Assets Exposed Financial Instruments Cash Collateral Received Derivative assets: Counterparty A $ 553 $ — $ 553 $ ( 1,785 ) $ — $ ( 1,232 ) Counterparty B 17,975 — 17,975 ( 4,732 ) — 13,243 Counterparty C 1,950 — 1,950 ( 7,270 ) — ( 5,320 ) Total $ 20,478 $ — $ 20,478 $ ( 13,787 ) $ — $ 6,691 Gross Amounts of Recognized Liabilities Gross Amounts Offset on the Condensed Consolidated Balance Sheets Net Amounts of Liabilities Presented on the Condensed Consolidated Balance Sheets Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets Net Liabilities Exposed Financial Instruments Cash Collateral Pledged Derivative liabilities: Counterparty A $ 1,785 $ — $ 1,785 $ ( 1,785 ) $ — $ — Counterparty B 4,732 — 4,732 ( 4,732 ) — — Counterparty C 7,270 — 7,270 ( 7,270 ) — — Total $ 13,787 $ — $ 13,787 $ ( 13,787 ) $ — $ — 18 Table of Contents Note 10. Debt Outstanding debt consisted of the following (in thousands): October 31, 2020 January 31, 2020 2020 Notes, net of unamortized debt discounts of $ 0 and $ 5,319 , respectively, and unamortized debt issuance costs of $ 0 and $ 307 , respectively $ — $ 244,319 2022 Notes, net of unamortized debt discounts of $ 90,964 and $ 124,403 , respectively, and unamortized debt issuance costs of $ 5,486 and $ 7,630 , respectively 1,053,550 1,017,967 Term Loan, net of unamortized debt discounts of $ 1,783 and $ 0 , respectively, and unamortized debt issuance costs of $ 164 and $ 0 , respectively 738,678 — Total debt $ 1,792,228 $ 1,262,286 Less: current debt $ ( 1,091,050 ) $ ( 244,319 ) Total debt, noncurrent $ 701,178 $ 1,017,967 As of October 31, 2020, contractual repayments and maturities of our outstanding debt are as follows (in thousands): Fiscal Period: Remainder of 2021 $ 9,375 2022 37,500 2023 1,225,000 2024 75,000 2025 75,000 Thereafter 468,750 Total $ 1,890,625 Convertible Senior Notes In June 2013, we issued 1.50 % convertible senior notes due July 15, 2020, with a principal amount of $ 250 million. The 2020 Notes were unsecured, unsubordinated obligations, and interest was payable in cash in arrears at a fixed rate of 1.50 % on January 15 and July 15 of each year. During the second quarter of fiscal 2021, the 2020 Notes were converted by note holders, and we repaid the $ 250 million principal balance in cash. We also distributed approximately 1.7 million shares of our Class A common stock to note holders during the second quarter of fiscal 2021, which represents the conversion value in excess of the principal amount. In September 2017, we issued 0.25 % convertible senior notes due October 1, 2022, with a principal amount of $ 1.15 billion. The 2022 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.25 % on April 1 and October 1 of each year. The 2022 Notes mature on October 1, 2022, unless repurchased or converted in accordance with their terms prior to such date. We cannot redeem the 2022 Notes prior to maturity. The terms of the 2022 Notes are governed by an Indenture by and between us and Wells Fargo Bank, National Association, as Trustee (“Indenture”). Upon conversion, holders of the 2022 Notes will receive cash, shares of Class A common stock, or a combination of cash and shares of Class A common stock, at our election. The initial conversion rate for the 2022 Notes is 6.7982 shares of Class A common stock per $ 1,000 principal amount, which is equal to an initial conversion price of approximately $ 147.10 per share of Class A common stock, subject to adjustment. Prior to the close of business on May 31, 2022, conversion of the 2022 Notes is subject to the satisfaction of certain conditions, as described below. Holders of the 2022 Notes who convert their 2022 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2022 Notes may require us to repurchase all or a portion of their 2022 Notes at a price equal to 100 % of the principal amount of the 2022 Notes, plus any accrued and unpaid interest. Holders of the 2022 Notes may convert all or a portion of their 2022 Notes prior to the close of business on May 31, 2022, in multiples of $1,000 principal amount, only under the following circumstances: • if the last reported sale price of our Class A common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2022 Notes on each applicable trading day; 19 Table of Contents • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2022 Notes for each day of that five day consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate of the 2022 Notes on such trading day; or • upon the occurrence of specified corporate events, as noted in the Indenture. On or after June 1, 2022, holders of the 2022 Notes may convert their 2022 Notes at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2022 Notes. For more than 20 trading days during the 30 consecutive trading days ended October 31, 2020, the last reported sale price of our Class A common stock exceeded 130 % of the conversion price of the 2022 Notes. As a result, the 2022 Notes are convertible at the option of the holders during the fourth quarter of fiscal 2021. Accordingly, the 2022 Notes are classified as current on the condensed consolidated balance sheet as of October 31, 2020. From November 1, 2020, through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material. As of January 31, 2020, the 2022 Notes are classified as noncurrent on the condensed consolidated balance sheets since the criteria for conversion was not met. In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components. The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amounts of the equity components representing the conversion option were determined by deducting the fair value of the liability components from the par value of the respective Notes. These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The gross carrying amounts of the equity components recorded were $ 68 million and $ 223 million for the 2020 Notes and 2022 Notes, respectively, and were included in Additional paid-in capital on the condensed consolidated balance sheets upon issuance. The equity components are not remeasured as long as they continue to meet the conditions for equity classification. The effective interest rate of the liability component of the 2020 Notes was 6.25 %, and the effective interest rate of the liability component of the 2022 Notes is 4.60 %. The interest rates were based on the interest rates of similar liabilities at the time of issuance that did not have associated convertible features. In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes. The issuance costs attributable to the equity components were netted against the respective equity components in Additional paid-in capital. Upon issuance of the 2020 Notes, we recorded liability issuance costs of $ 5 million and equity issuance costs of $ 2 million, and upon issuance of the 2022 Notes, we recorded liability issuance costs of $ 14 million and equity issuance costs of $ 4 million. Notes Hedges In connection with the issuance of the Notes, we entered into convertible note hedge transactions with respect to our Class A common stock (“Purchased Options”). The Purchased Options are intended to offset potential economic dilution to our Class A common stock upon any conversion of the Notes. The Purchased Options are separate transactions and are not part of the terms of the Notes. The amounts paid for the Purchased Options are included in Additional paid-in capital on the condensed consolidated balance sheets. The Purchased Options relating to the 2020 Notes gave us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2020 Notes, approximately 3.1 million shares of our Class A common stock for $ 81.74 per share, exercisable upon conversion of the 2020 Notes. During the second quarter of fiscal 2021, we received approximately 1.7 million shares of our Class A common stock from the exercise of the Purchased Options relating to the 2020 Notes. These shares are held as treasury stock. The Purchased Options relating to the 2022 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2022 Notes, approximately 7.8 million shares of our Class A common stock for $ 147.10 per share, exercisable upon conversion of the 2022 Notes. The Purchased Options relating to the 2022 Notes will expire in 2022, if not exercised earlier. 20 Table of Contents Warrants In connection with the issuance of the Notes, we also entered into warrant transactions to sell warrants (“Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 3.1 million shares over 60 scheduled trading days beginning in October 2020 and 7.8 million shares over 60 scheduled trading days beginning in January 2023 of our Class A common stock at an exercise price of $ 107.96 and $ 213.96 per share, respectively. If the Warrants are not exercised on their exercise dates, they will expire. The Warrants will be net share settled, and the resulting number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over the 60 scheduled trading day period beginning on the first expiration date of the Warrants. If the market value per share of our Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants will have a dilutive effect on our earnings per share assuming that we are profitable. The Warrants are separate transactions and are not part of the terms of the Notes or the Purchased Options. The proceeds from the sale of the Warrants are recorded in Additional paid-in capital on the condensed consolidated balance sheets. During the three months ended October 31, 2020, Warrants related to the 2020 Notes were exercised, and we distributed approximately 0.2 million shares of our Class A common stock to warrant holders utilizing treasury stock. As of October 31, 2020, there were 2.7 million Warrants outstanding related to the 2020 Notes. Credit Agreement In April 2020, we entered into a credit agreement pursuant to which the lenders would extend to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million. The Term Loan and Revolving Credit Facility bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin that ranges from 0 % to 0.625 %, or (ii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market plus a margin that ranges from 1.000 % to 1.625 %. The base rate is defined as the greatest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50 % or (iii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market for a period of one month (but not less than zero) plus 1.00 %. Actual margins under either election will be based on our consolidated leverage ratio, which is measured by dividing (a) our consolidated funded indebtedness as of the fiscal quarter end by (b) our consolidated EBITDA as defined in the Credit Agreement for the most recently completed four consecutive fiscal quarters. The Credit Agreement contains customary representations, warranties, and affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders. The financial covenant, based on a quarterly financial test, requires Workday not to exceed a maximum leverage ratio of 3.50 :1.00, subject to a step-up to 4.50 :1.00 at the election of Workday for a certain period following an Acquisition (as defined in the Credit Agreement). As of October 31, 2020, we were in compliance with all covenants. Term Loan The Term Loan was funded in two individual tranches. On April 2, 2020, $ 500 million of the Term Loan was funded, and the remaining $ 250 million was funded on July 13, 2020. The Term Loan matures on April 2, 2025, and provides for quarterly repayment in installments of the principal amount, beginning October 2020, at a rate of 1.25 % of the principal amount per quarter through January 2022, and 2.50 % of the principal amount per quarter thereafter. The Term Loan may be prepaid or permanently reduced by Workday without penalty or premium. We incurred fees of approximately $ 2 million in connection with entering into the agreement for the Term Loan. The fees paid to lenders on the issuance of the debt are accounted for as a debt discount, while the remaining fees paid to third parties are accounted for as debt issuance costs. The debt discount and issuance costs are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the contractual term of the arrangement. As of October 31, 2020, the Term Loan had a carrying value of $ 739 million, of which $ 38 million is classified as current and $ 701 million is classified as noncurrent on the condensed consolidated balance sheet. As of October 31, 2020, the interest rate on the Term Loan was 1.38 % and the effective interest rate was 1.92 %. Revolving Credit Facility The Revolving Credit Facility may be borrowed, repaid, and reborrowed until April 2, 2025, at which time all amounts borrowed must be repaid. We may request, no more than two times during the term of the Credit Agreement, that each revolving lender extend the maturity date for the revolving loans for one year. Additionally, we may request an increase in aggregate revolving commitments by up to $ 250 million at any time prior to April 2, 2025. The Revolving Credit Facility may be prepaid or permanently reduced by Workday without penalty or premium. 21 Table of Contents We are required to pay each revolving lender a commitment fee on a quarterly basis based on amounts committed but unused under the Revolving Credit Facility that ranges from 0.090 % to 0.225 % per annum, depending on our consolidated leverage ratio. The commitment fee is expensed as incurred and included within Other income (expense), net on the condensed consolidated statement of operations. We incurred fees of approximately $ 2 million in connection with entering into the agreement for the Revolving Credit Facility. The fees are recorded in Other assets on the condensed consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. As of October 31, 2020, there were no outstanding borrowings under the Revolving Credit Facility. Interest Expense on Debt The following table sets forth total interest expense recognized related to our debt (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Contractual interest expense $ 4,245 $ 1,657 $ 11,675 $ 4,969 Interest cost related to amortization of debt discount 11,374 13,584 38,993 40,256 Interest cost related to amortization of debt issuance costs 724 882 2,473 2,648 Total interest expense $ 16,343 $ 16,123 $ 53,141 $ 47,873 Note 11. Leases We have entered into operating lease agreements for our office space, data centers, and other property and equipment. As of October 31, 2020, and January 31, 2020, operating lease right-of-use assets were $ 416 million and $ 291 million, respectively, and operating lease liabilities were $ 437 million and $ 308 million, respectively. We have also entered into finance lease agreements for other property and equipment. As of October 31, 2020, and January 31, 2020, finance leases were not material. The components of operating lease expense were as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Operating lease cost $ 24,638 $ 19,735 $ 67,873 $ 57,210 Short-term lease cost 3,443 4,135 11,875 11,980 Variable lease cost 4,563 4,042 13,899 12,606 Total operating lease cost $ 32,644 $ 27,912 $ 93,647 $ 81,796 Supplemental cash flow information related to our operating leases was as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Cash paid for operating lease liabilities $ 22,765 $ 19,089 $ 64,930 $ 54,597 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities (1) 113,219 10,633 183,722 337,654 (1) Prior year activity includes $ 279 million for operating leases existing on February 1, 2019, and $ 59 million for operating leases that commenced during the nine months ended October 31, 2019. Other information related to our operating leases was as follows: October 31, 2020 January 31, 2020 Weighted average remaining lease term (in years) 6 6 Weighted average discount rate 1.81 % 3.36 % 22 Table of Contents As of October 31, 2020, maturities of operating lease liabilities are as follows (in thousands): Fiscal Period: Remainder of 2021 $ 21,398 2022 94,858 2023 83,040 2024 76,189 2025 65,123 Thereafter 139,056 Total lease payments 479,664 Less imputed interest ( 42,212 ) Total $ 437,452 As of October 31, 2020, we have additional operating leases, primarily for office space and data centers, that have not yet commenced with total undiscounted lease payments of $ 10 million. These operating leases will commence in the remaining months of fiscal 2021, with lease terms ranging from one to five years . Related-Party Lease Transactions We lease certain office space from an affiliate of our Chairman of the Board, Mr. Duffield, adjacent to our corporate headquarters in Pleasanton, California, under various lease agreements. During the three months ended October 31, 2020, we entered into an agreement with this affiliated party for a fee of $ 1.5 million, which gives us the option to purchase these leased facilities at a price based on third-party appraisals and negotiation between Workday and the affiliated party. In the event we do not exercise the purchase option, which expires on March 1, 2021, the existing lease agreements will be automatically renewed for four years beyond the current lease end dates at rates determined based on independent third-party evaluations. As of October 31, 2020, we are not reasonably certain that the option to purchase the leased facilities will be exercised. We accounted for this arrangement, which was approved by our Board of Directors, as a lease modification during the three months ended October 31, 2020. The operating lease right-of-use assets and operating lease liabilities related to these agreements were $ 139 million and $ 150 million, respectively, as of October 31, 2020, and $ 57 million and $ 70 million, respectively, as of January 31, 2020. The weighted average remaining lease term of these agreements is 8 years. The total rent expense under these agreements was $ 4 million and $ 3 million for the three months ended October 31, 2020, and 2019, respectively, and $ 12 million and $ 9 million for the nine months ended October 31, 2020, and 2019, respectively. Note 12. Commitments and Contingencies Third-Party Hosted Infrastructure Platform-Related Commitments We have entered into noncancelable agreements with third-party hosted infrastructure platform vendors with various expiration dates. As of October 31, 2020, future noncancelable minimum payments under these agreements were approximately $ 445 million. Legal Matters We are a party to various legal proceedings and claims that arise in the ordinary course of business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. In our opinion, as of October 31, 2020, there was not at least a reasonable possibility that we had incurred a material loss, or a material loss in excess of a recorded accrual, with respect to such loss contingencies. 23 Table of Contents Note 13. Stockholders’ Equity Common Stock As of October 31, 2020, there were 179 million shares of Class A common stock, net of treasury stock, and 60 million shares of Class B common stock outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Each share of Class B common stock can be converted into a share of Class A common stock at any time at the option of the holder. Employee Equity Plans Our 2012 Equity Incentive Plan (“EIP”) serves as the successor to our 2005 Stock Plan (together with the EIP, the “Stock Plans”). As of October 31, 2020, we had 63 million shares of Class A common stock available for future grants. We also have a 2012 Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees are granted options to purchase shares at the lower of 85 % of the fair market value of the stock at the time of grant or 85 % of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about June 1 and December 1, and are exercisable on or about the succeeding November 30 and May 31, respectively, of each year. As of October 31, 2020, 5 million shares of Class A common stock were available for issuance under the ESPP. Restricted Stock Units The Stock Plans provide for the issuance of restricted stock units (“RSUs”) to employees and non-employees. RSUs generally vest over four years . A summary of information related to RSU activity during the nine months ended October 31, 2020, is as follows: Number of Shares Weighted-Average Grant Date Fair Value Balance as of January 31, 2020 11,914,064 $ 147.96 RSUs granted 7,963,747 150.76 RSUs vested ( 4,630,623 ) 138.81 RSUs forfeited ( 828,949 ) 147.34 Balance as of October 31, 2020 14,418,239 152.48 As of October 31, 2020, there was a total of $ 2.0 billion in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately three years . Performance-Based Restricted Stock Units During fiscal 2020, 0.6 million shares of performance-based restricted stock units (“PRSUs”) were granted to all employees other than executive management that included both service conditions and performance conditions related to company-wide goals. These performance conditions were met and the PRSUs vested on March 15, 2020. During the nine months ended October 31, 2020, we recognized $ 19 million in compensation cost related to these PRSUs. Additionally, during fiscal 2021, 0.6 million shares of PRSUs were granted to all employees other than executive management that included both service conditions and performance conditions related to company-wide goals. We expect to grant additional shares related to this program for employees hired in fiscal 2021. These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2021, and if the individual employee continues to provide service through the vesting date of March 15, 2021. During each of the three and nine months ended October 31, 2020, we recognized $ 36 million and $ 55 million in compensation cost related to these PRSUs. A total of $ 54 million in unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately four months . 24 Table of Contents Stock Options The Stock Plans provide for the issuance of incentive and nonstatutory stock options to employees and non-employees. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed ten years and generally vest over five years . A summary of information related to stock option activity during the nine months ended October 31, 2020, is as follows (in millions, except share and per share data): Outstanding Stock Options Weighted-Average Exercise Price Aggregate Intrinsic Value Balance as of January 31, 2020 3,435,577 $ 9.78 $ 601 Stock options exercised ( 1,709,799 ) 6.32 Stock options canceled ( 41,363 ) 39.22 Balance as of October 31, 2020 1,684,415 12.57 333 Vested and expected to vest as of October 31, 2020 1,679,303 12.50 332 Exercisable as of October 31, 2020 1,521,062 10.33 304 As of October 31, 2020, there was a total of $ 13 million in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately one year . Note 14. Unearned Revenue and Performance Obligations Subscription services revenue of $ 846 million and $ 722 million was recognized during the three months ended October 31, 2020, and 2019, respectively, that was included in the unearned revenue balances as of July 31, 2020, and 2019, respectively. Subscription services revenue of $ 1.90 billion and $ 1.60 billion was recognized during the nine months ended October 31, 2020, and 2019, respectively, that was included in the unearned revenue balances as of January 31, 2020, and 2019, respectively. Professional services revenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods was not material. Transaction Price Allocated to the Remaining Performance Obligations As of October 31, 2020, approximately $ 8.87 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately $ 5.94 billion of these remaining performance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of October 31, 2020, was not material. Note 15. Other Income (Expense), Net Other income (expense), net consisted of the following (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Interest income $ 3,610 $ 10,803 $ 16,455 $ 32,392 Interest expense (1) ( 16,370 ) ( 16,205 ) ( 53,211 ) ( 42,279 ) Other (2) 3,914 1,266 5,484 12,786 Other income (expense), net $ ( 8,846 ) $ ( 4,136 ) $ ( 31,272 ) $ 2,899 (1) Interest expense includes the contractual interest expense of the Notes and Term Loan, and the related non-cash interest expense attributable to amortization of the debt discounts and debt issuance costs, net of capitalized interest costs. For further information, see Note 10, Debt. (2) Other includes the net gains (losses) from our equity investments, the commitment fee on the Revolving Credit Facility, and amortization of issuance costs on the Revolving Credit Facility. For further information, see Note 3, Investments, and Note 10, Debt. 25 Table of Contents Note 16. Income Taxes We compute the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax income or loss and adjust for discrete tax items in the period. We reported an income tax expense of $ 4 million and an income tax benefit of $ 1 million for each of the nine-month periods ended October 31, 2020, and 2019, respectively. The income tax expense for the nine months ended October 31, 2020, was primarily attributable to state taxes and income tax expenses in profitable foreign jurisdictions. There were no intra-period tax allocations for the gains from comprehensive income due to the adoption of ASU No. 2019-12 on February 1, 2020. The income tax benefit for the nine months ended October 31, 2019, was primarily attributable to the application of intra-period tax allocation rules for the gains from comprehensive income and the excess tax benefits in certain foreign jurisdictions from share-based compensation, partially offset by state taxes and income tax expenses in profitable foreign jurisdictions. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic. The CARES Act includes temporary changes to income and non-income based tax laws. We evaluated the applicable provisions of the CARES Act and determined that there is no material impact to our financial results. On June 22, 2020, the U.S. Supreme Court declined to hear the appeal of a ruling by the U.S. Court of Appeals for the Ninth Circuit regarding the treatment of stock-based compensation expenses in a cost-sharing agreement (Altera Corporation & Subsidiaries v. Commissioner). The U.S. Supreme Court decision resulted in an immaterial reduction in our deferred tax assets relative to the total gross deferred tax assets, which was fully offset by our valuation allowance. As a result, there was no net impact on our condensed consolidated financial statements. We are subject to income tax audits in the U.S. and foreign jurisdictions. We record liabilities related to uncertain tax positions and believe that we have provided adequate reserves for income tax uncertainties in all open tax years. Due to our history of tax losses, all years remain open to tax audit. We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. As of October 31, 2020, we continue to maintain a full valuation allowance on our deferred tax assets except in certain jurisdictions. Note 17. Net Loss Per Share Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, net of treasury stock. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, common stock related to unvested RSUs and PRSUs, common stock related to convertible senior notes to the extent dilutive, outstanding warrants, and common stock issuable pursuant to the ESPP. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive. The net loss per share attributable to common stockholders is allocated based on the contractual participation rights of the Class A common shares and Class B common shares as if the loss for the period had been distributed. As the liquidation and dividend rights are identical, the net loss attributable to common stockholders is allocated on a proportionate basis. The following table presents the calculation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share data): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Class A Class B Class A Class B Class A Class B Class A Class B Net loss per share, basic and diluted: Numerator: Allocation of distributed net loss $ ( 18,199 ) $ ( 6,141 ) $ ( 83,529 ) $ ( 32,200 ) $ ( 156,526 ) $ ( 54,198 ) $ ( 252,634 ) $ ( 100,082 ) Denominator: Weighted-average common shares outstanding 178,004 60,055 164,896 63,565 175,071 60,614 161,924 64,147 Basic and diluted net loss per share $ ( 0.10 ) $ ( 0.10 ) $ ( 0.51 ) $ ( 0.51 ) $ ( 0.89 ) $ ( 0.89 ) $ ( 1.56 ) $ ( 1.56 ) 26 Table of Contents Potentially dilutive securities that are not included in the calculation of diluted net loss per share because doing so would be antidilutive are as follows (in thousands): As of October 31, 2020 2019 Outstanding common stock options 1,685 4,009 Unvested RSUs and PRSUs 15,062 13,329 Shares related to the convertible senior notes 7,818 10,876 Shares subject to warrants related to the issuance of convertible senior notes 10,520 10,876 Shares issuable pursuant to the ESPP 463 394 Total 35,548 39,484 Note 18. Geographic Information Disaggregation of Revenue We sell our subscription contracts and related services in two primary geographical markets: to customers located in the United States and to customers located outside of the United States. Revenue by geography is generally based on the address of the customer as specified in our master subscription agreement. The following table sets forth revenue by geographic area (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 United States $ 833,544 $ 704,263 $ 2,400,940 $ 2,009,360 Other countries 272,416 233,837 785,372 641,547 Total $ 1,105,960 $ 938,100 $ 3,186,312 $ 2,650,907 No single country other than the United States had revenues greater than 10% of total revenues for the three and nine months ended October 31, 2020, and 2019. No customer individually accounted for more than 10% of our trade and other receivables, net as of October 31, 2020, or January 31, 2020. Long-Lived Assets Our long-lived assets, which primarily consist of property and equipment and operating lease right-of-use assets, are attributed to a country based on the physical location of the assets. Aggregate Property and equipment, net, and Operating lease right-of-use assets by geographic area was as follows (in thousands): October 31, 2020 January 31, 2020 United States $ 1,185,510 $ 1,064,292 Ireland 133,923 122,619 Other countries 72,724 40,170 Total $ 1,392,157 $ 1,227,081 27 Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements, which are subject to safe harbor protection under the Private Securities Litigation Reform Act of 1995. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “seek,” “plan,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those arising from the impact of the coronavirus pandemic (“COVID-19 pandemic”), as well as those described in the “Risk Factors” section, which we encourage you to read carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.