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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-02 compared with 2020-03-03 · 348 added, 300 removed, 997 unchanged (39% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The ongoing COVID-19 pandemic has resulted in negative impacts on global economies and financial markets, which may increase our foreign currency exchange risk and interest rate risk.

For further discussion of the potential impacts of the COVID-19 pandemic on our business, operating results, and financial condition, see “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.

Foreign Currency Exchange Risk

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For further information, see Note 10, Derivative Instruments, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Interest Rate Sensitivity

Interest Rate Risk on our Investments

We had cash, cash equivalents, and marketable securities totaling $3.5 billion and $1.9 billion as of January 31, 2021, and 2020, respectively.

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Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

However, because we classify our debt securities as “available for sale,” no gains or losses are recognized in income due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.

Our debt securities are classified as “available-for-sale.” When the fair value of the security declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the impaired security, is recognized on the consolidated statement of operations.

An immediate increase of 100 basis points in interest rates would have resulted in a $10 million and $7 million market value reduction in our investment portfolio as of January 31, 2021, and 2020, respectively.

This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur.

Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in Accumulated other comprehensive income (loss) and are realized only if we sell the underlying securities before maturity.

Market Risk and Market Interest Risk

In June 2013, we completed an offering of $350 million of 0.75% convertible senior notes due July 15, 2018, which were subsequently converted by note holders during the second quarter of fiscal 2019 (“2018 Notes”).

In June 2013, concurrent with the 2018 Notes offering, we issued $250 million of 1.50% convertible senior notes due July 15, 2020 (“2020 Notes”).

In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022 (“2022 Notes”) (together with the 2020 Notes, referred to as the “Outstanding Notes,” and together with the 2018 Notes and 2020 Notes, referred to as the “Notes”).

Holders may convert the Outstanding Notes prior to maturity upon the occurrence of certain circumstances.

Upon conversion, holders of the Outstanding 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.

Concurrently with the issuance of Notes, we entered into separate note hedge and warrant transactions.

These separate transactions were completed to reduce the potential economic dilution from the conversion of these Notes.

The 2020 Notes and 2022 Notes have fixed annual interest rates of 1.50% and 0.25%, respectively, and therefore we do not have economic interest rate exposure on the Outstanding Notes.

However, the values of the Outstanding Notes are exposed to interest rate risk.

Generally, the fair values of fixed interest rate notes will increase as interest rates fall and decrease as interest rates rise.

In addition, the fair values of the Outstanding Notes are affected by our stock price.

The carrying values of the 2020 Notes and 2022 Notes were $244 million and $1.0 billion, respectively, as of January 31, 2020.

The carrying values represent the liability components of the principal balances of the Outstanding Notes as of January 31, 2020.

The estimated fair values of the 2020 Notes and 2022 Notes were $571 million and $1.6 billion, respectively, as of January 31, 2020.

The estimated fair values were determined based on the quoted bid prices of the 2020 Notes and 2022 Notes in an over-the-counter market as of the last trading day for fiscal 2020, which were $228.47 and $138.09, respectively.

For further information, see Note 11, Convertible Senior Notes, Net, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Interest Rate Risk on our Debt

In April 2020, we entered into a Credit Agreement pursuant to which the lenders would extend to Workday a senior unsecured Term Loan 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 0.000% 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.

As of January 31, 2021, the Term Loan had a carrying value of $729 million and there were no outstanding borrowings under the Revolving Credit Facility.

The interest rate on the Term Loan was 1.38% as of January 31, 2021.

Because the interest rates applicable to borrowings under the Credit Agreement are variable, we are exposed to market risk from changes in the underlying index rates, which affect our cost of borrowing.

A hypothetical immediate increase of 100 basis points in interest rates would not have had a significant impact on our results of operations.

In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022.

The 2022 Notes have a fixed annual interest rate of 0.25%, and therefore we do not have economic interest rate exposure on the 2022 Notes.

However, the value of the 2022 Notes is exposed to interest rate risk.

Generally, the fair value of the 2022 Notes will increase as interest rates fall and decrease as interest rates rise.

In addition, the fair value of the 2022 Notes is affected by our stock price.

The carrying value of the 2022 Notes was $1.1 billion as of January 31, 2021.

The carrying value represents the liability component of the principal balance of the 2022 Notes as of January 31, 2021.

The estimated fair value of the 2022 Notes was $1.8 billion as of January 31, 2021.

The estimated fair value was determined based on the quoted bid price of the 2022 Notes in an over-the-counter market as of the last trading day for fiscal 2021, which was $159.87.

For further information, see Note 11, Debt, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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In such cases, the transaction price is allocated to the distinct performance obligations on a relative standalone selling price basis.

Auditing the Company's determination of distinct performance obligations and the allocation of the transaction price to these performance obligations can be challenging.

For example, there may be nonstandard terms and conditions that require judgment to determine the distinct performance obligations and relative standalone selling prices are accounted for appropriately.

Auditing the Company's determination of distinct performance obligations and the allocation of the transaction price to these performance obligations was challenging.

For example, there were nonstandard terms and conditions that required judgment to determine the distinct performance obligations and relative standalone selling prices were accounted for appropriately.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to identify distinct performance obligations and allocate the transaction price to those performance obligations, including the underlying assumptions related to the relative standalone selling price.

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Marketable securities 2,151,472 1,213,432

Trade and other receivables, net of allowance for doubtful accounts of $ 6,762 and $ 5,965 , respectively

Trade and other receivables, net of allowance for credit losses of $ 14,267 and $ 6,762 , respectively

1,032,484 877,578

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Operating lease liabilities 93,000 66,147

Current portion of convertible senior notes, net 244,319 232,514

Debt, current 1,103,101 244,319

Total current liabilities 4,282,648 2,969,404

Convertible senior notes, net 1,017,967 972,264

Debt, noncurrent 691,913 1,017,967

Unearned revenue, noncurrent 80,111 86,025

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Additional paid-in capital 6,254,936 5,090,187

Treasury stock, at cost;

0.1 million and 0 million shares as of January 31, 2021, and 2020, respectively

Accumulated other comprehensive income (loss) ( 54,970 ) 23,492

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Total costs and expenses 4,566,595 4,129,436 3,285,464

Operating loss ( 502,230 ) ( 463,284 ) ( 303,223 )

Operating income (loss) ( 248,599 ) ( 502,230 ) ( 463,284 )

Other income (expense), net ( 26,535 ) 19,783 39,532

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Net loss $ ( 282,431 ) $ ( 480,674 ) $ ( 418,258 )

Net loss attributable to Class A and Class B common stockholders $ ( 480,674 ) $ ( 418,258 ) $ ( 321,222 )

Net loss per share attributable to Class A and Class B common stockholders, basic and diluted $ ( 1.19 ) $ ( 2.12 ) $ ( 1.93 )

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Other comprehensive income (loss), net of tax ( 78,462 ) 24,301 45,604

24,301 45,604 ( 48,484 )

Comprehensive loss $ ( 360,893 ) $ ( 456,373 ) $ ( 372,654 )

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Issuance of common stock under employee equity plans 9 10 8

Vested restricted stock units 7 6 6

Settlement of convertible senior notes 2 — 2

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Issuance of common stock under employee equity plans 148,664 125,663 37,746

Vesting of early exercised stock options — — 775

Vested restricted stock units ( 7 ) ( 6 ) ( 6 )

Share-based compensation 1,003,726 858,809 652,404

Purchase of convertible senior notes hedges — — ( 175,530 )

Issuance of warrants — — 80,805

Equity component of convertible senior notes — — 219,702

Equity awards assumed in business combination — — 4,350

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Settlement of warrants ( 290,875 ) — ( 137,245 )

Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No.

2018-07 381 — —

Cumulative effect of accounting changes — 381 —

Balance, end of period 6,254,936 5,090,187 4,105,334

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Settlement of warrants — — ( 617 )

Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No.

2018-07 ( 381 ) — —

Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No.

2016-16 — 427 —

Cumulative-effect adjustment to Accumulated deficit related to the adoption of ASU No.

2016-09 — — 231

Cumulative effect of accounting changes ( 200 ) ( 381 ) 427

Balance, end of period ( 2,909,990 ) ( 2,627,359 ) ( 2,146,304 )

Total stockholders’ equity $ 3,277,834 $ 2,486,551 $ 1,958,442

See Notes to Consolidated Financial Statements

Year Ended January 31,

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Issuance of common stock under employee equity plans 9,371,466 9,656,111 9,011,223

Vested restricted stock units 6,582,657 6,273,733 5,715,576

Settlement of warrants 1,587,375 — 1,063,380

Purchase of treasury stock from the exercise of convertible senior notes hedges ( 1,654,921 ) — ( 1,457,548 )

Settlement of convertible senior notes 1,654,472 217 1,457,513

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Cash flows from financing activities:

Proceeds from borrowings on convertible senior notes, net of issuance costs — — 1,132,101

Proceeds from issuance of warrants — — 80,805

Purchase of convertible senior notes hedges — — ( 175,530 )

Proceeds from borrowings on Term Loan, net of debt discount and issuance costs 747,795 — —

Payments on convertible senior notes ( 250,012 ) ( 30 ) ( 350,030 )

Payments on Term Loan ( 18,750 ) — —

Proceeds from issuance of common stock from employee equity plans 148,673 125,673 93,567

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Company and Background

Workday delivers financial management, human capital management, planning, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies.

Workday delivers financial management, spend management, human capital management, planning, 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 capital resources.

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.

Our fiscal year ends on January 31.

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Basis of Presentation

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the results of Workday, Inc.

These consolidated financial statements have been prepared in accordance with GAAP and include the results of Workday, Inc.

and its wholly-owned subsidiaries.

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The preparation of 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

These estimates and judgments 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 consolidated financial position and results of operations.

Significant estimates, judgments, and assumptions include, but are not limited to, the determination of the fair value and useful lives of assets acquired and liabilities assumed through business combinations, the period of benefit for deferred commissions, the fair value of certain equity awards, and the valuation of non-marketable equity investments.

Actual results could differ from those estimates and such differences could be material to our 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 the chief operating decision maker, who is our chief executive officer, in deciding how to allocate resources and assessing performance.

Our chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by chief operating decision makers (“CODMs”) in deciding how to allocate resources and assessing performance.

For fiscal 2021, our CODMs were our co-chief executive officers, Aneel Bhusri and Chano Fernandez.

Our CODMs allocate resources and assess performance based upon discrete financial information at the consolidated level.

Accounting Standards and Significant Accounting Policies

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Revenue Recognition

We derive our revenues primarily from subscription services and professional services.

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for these services.

We derive our revenues from subscription services and professional services.

We determine revenue recognition through the following steps:

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• Recognition of revenue when, or as, we satisfy a performance obligation.

Subscription Services Revenues

Subscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, planning, and analytics, with routine customer support.

Subscription Services Revenue

Subscription services revenue primarily consists of fees that provide customers access to one or more of our cloud applications for financial management, spend management, human capital management, planning, and analytics, with routine customer support.

Revenue is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer.

Our subscription contracts are generally three years or longer in length, billed annually in advance, and are non-cancelable.

Professional Services Revenues

Professional services revenues primarily consist of consulting fees for deployment and optimization services, as well as training.

Our subscription contracts are generally three years or longer in length, billed annually in advance, and are generally noncancelable.

Professional Services Revenue

Professional services revenue primarily consists of consulting fees for deployment and optimization services, as well as training.

Our consulting contracts are billed on a time and materials basis or a fixed price basis.

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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.

In addition, we measure our non-marketable equity investments for which there has been an observable price change from an orderly transaction for identical or similar investments of the same issuer at 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.

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Debt Securities

Our debt securities primarily consist of investments in U.S.

Debt securities primarily consist of investments in U.S.

treasury securities, U.S.

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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 in the accompanying consolidated balance sheets.

All debt securities are recorded at their estimated fair value.

Unrealized gains and losses on available-for-sale debt securities are recorded in Accumulated other comprehensive income (loss) (“AOCI”).

We evaluate our investments to assess whether those in unrealized loss positions are other-than-temporarily impaired.

We consider impairments to be other-than-temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis.

Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in Other income (expense), net on the consolidated statements of operations.

Debt securities included in Marketable securities on the consolidated balance sheets consist of securities with original maturities greater than three months at the time of purchase.

When the fair value of a debt 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 will be 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 these 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 issuer’s 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 consolidated statements of operations.

Non-credit related impairment losses are recorded in Other comprehensive income (loss) (“OCI”).

If quoted prices for identical instruments are available in an active market, debt securities are classified within Level 1 of the fair value hierarchy.

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Equity Investments

We hold marketable and non-marketable equity investments, over which we do not have a controlling interest or significant influence.

Marketable equity investments are measured using quoted prices in active markets with changes recorded in Other income (expense), net on the consolidated statements of operations.

Non-marketable equity investments have no readily determinable fair values and are measured using the measurement alternative, which is defined as cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer.

Adjustments are recorded in Other income (expense), net on the consolidated statements of operations.

Non-marketable equity investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of market prices and inherent lack of liquidity.

The carrying value for these investments is not adjusted if there are no observable transactions for identical or similar investments of the same issuer or if there are no identified events or changes in circumstances that may indicate impairment.

Valuations of non-marketable equity investments are inherently complex due to the lack of readily available market data.

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.

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.

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 consolidated financial statements.

As of January 31, 2021, 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 consolidated balance sheets.

Our share of earnings and losses are recorded in Other income (expense), net on the consolidated statements of operations.

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.

These investments are included in Other assets on the consolidated balance sheets.

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.

Additionally, we assess our non-marketable equity investments quarterly for impairment.

Adjustments and impairments are recorded in Other income (expense), net on the consolidated statements of operations.

Non-marketable equity investments are valued using significant unobservable inputs or data in an inactive market.

Valuations of non-marketable equity investments are inherently complex due to the lack of readily available market data, and require our judgment due to the absence of market prices and inherent lack of liquidity.

In addition, the determination of whether an orderly transaction is for an identical or similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments and the extent to which those differences would affect the fair values of those investments.

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.

If our investment is considered to be impaired, we will record an impairment in Other income (expense), net on the consolidated statements of operations and establish a new carrying value for the investment.

Our impairment analysis encompasses a qualitative and quantitative analysis of 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 consider the impacts of the COVID-19 pandemic.

These factors require significant judgment.

If impairment is identified, we will assess the severity and duration of the impairment.

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

We hold marketable equity investments over which we do not have a controlling interest or significant influence.

Marketable equity investments are included in Marketable securities on the consolidated balance sheets.

They are measured using quoted prices in active markets with changes recorded in Other income (expense), net on the consolidated statements of operations.

Trade and Other Receivables

Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, which is not material.

Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for credit losses.

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 consolidated statements of operations.

Other receivables represent unbilled receivables related to subscription and professional services contracts.

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Derivative Financial Instruments and Hedging Activities

We use derivative financial instruments to manage foreign currency risks.

We use derivative financial instruments to manage foreign currency exchange risk.

Derivative instruments are carried at fair value and recorded as either an asset or liability on the consolidated balance sheets.

Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

For derivative instruments designated as cash flow hedges, which we use to hedge certain customer contracts denominated in foreign currencies, the gains or losses are recorded in AOCI and subsequently reclassified to income in the same period that the underlying revenues are earned.

For derivative instruments designated as cash flow hedges, which we use to hedge certain customer contracts denominated in foreign currencies, the gains or losses are recorded in Accumulated other comprehensive income (loss) (“AOCI”) on the consolidated balance sheets and subsequently reclassified to income in the same period that the underlying revenues are earned.

For derivative instruments not designated as hedging instruments, which we use to hedge a portion of our net outstanding monetary assets and liabilities, the gains or losses are recorded in Other income (expense), net on the consolidated statement of operations in the period of change.

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Convertible Senior Notes

In June 2013, we issued 0.75 % convertible senior notes due July 15, 2018, (“2018 Notes”) with a principal amount of $ 350 million, which were subsequently converted by note holders during the second quarter of fiscal 2019.

Concurrently in June 2013, we issued 1.50 % convertible senior notes due July 15, 2020 (“2020 Notes”) with a principal amount of $ 250 million.

In September 2017, we issued 0.25 % convertible senior notes due October 1, 2022, (“2022 Notes”) with a principal amount of $ 1.15 billion (together with the 2018 Notes and 2020 Notes, referred to as the “Notes”).

In June 2013, we issued 0.75 % convertible senior notes due July 15, 2018, with a principal amount of $ 350 million, which were subsequently converted by note holders during the second quarter of fiscal 2019.

Concurrently.

in June 2013, we issued 1.50 % convertible senior notes due July 15, 2020 with a principal amount of $ 250 million, which were subsequently converted by note holders during the second quarter of fiscal 2021.

In September 2017, we issued 0.25 % convertible senior notes due October 1, 2022, with a principal amount of $ 1.15 billion.

In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components.

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Right-of-use assets also include adjustments related to prepaid or deferred lease payments and lease incentives.

As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate as of the first day of each fiscal quarter for the leases commenced in the respective quarter to determine the present value of lease payments.

As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate to determine the present value of lease payments.

We recognize variable lease costs in our consolidated statement of operations in the period incurred.

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Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise such options.

The remaining lease term of our leases generally ranges from less than one year to ten years .

The remaining lease term of our leases generally ranges from less than one year to nine years .

Advertising Expenses

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Share-Based Compensation

We measure and recognize compensation expense for share-based awards issued to employees and non-employees, including restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”), stock options, and purchases under the 2012 Employee Stock Purchase Plan (“ESPP”), on our consolidated statements of operations.

We measure and recognize compensation expense for share-based awards issued to employees and non-employees, including RSUs, performance-based restricted stock units (“PRSUs”), stock options, and purchases under the 2012 Employee Stock Purchase Plan (“ESPP”), on our consolidated statements of operations.

For RSUs and PRSUs, fair value is based on the closing price of our common stock on the grant date.

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In the event our failure to meet those levels triggers a termination right for a customer, we permit a terminating customer to receive a refund of prepaid amounts related to unused subscription services.

To date, we have not experienced any significant failures to meet defined levels of availability and performance of those obligations and, as a result, we have not accrued any liabilities related to these agreements on the consolidated financial statements.

To date, we have not experienced any significant failures to meet defined levels of availability and performance and, as a result, we have not accrued any liabilities related to these agreements on the consolidated financial statements.

Foreign Currency Exchange

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We translate the foreign functional currency financial statements to U.S.

dollars for those entities that do not have U.S.

dollars as their functional currency using the exchange rates at the balance sheet date for assets and liabilities, the period average exchange rates for revenues and expenses, and the historical exchange rates for equity transactions.

The effects of foreign currency translation adjustments are recorded in other comprehensive income (“OCI”) as a component of stockholders’ equity and related periodic movements are summarized as a line item in our consolidated statements of comprehensive loss.

dollars for those entities that do not have the U.S.

dollar as their functional currency using the exchange rates at the balance sheet date for assets and liabilities, the period average exchange rates for revenues and expenses, and the historical exchange rates for equity transactions.

The effects of foreign currency translation adjustments are recorded in AOCI on the consolidated balance sheets.

Foreign currency transaction gains and losses are included in Other income (expense), net on the consolidated statements of operations.

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No customer individually accounted for more than 10% of trade and other receivables, net as of January 31, 2021, or 2020.

No customer individually accounted for more than 10% of total revenues for any of the periods on the consolidated financial statements.

No customer individually accounted for more than 10% of total revenues during fiscal 2021, 2020, or 2019.

In order to reduce the risk of down-time of our cloud applications, we have established data centers in various geographic regions.

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Even with these procedures for disaster recovery in place, our cloud applications could be significantly interrupted during the implementation of the procedures to restore services.

In addition, we rely upon third-party hosted infrastructure partners globally, including Amazon Web Services and Dimension Data, to serve customers and operate certain aspects of our services, such as environments for development testing, training, sales demonstrations, and production usage.

In addition, we rely upon third-party hosted infrastructure partners globally, including AWS and Dimension Data, to serve customers and operate certain aspects of our services, such as environments for development testing, training, sales demonstrations, and production usage.

Given this, any disruption of or interference at our hosted infrastructure partners would impact our operations and our business could be adversely impacted.

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Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) , which requires the recognition of right-of-use assets and lease liabilities on the balance sheet for those leases currently classified as operating leases under Accounting Standards Codification Topic 840 Leases .

Accounting for finance leases remains substantially unchanged.

We adopted this standard effective February 1, 2019, using a modified retrospective method, under which financial results reported in periods prior to February 1, 2019, were not adjusted.

We elected the package of transition practical expedients, which among other things, does not require reassessment of lease classifications.

Additionally, we elected to combine lease and non-lease components for each of our existing underlying asset classes and to not include leases with a term of 12 months or less on our consolidated balance sheets.

The most significant impact of adopting this standard was the recognition of $ 279 million of operating lease right-of-use assets and $ 307 million of operating lease liabilities on our consolidated balance sheet as of February 1, 2019.

Additionally, we reclassified $ 28 million in previously recognized deferred rent obligations and lease incentives to operating lease right-of-use assets.

This adoption did not result in any cumulative-effect adjustments to Accumulated deficit, and there was no material impact on our consolidated statement of operations.

For further information, see Note 12, Leases.

In August 2017, the FASB issued ASU No.

2017-12, Derivatives and Hedging (Topic 815) , to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

We adopted this new standard effective February 1, 2019.

As a result of adopting the standard, the entire change in the fair value of our foreign currency forward contracts designated as cash flow hedges will be presented in the same income statement line item as the respective hedged items.

This adoption did not result in any cumulative-effect adjustments to Accumulated deficit, and the amended presentation guidance was applied prospectively.

For further information, see Note 10, Derivative Instruments.

In February 2018, the FASB issued ASU No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act to retained earnings.

We adopted this new standard effective February 1, 2019.

The adoption of this new standard did not have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No.

2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Non-employee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, with certain exceptions.

We adopted this standard effective February 1, 2019, and remeasured all outstanding equity-classified non-employee share-based payment awards at fair value as of the adoption date, which resulted in a $ 0.4 million cumulative-effect adjustment to Accumulated deficit.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued 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.

2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates.

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.

These changes may result in more timely recognition of credit losses.

We plan to adopt this new standard in the first quarter of our fiscal 2021.

The impact on our consolidated financial statements from the adoption of this standard is expected to be immaterial.

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.

In August 2018, the FASB issued ASU No.

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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 plan to adopt this standard in the first quarter of our fiscal 2021, on a prospective basis.

The impact of our adoption of this standard on our consolidated financial statements will largely depend on the magnitude of implementation costs incurred in our cloud computing arrangements beginning February 1, 2020.

Implementation costs capitalized subsequent to adoption will be recognized in operating expenses in our consolidated financial statements over the related contract life.

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 consolidated financial statements.

Subsequent impact on our 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 consolidated statements of operations over the noncancelable period of the hosting arrangement plus any renewal periods reasonably certain to be taken.

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.

Simplifying the Accounting for Income Taxes , which simplifies accounting guidance for certain tax matters, including franchise taxes and certain transactions that result in a step-up in tax basis of goodwill, and enacts 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.

The standard is applicable to our consolidated financial statements in interim and annual periods beginning February 1, 2021.

Early adoption is permitted.

We plan to adopt this guidance in the first quarter of our fiscal 2021.

We are currently evaluating the accounting, transition, and disclosure requirements of this standard.

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 consolidated financial statements.

Recently Issued Accounting Pronouncements

2020-04 and ASU No.

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 to alternative reference rates.

In January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848) , which refines the scope of Topic 848 and clarifies some of its guidance.

We may elect to apply the amendments prospectively through December 31, 2022.

The impact on our consolidated financial statements from the adoption of this standard is expected to be immaterial.

In August 2020, the FASB issued ASU No.

2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).

Under ASU No.

2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital.

Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives.

The new guidance also requires the if-converted method to be applied for all convertible instruments when calculating earnings per share.

This new standard is effective for our interim and annual periods beginning February 1, 2022, and earlier adoption is permitted.

We intend to early adopt this standard effective February 1, 2021, using the modified retrospective approach.

Adoption of the new standard is expected to result in a decrease to Accumulated deficit of approximately $ 140 million, a decrease to Additional paid-in capital of approximately $ 220 million, and an increase to Debt, current of approximately $ 80 million.

There will be an immaterial impact on Property and equipment related to non-cash interest previously capitalized.

If all of the 2022 Notes remain outstanding through maturity, non-cash interest expense will be reduced by approximately $ 45 million in fiscal 2022, and approximately $ 30 million in fiscal 2023.

Debt Securities

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Included in Marketable securities $ 1,210,414 $ 3,067 $ ( 49 ) $ 1,213,432

We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of January 31, 2020, which includes an assessment of whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis.

The unrealized losses on debt securities that have been in a net loss position for 12 months or more were not material as of January 31, 2020.

Debt securities included in Marketable securities on the 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.

We sold $ 6 million, $ 950 million, and $ 244 million of our debt securities during fiscal 2020, 2019, and 2018, respectively.

The unrealized losses associated with our debt securities were immaterial as of January 31, 2021, and January 31, 2020, and we did not recognize any credit losses related to our debt securities during fiscal 2021, 2020, or 2019.

We sold $ 11 million, $ 6 million, and $ 950 million of debt securities during fiscal 2021, 2020, and 2019, respectively.

The realized gains and losses from the sales were immaterial.

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Marketable securities 21,300 —

Non-marketable equity investments (2)

Equity investments accounted for under the equity method Other assets 48,222 —

Non-marketable equity investments measured using the measurement alternative (2)

Other assets 73,142 59,026

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(2) Investments in privately held companies without readily determinable fair values.

We sold $ 51 million of marketable equity investments during fiscal 2020, with a corresponding gain recognized of $ 7 million.

There were no sales of marketable equity investments during fiscal 2019 and 2018, respectively.

During fiscal 2020, there were $ 6 million in upward adjustments to the carrying values of non-marketable equity investments and an immaterial amount of downward adjustments.

No material adjustments were made to the carrying values during fiscal 2019.

In addition, we also recognized a $ 20 million non-cash gain on the sale of a non-marketable equity investment as part of the Scout acquisition.

See Note 7, Business Combinations for further details on the Scout acquisition.

Total realized and unrealized gains and losses associated with our equity investments consisted of the following (in thousands):

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Total net gains (losses) recognized in Other income (expense), net $ 20,092 $ 32,894 $ 40,460

In February 2020, we purchased an ownership interest in a limited partnership for $ 50 million.

This investment will be accounted for as an equity method investment.

Equity Investments Accounted for Under the Equity Method

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 January 31, 2021.

There was no impairment loss recorded on this investment during fiscal 2021.

Non-Marketable Equity Investments Measured Using the Measurement Alternative

During fiscal 2021 and 2020, there were $ 9 million and $ 6 million in upward adjustments to the carrying values of non-marketable equity investments as measured under the measurement alternative.

No material adjustments were made to the carrying value of the non-marketable equity investments during fiscal 2019, and no material impairment losses were recorded during fiscal 2021, 2020, or 2019.

In addition, during fiscal 2020 we recognized a $ 20 million non-cash gain on the sale of a non-marketable equity investment as part of the Scout acquisition.

See Note 7, Business Combinations for further details on the Scout acquisition.

Marketable Equity Investments

During fiscal 2021 and 2019, we recorded unrealized gains on marketable equity investments of $ 14 million and $ 34 million, respectively.

There were no unrealized gains or losses recorded during fiscal 2020.

During fiscal 2020, we sold $ 51 million of marketable equity investments, with a corresponding gain recognized of $ 7 million.

There were no sales of marketable equity investments during fiscal 2021 or 2019.

Fair Value Measurements

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Money market funds 659,964 — — 659,964

Marketable equity investments 21,300 — — 21,300

Foreign currency derivative assets — 3,221 — 3,221

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Money market funds 386,909 — — 386,909

Marketable equity investments 44,127 — — 44,127

Foreign currency derivative assets — 33,274 — 33,274

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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 consolidated balance sheets (in thousands):

In April 2020, we entered into a Credit Agreement pursuant to which the lenders extended to Workday a senior unsecured Term Loan in an aggregate principal amount of $ 750 million and an unsecured Revolving Credit Facility in an aggregate principal amount of $ 750 million.

As of January 31, 2021, the carrying value of the Term Loan was $ 729 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 11, Debt.

The following table presents the carrying amounts and estimated fair values of our outstanding Notes which are not recorded at fair value on the consolidated balance sheets (in thousands):

January 31, 2021 January 31, 2020

Net Carrying Amount Estimated Fair Value Net Carrying Amount Estimated Fair Value

1.50 % Convertible senior notes

1.50 % Convertible senior notes due 2020

$ — $ — $ 244,319 $ 571,057

0.25 % Convertible senior notes

0.25 % Convertible senior notes due 2022

1,065,601 1,838,448 1,017,967 1,587,978

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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 fiscal 2021 and 2020.

The if-converted values of the 2020 and 2022 Notes exceeded the principal amounts by $ 315 million and $ 293 million, respectively.

The if-converted values were determined based on the closing price of our common stock of $ 184.63 on January 31, 2020.

For further information, see Note 11, Convertible Senior Notes, Net.

As of January 31, 2021, the if-converted value of the 2022 Notes exceeded the principal amount by $ 629 million.

The if-converted value was determined based on the closing price of our common stock of $ 227.53 on the last trading day of fiscal 2021.

For further information, see Note 11, Debt.

Deferred Costs

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Property and equipment, gross 1,721,586 1,492,832

1,492,832 1,197,144

Less accumulated depreciation and amortization ( 749,183 ) ( 556,653 )

Property and equipment, net $ 972,403 $ 936,179

(1) Property and equipment, gross included construction-in-progress for owned real estate projects of $ 3 million, and $ 355 million that had not yet been placed in service as of January 31, 2020, and 2019, respectively.

The decrease in construction-in-progress for owned real estate projects was due to the completion of our development center in the second quarter of fiscal 2020.

Depreciation expense totaled $ 231 million, $ 201 million, and $ 147 million for fiscal 2021, 2020, and 2019, respectively.

Interest costs capitalized to property and equipment totaled $ 6 million, $ 11 million, and $ 8 million for fiscal 2020, 2019, and 2018, respectively.

No interest costs were capitalized to Property and equipment, net during fiscal 2021.

Interest costs capitalized to Property and equipment, net totaled $ 6 million and $ 11 million for fiscal 2020 and 2019, respectively.

Business Combinations

Scout Acquisition

On December 9, 2019, we acquired all outstanding stock of Scout RFP (“Scout”), a cloud-based platform for strategic sourcing and supplier engagement, for total purchase consideration of $ 513 million, attributable to cash consideration of $ 485 million and the fair value of a previously held equity interest of $ 28 million.

We believe the acquisition of Scout will accelerate our ability to deliver a comprehensive source-to-pay solution to our customers.

The purchase consideration was preliminarily allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess recorded to goodwill.

The fair values of assets acquired and liabilities assumed may change over the measurement period as additional information is received.

The primary areas that are subject to change include income taxes payable and deferred taxes.

The measurement period will end no later than one year from the acquisition date.

The preliminary purchase consideration allocation was as follows (in thousands):

On December 9, 2019, we acquired all outstanding stock of Scout, a cloud-based platform for strategic sourcing and supplier engagement, for total purchase consideration of $ 513 million, attributable to cash consideration of $ 485 million and the fair value of a previously held equity interest of $ 28 million.

The acquisition of Scout helps accelerate our ability to deliver a comprehensive source-to-pay solution to our customers.

The purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess recorded to goodwill as shown below.

The purchase consideration allocation, which includes measurement period adjustments, was as follows (in thousands):

Acquisition-related intangible assets $ 63,400

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Estimated goodwill $ 430,275

The fair values and estimated useful lives of the acquired intangible assets by category are as follows (in thousands, except years):

The fair values and estimated useful lives of the acquired intangible assets by category were as follows (in thousands, except years):

Estimated Fair Values Estimated Useful Lives (in Years)

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On August 1, 2018, we acquired all outstanding stock of Adaptive Insights for $ 1.5 billion.

The acquisition of Adaptive Insights, a cloud-based provider of business planning software, strengthens our product portfolio and helps enable our customers to better plan, execute, and analyze in one system.

The acquisition of Adaptive Insights, a cloud-based provider of business planning software, strengthened our product portfolio and helps enable our customers to better plan, execute, and analyze in one system.

The purchase consideration transferred consisted of the following (in thousands):

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federal income tax purposes.

The fair values and estimated useful lives of the acquired intangible assets by category are as follows (in thousands, except years):

The fair values and estimated useful lives of the acquired intangible assets by category were as follows (in thousands, except years):

Estimated Fair Values Estimated Useful Lives

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Amortization expense related to acquisition-related intangible assets was $ 60 million, $ 72 million, and $ 49 million for fiscal 2021, 2020, and 2019, respectively.

As of January 31, 2020, our future estimated amortization expense related to acquisition-related intangible assets is as follows (in thousands):

As of January 31, 2021, our future estimated amortization expense related to acquisition-related intangible assets was as follows (in thousands):

Fiscal Period:

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Non-marketable equity and other investments (1)

$ 85,868 $ 75,004

Equity investments accounted for under the equity method 48,222 —

Prepayments for goods and services 19,824 27,928

Technology patents and other intangible assets, net 17,766 17,898

Derivative assets 9,529 10,035

Deposits 6,335 4,383

Prepayments for third-party hosted infrastructure platforms 4,797 16,976

Net deferred tax assets 9,985 6,912

Deposits 6,218 6,335

Derivative assets 173 9,529

Other 1,701 999

Total $ 189,757 $ 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 January 31, 2021, and 2020, respectively.

As of January 31, 2021, 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 January 31, 2020, the future estimated amortization expense is as follows (in thousands):

As of January 31, 2021, the future estimated amortization expense was as follows (in thousands):

Fiscal Period:

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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.

To mitigate this risk, we utilize derivative hedging contracts as described below.

We do not enter into any derivatives for trading or speculative purposes.

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Gains or losses resulting from changes in the fair value of these hedges are recorded in AOCI on the consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the consolidated statements of operations in the same period that the underlying revenues are earned.

As of January 31, 2020, we estimate that $ 16 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 January 31, 2020, and 2019, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $ 908 million and $ 717 million, respectively.

All contracts have maturities not greater than 48 months.

As of January 31, 2021, we estimate that $ 8 million of net losses 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 January 31, 2021, and 2020, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $ 1.3 billion and $ 908 million, respectively.

The notional value represents the amount that will be bought or sold upon maturity of the forward contract.

All contracts have maturities of less than 48 months.

Foreign Currency Forward Contracts Not Designated as Hedges

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The effect of foreign currency forward contracts designated as cash flow hedges on the consolidated statements of operations was as follows (in thousands):

Consolidated Statements of Operations Location Year Ended January 31, 2020

Year Ended January 31,

Consolidated Statements of Operations Location 2021 2020

Total revenues Revenues $ 4,317,996 $ 3,627,206

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(1) Prior to the adoption of ASU No.

2017-12, the changes in value of these foreign currency forward contracts resulting from changes in forward points were excluded from the assessment of hedge effectiveness and were recorded as incurred in Other income (expense), net on the consolidated statements of operations.

2017-12, Derivatives and Hedging (Topic 815) , the changes in value of these foreign currency forward contracts resulting from changes in forward points were excluded from the assessment of hedge effectiveness and were recorded as incurred in Other income (expense), net on the consolidated statements of operations.

Upon adoption of ASU No.

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Foreign currency forward contracts not designated as hedges Other income (expense), net $ ( 4,095 ) $ 3,671 $ 4,706

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.

We are subject to master netting agreements with all of the 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 consolidated balance sheets.

8 unchanged sentences

Counterparty C 104 — 104 ( 104 ) — —

Counterparty D 140 — 140 ( 140 ) — —

Total $ 3,221 $ — $ 3,221 $ ( 3,221 ) $ — $ —

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Counterparty C 22,136 — 22,136 ( 104 ) — 22,032

Counterparty D 195 — 195 ( 140 ) — 55

Total $ 49,456 $ — $ 49,456 $ ( 3,221 ) $ — $ 46,235

Convertible Senior Notes, Net

Outstanding debt consisted of the following (in thousands):

January 31, 2021 January 31, 2020

Term Loan, net of unamortized debt discounts of $ 1,682 and $ 0 , respectively, and unamortized debt issuance costs of $ 155 and $ 0 , respectively

$ 729,413 $ —

2020 Notes, net of unamortized debt discounts of $ 0 and $ 5,319 , respectively, and unamortized debt issuance costs of $ 0 and $ 307 , respectively

2022 Notes, net of unamortized debt discounts of $ 79,562 and $ 124,403 , respectively, and unamortized debt issuance costs of $ 4,771 and $ 7,630 , respectively

1,065,601 1,017,967

Total debt $ 1,795,014 $ 1,262,286

debt, current $ ( 1,103,101 ) $ ( 244,319 )

Total debt, noncurrent $ 691,913 $ 1,017,967

As of January 31, 2021, contractual repayments and maturities of our outstanding debt were as follows (in thousands):

Fiscal Period:

2022 $ 37,500

2023 1,224,934

Total $ 1,881,184

Credit Agreement

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 end of the fiscal quarter 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 January 31, 2021, we were in compliance with all covenants.

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 the lenders for 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 January 31, 2021, the Term Loan had a carrying value of $ 729 million, of which $ 38 million is classified as current and $ 692 million is classified as noncurrent on the consolidated balance sheet.

As of January 31, 2021, the interest rate on the Term Loan was 1.38 % and the effective interest rate was 1.46 %.

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 of 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.

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 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 consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement.

As of January 31, 2021, there were no outstanding borrowings under the Revolving Credit Facility.

Convertible Senior Notes

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In June 2013, we issued 1.50 % convertible senior notes due July 15, 2020, with a principal amount of $ 250 million.

The 2020 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 1.50 % on January 15 and July 15 of each year.

The 2020 Notes mature on July 15, 2020, unless repurchased or converted in accordance with their terms prior to such date.

We cannot redeem the 2020 Notes prior to maturity.

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 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 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.

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We cannot redeem the 2022 Notes prior to maturity.

The terms of the Notes are governed by Indentures by and between us and Wells Fargo Bank, National Association, as Trustee (“Indentures”).

The terms of the 2022 Notes are governed by an Indenture by and between us and Wells Fargo Bank, National Association, as Trustee.

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.

For the 2020 Notes, the initial conversion rate is 12.2340 shares of Class A common stock per $ 1,000 principal amount, which is equal to an initial conversion price of approximately $ 81.74 per share of Class A common stock, subject to adjustment.

Prior to the close of business on March 13, 2020, conversion of the 2020 Notes is subject to the satisfaction of certain conditions, as described below.

For the 2022 Notes, the initial conversion rate 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.

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 Notes who convert their Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indentures) 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 Indentures), holders of the Notes may require us to repurchase all or a portion of their Notes at a price equal to 100 % of the principal amount of the Notes, plus any accrued and unpaid interest.

Holders of the 2020 Notes and 2022 Notes may convert all or a portion of their Notes prior to the close of business on March 13, 2020, and May 31, 2022, respectively, 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 respective Notes on each applicable trading day;

• 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 respective 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 our Class A common stock and the conversion rate of the respective Notes on such trading day;

• upon the occurrence of specified corporate events, as noted in the Indentures.

On or after March 15, 2020, for the 2020 Notes, and June 1, 2022, for the 2022 Notes, holders of the respective Notes may convert their Notes at any time until the close of business on the second scheduled trading day immediately preceding the respective maturity date of their Notes.

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:

• 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;

• 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.

The 2022 Notes became convertible at the option of the holders during the fourth quarter of fiscal 2021 and continue to be convertible in the first quarter of fiscal 2022 since the trigger for early conversion was met.

Specifically, the last reported sale price of our Class A common stock exceeded 130 % of the conversion price of the 2022 Notes for more than 20 trading days during the 30 consecutive trading days ended October 31, 2020, and January 31, 2021.

Accordingly, the 2022 Notes are classified as current on the consolidated balance sheet as of January 31, 2021.

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.

In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components.

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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 $ 77 million, $ 68 million, and $ 223 million for the 2018 Notes, 2020 Notes, and 2022 Notes, respectively, and were included in Additional paid-in capital on the 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 was 5.75 %, 6.25 %, 4.60 % for the 2018 Notes, 2020 Notes, and 2022 Notes, respectively.

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.

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The issuance costs attributable to the equity components were netted against the respective equity components in Additional paid-in capital.

For the 2018 Notes, we recorded liability issuance costs of $ 7 million and equity issuance costs of $ 2 million.

The 2018 Notes were converted and repaid during fiscal 2019.

Accordingly, there was no related amortization expense for fiscal 2020.

Amortization expense was less than $ 1 million for fiscal 2019, and $ 1 million for fiscal 2018.

For the 2020 Notes, we recorded liability issuance costs of $ 5 million and equity issuance costs of $ 2 million.

Amortization expense for the liability issuance costs was less than $ 1 million for each of fiscal 2020, 2019, and 2018.

For the 2022 Notes, we recorded liability issuance costs of $ 14 million and equity issuance costs of $ 4 million.

Amortization expense for the liability issuance costs was $ 3 million, $ 3 million, and $ 1 million for each of fiscal 2020, 2019, and 2018, respectively.

Our outstanding convertible senior notes consist of the following (in thousands):

January 31, 2020 January 31, 2019

2020 Notes 2022 Notes 2020 Notes 2022 Notes

Principal amounts:

Principal $ 249,945 $ 1,150,000 $ 249,975 $ 1,150,000

Unamortized debt discount ( 5,319 ) ( 124,403 ) ( 16,480 ) ( 167,249 )

Unamortized debt issuance costs ( 307 ) ( 7,630 ) ( 981 ) ( 10,487 )

Net carrying amount of the liability component $ 244,319 $ 1,017,967 $ 232,514 $ 972,264

Carrying amount of the equity component (1)

$ 66,007 $ 219,702 $ 66,007 $ 219,702

(1) Included on the consolidated balance sheets within Additional paid-in capital, net of $ 2 million and $ 4 million in equity issuance costs for the 2020 Notes and 2022 Notes, respectively.

As of January 31, 2020, the 2020 Notes and 2022 Notes have remaining lives of approximately 5 months and 32 months, respectively.

For more than 20 trading days during the 30 consecutive trading days ended January 31, 2020, and 2019, the last reported sale price of our Class A common stock exceeded 130 % of the conversion price of the 2020 Notes.

As a result, the 2020 Notes were convertible at the option of the holders during the first quarter of fiscal 2020, and continue to be convertible at the option of the holders during the first quarter of fiscal 2021.

Accordingly, the 2020 Notes are classified as current on the consolidated balance sheets as of January 31, 2020, and 2019.

As of the date of this filing, the total amount of the principal balance of the 2020 Notes that has been converted or for which conversion has been requested was not material.

The 2022 Notes are classified as noncurrent on the consolidated balance sheets as of January 31, 2020, and 2019, since the criteria for conversion was not met.

The effective interest rates of the liability components of the 2018 Notes, 2020 Notes, and 2022 Notes are 5.75 %, 6.25 %, and 4.60 %, respectively.

These interest rates were based on the interest rates of similar liabilities at the time of issuance that did not have associated convertible features.

The following table sets forth total interest expense recognized related to the Notes (in thousands):

Year Ended January 31,

2020 2019 2018

2020 Notes 2022 Notes 2018 Notes 2020 Notes 2022 Notes 2018 Notes 2020 Notes 2022 Notes

Contractual interest expense $ 3,749 $ 2,875 $ 1,196 $ 3,750 $ 2,875 $ 2,625 $ 3,750 $ 1,086

Interest cost related to amortization of debt issuance costs 674 2,857 641 673 2,858 1,409 673 1,080

Interest cost related to amortization of the debt discount 11,161 42,846 7,850 10,488 40,939 16,530 9,852 14,989

Interest costs capitalized to property and equipment totaled $ 6 million, $ 11 million, and $ 8 million for fiscal 2020, 2019, and 2018, respectively.

Upon issuance of the 2018 Notes, we recorded liability issuance costs of $ 7 million and equity issuance costs of $ 2 million;

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.

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”).

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The Purchased Options are separate transactions and are not part of the terms of the Notes.

We paid an aggregate amount of $ 144 million for the Purchased Options relating to the 2018 Notes and 2020 Notes, and $ 176 million for the Purchased Options relating to the 2022 Notes.

The amount paid for the Purchased Options is included in Additional paid-in capital on the consolidated balance sheets.

The amounts paid for the Purchased Options are included in Additional paid-in capital on the consolidated balance sheets.

The Purchased Options relating to the 2018 Notes gave us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2018 Notes, approximately 4.2 million shares of our Class A common stock for $ 83.28 per share, exercisable upon conversion of the 2018 Notes.

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These shares were recorded as treasury stock.

The Purchased Options relating to the 2020 Notes give 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.

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 were recorded 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 will expire in 2020 for the 2020 Notes and in 2022 for the 2022 Notes, if not exercised earlier.

The Purchased Options relating to the 2022 Notes will expire in 2022, if not exercised earlier.

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 4.2 million shares over 60 scheduled trading days beginning in October 2018, 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 , $ 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.

We received aggregate proceeds of $ 93 million from the sale of the Warrants related to the 2018 Notes and the 2020 Notes, and $ 81 million from the sale of the Warrants related to the 2022 Notes.

The proceeds from the sale of the Warrants are recorded in Additional paid-in capital on the consolidated balance sheets.

During fiscal 2019, Warrants related to the 2018 Notes were exercised, and we distributed approximately 1.1 million shares of our Class A common stock to warrant holders primarily utilizing treasury stock.

Accordingly, no Warrants remain outstanding related to the 2018 Notes.

The number of net shares distributed was determined based on the number of Warrants exercised multiplied by the difference between the exercise price of the Warrants and their daily volume weighted-average stock price.

During the third and fourth quarters of fiscal 2019, Warrants related to the 2018 Notes were exercised, and we distributed approximately 1.1 million shares of our Class A common stock to warrant holders primarily utilizing treasury stock.

As of January 31, 2019, there were no Warrants outstanding related to the 2018 Notes.

During the third and fourth quarters of fiscal 2021, Warrants related to the 2020 Notes were exercised, and we distributed approximately 1.6 million shares of our Class A common stock to warrant holders primarily utilizing treasury stock.

As of January 31, 2021, there were no Warrants outstanding related to the 2020 Notes.

Interest Expense on Debt

The following table sets forth total interest expense recognized related to our debt, net of amounts capitalized (in thousands):

Year Ended January 31,

2021 2020 2019

Contractual interest expense $ 15,012 $ 6,624 $ 7,821

Interest cost related to amortization of debt issuance costs 3,196 3,531 4,172

Interest cost related to amortization of debt discount 50,497 54,007 59,277

Total interest expense $ 68,705 $ 64,162 $ 71,270

We have entered into operating lease agreements for our office space, data centers, and other property and equipment.

As of January 31, 2020, total operating lease right-of-use assets and operating lease liabilities were approximately $ 291 million and $ 308 million, respectively.

As of January 31, 2021, and 2020, operating lease right-of-use assets were $ 414 million and $ 291 million, respectively, and operating lease liabilities were $ 443 million and $ 308 million, respectively.

We have also entered into finance lease agreements for other property and equipment.

As of January 31, 2020, finance leases were not material.

As of January 31, 2021, and 2020, finance leases were not material.

The components of operating lease expense were as follows (in thousands):

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Prior to the adoption of ASU No.

2016-02 in the first quarter of fiscal 2020, we generally recognized rent expense on a straight-line basis over the period in which we benefited from the lease.

Total rent expense associated with operating leases was $ 99 million and $ 82 million for fiscal 2019, and 2018, respectively.

Information related to our operating lease right-of-use assets and operating lease liabilities was as follows (in thousands, except periods and percentages):

2016-02, Leases (Topic 842) in the first quarter of fiscal 2020, we generally recognized rent expense on a straight-line basis over the period in which we benefited from the lease.

Total rent expense associated with operating leases was $ 99 million for fiscal 2019.

Supplemental cash flow information related to our operating leases was as follows (in thousands):

Year Ended January 31,

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Operating lease right-of-use assets obtained in exchange for new operating lease liabilities (1)

205,103 365,305

(1) Prior year activity includes $ 279 million for operating leases existing on February 1, 2019, and $ 86 million for operating leases that commenced during fiscal 2020.

Other information related to our operating leases was as follows:

Year Ended January 31,

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Weighted average discount rate 1.73 % 3.36 %

(1) Includes $ 279 million for operating leases existing on February 1, 2019, and $ 86 million for operating leases that commenced during the fiscal year ended January 31, 2020.

As of January 31, 2021, maturities of operating lease liabilities were as follows (in thousands):

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Total $ 443,051

As of January 31, 2020, we have additional operating leases, primarily for office space, that have not yet commenced with total undiscounted lease payments of $ 37 million.

These operating leases will commence in fiscal 2021, with lease terms ranging from one to ten years .

As of January 31, 2021, there were no operating leases that had not yet commenced.

Related-Party Lease Transactions

We lease certain office space from an affiliate of our Chairman, Mr.

We lease certain office space from an affiliate of our Chairman of the Board of Directors, Mr.

Duffield, adjacent to our corporate headquarters in Pleasanton, California, under various lease agreements.

As of January 31, 2020, the operating lease right-of-use assets and operating lease liabilities related to these agreements were $ 57 million and $ 70 million, respectively.

The weighted average remaining lease term of these agreements is five years .

As of January 31, 2021, and 2020, operating lease right-of-use assets related to these agreements were $ 134 million and $ 57 million, respectively, and operating lease liabilities were $ 146 million and $ 70 million, respectively.

The weighted average remaining lease term of these agreements is eight years .

The total rent expense under these agreements was $ 16 million, $ 13 million, and $ 11 million for fiscal 2021, 2020, and 2019, respectively.

During fiscal 2021, we entered into an agreement with this affiliated party for a fee of $ 2 million for an option to purchase these leased properties at a price based on third-party appraisals and negotiation between Workday and the affiliated party.

If the Leased Property Purchase Option was not exercised by March 1, 2021, the existing lease agreements would have been automatically renewed for four years beyond the current lease end dates at rates determined based on independent third-party evaluations.

We accounted for this arrangement, which was approved by our Board of Directors, as a lease modification during the third quarter of fiscal 2021, as we were not reasonably certain that the option to purchase the leased facilities would be exercised.

As of January 31, 2021, this assessment did not change.

On February 23, 2021, our Board of Directors approved the exercise of this Leased Property Purchase Option to purchase the leased properties.

See Note 22, Subsequent Events for further details.

Commitments and Contingencies

Third-Party Hosted Infrastructure Platform-Related Commitments

We have entered into non-cancelable agreements with third-party hosted infrastructure platform vendors with various expiration dates.

In June 2019, we entered into a $ 500 million agreement for the use of cloud services that superseded a previous agreement and expires in June 2025.

As of January 31, 2020, future non-cancelable minimum payments for third-party hosted infrastructure platforms are as follows (in thousands):

Third-Party Hosted Infrastructure Platforms

We have entered into noncancelable agreements with third-party hosted infrastructure platform vendors with various expiration dates.

As of January 31, 2021, future noncancelable minimum payments under these agreements were approximately $ 424 million.

As of January 31, 2021, future noncancelable minimum payments for third-party hosted infrastructure platforms were as follows (in thousands):

Fiscal Period:

2022 $ 41,000

Thereafter 272,084

Total $ 423,730

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Stockholders’ Equity

As of January 31, 2020, there were 170 million shares of Class A common stock and 62 million shares of Class B common stock outstanding.

As of January 31, 2021, there were 184 million shares of Class A common stock, net of treasury stock, and 59 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.

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Our 2012 Equity Incentive Plan (“EIP”) serves as the successor to our 2005 Stock Plan (together with the EIP, the “Stock Plans”).

Pursuant to the terms of the EIP, the share reserve increased by 11 million shares in March 2019.

As of January 31, 2021, we had approximately 63 million shares of Class A common stock available for future grants.

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The weighted-average grant date fair value of RSUs granted during fiscal 2021, 2020, and 2019 was $ 152.70 , $ 187.89 , and $ 129.62 , respectively.

The total fair value of RSUs vested as of the vesting dates during fiscal 2020, 2019, and 2018 was $ 1.2 billion, $ 801 million, and $ 528 million, respectively.

The total fair value of RSUs vested as of the vesting dates during fiscal 2021, 2020, and 2019 was $ 1.1 billion, $ 1.2 billion, and $ 801 million, respectively.

As of January 31, 2021, there was a total of $ 1.8 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 2019, 0.5 million shares of performance-based restricted stock units 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, 2019.

During fiscal 2020, we recognized $ 15 million in compensation cost related to these PRSUs.

Additionally, during fiscal 2020, 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.

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.

These performance conditions were met and the PRSU awards will vest if the individual employee continues to provide service through the vesting date of March 15, 2021.

During fiscal 2021, we recognized $ 91 million in compensation cost related to these PRSUs, and as of January 31, 2021, there was a total of $ 18 million in unrecognized compensation cost which is expected to be recognized over a weighted-average period of approximately two months .

During fiscal 2020, 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.

These performance conditions were met and the PRSUs vested on March 15, 2020.

During fiscal 2021, we recognized $ 19 million in compensation cost related to these PRSUs.

Stock Options

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The weighted-average remaining contractual life of vested and expected to vest stock options as of January 31, 2021, is approximately three years .

As of January 31, 2020, there was a total of $ 34 million in unrecognized compensation cost related to unvested assumed stock options, which is expected to be recognized over a weighted-average period of approximately two years .

As of January 31, 2021, there was a total of $ 9 million in unrecognized compensation cost related to unvested assumed stock options, which is expected to be recognized over a weighted-average period of approximately one year .

The stock options that are exercisable as of January 31, 2021, have a weighted-average remaining contractual life of approximately two years .

The weighted-average remaining contractual life of outstanding stock options as of January 31, 2021, is approximately three years .

No stock options were assumed during fiscal 2020.

There were no stock options granted during fiscal 2021, 2020, and 2019, and no stock options assumed during fiscal 2021 and 2020.

The weighted-average grant date fair value of stock options assumed during fiscal 2019 was $ 100.69 .

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Dividend yield — %

There were no stock options granted during fiscal 2020, 2019, and 2018.

Employee Stock Purchase Plan

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Unearned Revenue and Performance Obligations

$ 1.8 billion, $ 1.4 billion, and $ 1.0 billion of subscription services revenue was recognized during fiscal 2020, 2019, and 2018, respectively, that was included in the unearned revenue balances at the beginning of the respective periods.

Subscription services revenue of $ 2.2 billion, $ 1.8 billion, and $ 1.4 billion was recognized during fiscal 2021, 2020, and 2019, respectively, that was included in the unearned revenue balances at the beginning of the respective periods.

Professional services revenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods was not material.

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Other income (expense), net $ ( 26,535 ) $ 19,783 $ 39,532

(1) Interest expense includes the contractual interest expense of the Notes, and related non-cash interest expense attributable to amortization of the related debt discount and debt issuance costs, net of capitalized interest costs.

For further information, see Note 11, Convertible Senior Notes, Net.

(2) Other includes the net gains (losses) from our equity investments.

For further information, see Note 3, Investments.

(1) Interest expense includes the contractual interest expense of the Term Loan and Notes, 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 11, 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 11, Debt.

The components of loss before provision for (benefit from) income taxes were as follows (in thousands):

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State taxes, net of federal benefit ( 0.5 ) % ( 0.1 ) % ( 0.1 ) %

corporate tax rate reduction — % — % ( 81.3 ) %

Changes in valuation allowance ( 56.3 ) % ( 48.3 ) % ( 39.7 ) %

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Other ( 1.0 ) % ( 0.8 ) % — %

0.4 % 1.3 % ( 2.1 ) %

In December 2017, the SEC staff issued Staff Accounting Bulletin No.

118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act , which allowed companies to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year from the enactment date.

We completed our analysis in fiscal 2019, recording no adjustments.

Total ( 2.7 ) % 0.4 % 1.3 %

As a result of our history of net operating losses, the current provision for income taxes primarily relates to state income taxes and the current foreign provision from our profitable foreign entities.

The benefit from domestic deferred federal and state income tax primarily relates to the release of the valuation allowance for certain intangibles from fiscal 2020, business acquisitions, where the balance for financial reporting exceeded the tax basis.

The foreign deferred income tax benefit primarily relates to the application of intra-period tax allocation rules for the gains from other comprehensive income and the excess tax benefit in certain foreign jurisdictions from share-based compensation.

The foreign deferred income tax benefit primarily relates to the excess of tax benefit from share-based compensation in certain foreign jurisdictions.

Significant components of our deferred tax assets and liabilities were as follows (in thousands):

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Other 40,603 19,904

2,060,013 1,645,225

Total deferred tax assets 2,298,108 2,067,557

Valuation allowance ( 2,083,683 ) ( 1,903,837 )

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Deferred tax liabilities:

Intercompany transactions ( 19,609 ) ( 30,900 )

Other prepaid assets ( 1,364 ) ( 466 )

Other ( 22,992 ) ( 28,517 )

Deferred commissions ( 81,125 ) ( 61,459 )

Operating lease right-of-use assets ( 100,917 ) ( 67,775 )

( 150,207 ) ( 78,531 )

Total deferred tax liabilities ( 205,034 ) ( 157,751 )

Net deferred tax assets $ 9,391 $ 5,969

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Reductions for tax positions taken in prior years ( 2,347 ) — —

Decrease for tax positions taken in prior years due to federal rate reduction — — ( 10,062 )

Additions for tax positions related to the current year 15,158 13,109 12,336

Reductions related to a lapse of applicable statute of limitations ( 807 ) ( 568 ) —

Reductions related to settlements ( 403 ) — —

Unrecognized tax benefits at the end of the period $ 159,862 $ 143,621 $ 130,771

Our policy is to include interest and penalties related to unrecognized tax benefits within our provision for income taxes.

We did no t accrue any interest expense or penalties during fiscal 2020, 2019, or 2018.

We did no t accrue any material interest expense or penalties during fiscal 2021, 2020, or 2019.

Of the total amount of unrecognized tax benefits of $ 160 million, $ 1 million, if recognized, would impact the effective tax rate as of January 31, 2021.

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Due to our net operating loss carryforwards, our income tax returns generally remain subject to examination by federal and most state and foreign tax authorities.

On December 1, 2015, the United States Tax Court (“Tax Court”) issued its final decision with respect to Altera Corporation’s litigation with the Internal Revenue Service (“IRS”).

The litigation related to the treatment of share-based compensation expense in an inter-company cost-sharing arrangement with the taxpayer’s foreign subsidiary for fiscal 2004 through 2007.

In its final decision, the Tax Court accepted Altera’s position of excluding share-based compensation in its cost sharing arrangement and concluded that the related IRS Regulations were invalid.

Subsequent to the decision, the IRS filed an appeal on February 23, 2016.

On June 22, 2020, the U.S.

Tax Court of Appeals of the Ninth Circuit (“Ninth Circuit”) reversed the United States Tax Court decision and on November 11, 2019, the Ninth Circuit released a court order denying an en banc rehearing of the case following Altera’s petition filed on July 22, 2019.

Altera submitted a petition for writ of certiorari to the U.S.

Supreme Court on February 10, 2020.

Based on the facts and circumstances of the Tax Court Case, we believe that it is more likely than not that the decision will be upheld.

We have therefore recorded the effects of the decision and determined that there was no material impact to our effective tax rate and income tax expense due to our current full valuation allowance position.

We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

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).

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 consolidated financial statements.

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.

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.

Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, outstanding warrants, common stock related to unvested early exercised stock options, common stock related to unvested RSUs and PRSUs, common stock related to convertible senior notes to the extent dilutive, and common stock issuable pursuant to the ESPP.

Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, 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 year had been distributed.

As the liquidation and dividend rights are identical, the net loss attributable to common stockholders is allocated on a proportionate basis.

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Class A Class B Class A Class B Class A Class B

Basic and diluted net loss attributable to Class A and Class B common stockholders per share:

Basic and diluted net loss per share attributable to Class A and Class B common stockholders:

Allocation of distributed net loss attributable to common stockholders $ ( 210,637 ) $ ( 71,794 ) $ ( 345,958 ) $ ( 134,716 ) $ ( 287,021 ) $ ( 131,237 )

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Basic and diluted net loss per share $ ( 1.19 ) $ ( 1.19 ) $ ( 2.12 ) $ ( 2.12 ) $ ( 1.93 ) $ ( 1.93 )

The anti-dilutive securities excluded from the weighted-average shares used to calculate the diluted net loss per common share were as follows (in thousands):

Potentially dilutive securities that were not included in the calculation of diluted net loss per share because doing so would be anti-dilutive were as follows (in thousands):

2021 2020 2019

Outstanding common stock options 1,260 3,436 5,781

Unvested restricted stock awards, units, and PRSUs 12,530 13,551 13,209

Unvested RSUs and PRSUs 13,790 12,530 13,551

Shares related to the convertible senior notes 7,818 10,876 10,876

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Long-Lived Assets

We attribute our long-lived assets, which primarily consist of property and equipment and operating lease right-of-use assets, 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 is as follows (in thousands):

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):

United States $ 1,169,820 $ 1,064,292

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We match a certain portion of employee contributions up to a fixed maximum per employee.

Our contributions to the plan were $ 36 million, $ 28 million, and $ 15 million in fiscal 2020, 2019, and 2018, respectively.

Our contributions to the plan were $ 42 million, $ 36 million, and $ 28 million during fiscal 2021, 2020, and 2019, respectively.

Selected Quarterly Financial Data (unaudited)

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Net loss per share, basic and diluted ( 0.30 ) ( 0.10 ) ( 0.12 ) ( 0.68 ) ( 0.56 ) ( 0.51 ) ( 0.53 ) ( 0.52 )

Subsequent Events

On January 28, 2021, we entered into a definitive agreement to acquire Peakon ApS, an employee success platform that converts feedback into actionable insights, for consideration of approximately $ 700 million in cash, subject to adjustments.

The acquisition is expected to close during our first quarter of fiscal 2022, subject to the satisfaction of customary closing conditions, including required regulatory approvals.

Exercise of Leased Property Purchase Option

As discussed in Note 12, Leases, we entered into an agreement with an affiliated party during fiscal 2021 which gives us the option to purchase certain leased properties.

On February 23, 2021, our Board of Directors approved the exercise of this Leased Property Purchase Option to purchase the leased properties.

This purchase provides long-term stability to our corporate headquarter footprint in Pleasanton, California.

The purchase price is $ 173 million in cash, reduced by the $ 2 million fee paid for the Leased Property Purchase Option.

The transaction is expected to be completed in the first quarter of fiscal 2022.

The net carrying value of the properties purchased will be $ 159 million at the time of purchase, which is calculated as the net purchase price of $ 171 million, reduced by the difference between the carrying values of the right-of-use asset and lease liability of the leased properties immediately prior to the purchase of approximately $ 12 million.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk