What changed in this filing

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Item 1. Financial Statements

2021-05-26 compared with 2020-11-20 · 260 added, 308 removed, 503 unchanged (53% of the section changed)

3 unchanged sentences

(in thousands)

October 31, 2020 January 31, 2020

April 30, 2021 January 31, 2021

Current assets:

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(in thousands, except per share data)

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Subscription services $ 1,032,169 $ 881,956

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(1) Costs and expenses include share-based compensation expenses as follows:

Three Months Ended April 30,

Costs of subscription services $ 20,717 $ 13,892

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(in thousands)

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Net loss $ ( 46,522 ) $ ( 158,368 )

Other comprehensive (loss) income, net of tax:

Other comprehensive income (loss):

Net change in foreign currency translation adjustment 218 ( 1,247 )

Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax provision of $ 0 , $ 444 , $ 0 , and $ 875 , respectively

( 2,578 ) 1,194 ( 332 ) 2,786

Net change in market value of effective foreign currency forward exchange contracts, net of tax provision of $ 0 , $( 1,315 ), $ 0 , and $ 3,295 , respectively

3,044 ( 9,206 ) ( 22,485 ) 23,062

Other comprehensive (loss) income, net of tax 464 ( 7,839 ) ( 22,382 ) 25,428

Net change in unrealized gains (losses) on available-for-sale debt securities ( 898 ) 2,974

Net change in market value of effective foreign currency forward exchange contracts ( 4,771 ) 32,307

Other comprehensive income (loss) ( 5,451 ) 34,034

Comprehensive loss $ ( 51,973 ) $ ( 124,334 )

2 unchanged sentences

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

(in thousands)

Three Months Ended April 30,

Common stock:

Balance, beginning of period $ 242 $ 231

Issuance of common stock under employee equity plans 2 2 7 8

Settlement of convertible senior notes — — 2 —

Issuance of common stock under employee equity plans, net of shares withheld for employee taxes 4 4

Balance, end of period 246 235

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Balance, beginning of period 6,254,936 5,090,187

Issuance of common stock under employee equity plans 3,648 1,778 78,160 63,312

Issuance of common stock under employee equity plans, net of shares withheld for employee taxes ( 1,361 ) 3,573

Share-based compensation 264,605 236,410

Settlement of warrants ( 34,118 ) — ( 34,118 ) —

Exercise of convertible senior notes hedges 39 —

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Exercise of convertible senior notes hedges ( 36 ) —

Settlement of warrants 34,118 — 34,118 —

Balance, end of period ( 12,420 ) —

1 unchanged sentence

Balance, beginning of period ( 54,970 ) 23,492

Other comprehensive (loss) income 464 ( 7,839 ) ( 22,382 ) 25,428

Other comprehensive income (loss) ( 5,451 ) 34,034

Balance, end of period ( 60,421 ) 57,526

5 unchanged sentences

Total stockholders’ equity $ 3,405,441 $ 2,602,004

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Common stock (in shares):

Balance, beginning of period 242,667 231,708

Issuance of common stock under employee equity plans 1,935,725 1,931,916 7,388,498 7,487,250

Settlement of warrants ( 186,202 ) — ( 186,202 ) —

Settlement of convertible senior notes — 20 1,654,308 217

Purchase of treasury stock from the exercise of convertible senior notes hedges — — ( 1,654,757 ) —

Issuance of common stock under employee equity plans, net of shares withheld for employee taxes 3,562 3,462

Issuance of restricted stock awards 82 —

Balance, end of period 246,311 235,170

3 unchanged sentences

(in thousands)

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Cash flows from operating activities:

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Cash flows from financing activities:

Proceeds from borrowings on term loan, net — — 747,795 —

Proceeds from borrowings on Term Loan, net of debt discount and issuance costs — 497,795

Payments on convertible senior notes ( 51 ) ( 1 )

Payments on Term Loan ( 9,375 ) —

Proceeds from issuance of common stock from employee equity plans 3,650 1,780 78,167 63,320

Proceeds from issuance of common stock from employee equity plans, net of taxes paid for shares withheld ( 1,357 ) 3,577

Other ( 225 ) ( 2,040 )

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See Notes to Condensed Consolidated Financial Statements

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Supplemental cash flow data:

Cash paid for interest, net of amounts capitalized $ 5,309 $ 959 $ 11,686 $ 1,431

Cash paid for interest $ 4,638 $ 1,438

Cash paid for income taxes 4,493 2,945

1 unchanged sentence

Purchases of property and equipment, accrued but not paid 78,468 39,721

As of October 31,

As of April 30,

Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of cash flows:

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Company and Background

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

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.

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All such adjustments are of a normal, recurring nature.

The results of operations for the quarter ended October 31, 2020, shown in this report are not necessarily indicative of the results to be expected for the full year ending January 31, 2021.

The results of operations for the quarter ended April 30, 2021, shown in this report are not necessarily indicative of the results to be expected for the full year ending January 31, 2022.

The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 2, 2021.

There have been no material changes in our significant accounting policies as described in our Annual Report on Form 10-K for the year ended January 31, 2020, other than the adoption of accounting pronouncements as described in Note 2, Accounting Standards.

Certain prior period amounts reported in our condensed consolidated financial statements have been reclassified to conform to current period presentation.

There have been no material changes in our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, other than the adoption of an accounting pronouncement as described in Note 2, Accounting Standards.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

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

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 condensed consolidated financial statements.

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We operate in one operating segment, cloud applications.

Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by chief operating decision makers, who are our co-chief executive officers, in deciding how to allocate resources and assessing performance.

Our chief operating decision makers allocate resources and assess performance based upon discrete financial information at the consolidated level.

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 the three months ended April 30, 2021, our CODMs were our Co-Chief Executive Officer and Chairman, Aneel Bhusri, and our Co-Chief Executive Officer, Chano Fernandez.

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

Accounting Standards

Recently Adopted Accounting Pronouncements

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

2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables.

It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.

We adopted this standard effective February 1, 2020, using a modified retrospective approach, which resulted in a cumulative-effect adjustment of $ 0.2 million to Accumulated deficit.

Under the new standard, we assess our allowance for credit losses on trade receivables by taking into consideration forecasts of future economic conditions, information about past events, such as our historical trend of write-offs, and customer-specific circumstances, such as bankruptcies and disputes.

The allowance for credit losses on trade receivables is recorded in operating expenses on our condensed consolidated statements of operations.

With respect to available-for-sale debt securities, when the fair value of the security is below its amortized cost, the amortized cost should be written down to its fair value if i) it is more likely than not that management is required to sell the impaired security before recovery of its amortized basis or ii) management has the intention to sell the security.

If neither of the conditions are met, we must determine whether the impairment is due to credit losses.

To determine the amount of credit losses, we compare the present value of the expected cash flows of the security, derived by taking into account the issuers’ credit ratings and remaining payment terms, with its amortized cost basis.

The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security.

An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in Other income (expense), net on our condensed consolidated statements of operations.

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

In August 2018, the FASB issued ASU No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements.

We adopted this standard effective February 1, 2020, using a prospective approach.

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

Subsequent impact on our condensed consolidated financial statements will depend on the magnitude of implementation costs to be incurred.

Implementation costs capitalized subsequent to adoption will be recognized in operating expenses on our condensed consolidated statements of operations over the noncancelable period of the hosting arrangement plus any renewal periods reasonably certain to be taken.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

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

In addition, it eliminates a company’s need to evaluate certain exceptions relating to the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses.

We adopted this standard effective February 1, 2020.

We adopted the amendments in this update on a retrospective basis for the provision related to franchise taxes and prospectively for all other applicable amendments.

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

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 diluted earnings per share.

We adopted this standard effective February 1, 2021, using a modified retrospective method, under which financial results reported in prior periods were not adjusted.

We applied the provisions of this guidance to our 0.25 % convertible senior notes due October 1, 2022 (“2022 Notes”).

Upon adoption, we recorded a decrease to Accumulated deficit of $ 136 million, a decrease to Additional paid-in capital of $ 220 million, an increase to Debt, current of $ 79 million, and a decrease to Property and equipment, net of $ 5 million, which represented non-cash interest previously capitalized.

There was no impact to diluted loss per share as the inclusion of potential shares of common stock related to the 2022 Notes would have been anti-dilutive.

For further information, see Note 11, Debt.

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 (“LIBOR”) 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 condensed consolidated financial statements from the adoption of this standard is expected to be immaterial.

In August 2020, the FASB issued ASU No.

2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity , which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes.

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

We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements.

Debt Securities

As of October 31, 2020, debt securities consisted of the following (in thousands):

As of April 30, 2021, debt securities consisted of the following (in thousands):

Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value

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Debt securities included in Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase greater than three months, and the remainder of the securities is included in Cash and cash equivalents.

The unrealized losses associated with our debt securities were immaterial as of October 31, 2020, and January 31, 2020, and we did not recognize any credit losses related to our debt securities during the three and nine months ended October 31, 2020.

There were no sales of debt securities during the three months ended October 31, 2020, and 2019.

We sold $ 5 million of debt securities during the nine months ended October 31, 2020, and 2019.

The unrealized losses associated with our debt securities were immaterial as of April 30, 2021, and January 31, 2021, and we did not recognize any credit losses related to our debt securities during the three months ended April 30, 2021, or 2020.

We sold $ 10 million and $ 5 million of debt securities for the three months ended April 30, 2021, and 2020, respectively.

The realized gains and losses from the sales were immaterial.

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Equity investments consisted of the following (in thousands):

Condensed Consolidated Balance Sheets Location October 31, 2020 January 31, 2020

Money market funds (1)

Cash and cash equivalents $ 517,031 $ 386,909

Marketable equity investments (1)

Marketable securities 10,696 —

Condensed Consolidated Balance Sheets Location April 30, 2021 January 31, 2021

Money market funds Cash and cash equivalents $ 337,727 $ 659,964

Equity investments accounted for under the equity method Other assets 46,010 48,222

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

Other assets 62,741 59,026

Non-marketable equity investments measured using the measurement alternative Other assets 100,778 73,142

Marketable equity investments Marketable securities 9,660 21,300

$ 494,175 $ 802,628

(1) Investments with readily determinable fair values.

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

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Net realized gains (losses) recognized on equity investments sold (1)

Net unrealized gains (losses) recognized on equity investments held 3,830 — 1,643 2,169

$ ( 1,751 ) $ 1,591

Net unrealized gains (losses) recognized on equity investments held as of the end of the period ( 4,298 ) ( 4,096 )

Total net gains (losses) recognized in Other income (expense), net $ ( 6,049 ) $ ( 2,505 )

We determine at the inception of each arrangement whether an investment or other interest is considered a variable interest entity (“VIE”).

If the investment or other interest is determined to be a VIE, we must evaluate whether we are considered the primary beneficiary.

For investments in VIEs in which we are considered the primary beneficiary, the assets, liabilities, and results of operations of the VIE are consolidated in our condensed consolidated financial statements.

The primary beneficiary of a VIE is the party that meets both of the following criteria:

(1) has the power to direct the activities that most significantly impact the VIE’s economic performance;

and (2) has the obligation to absorb losses or the right to receive benefits from the VIE.

As of October 31, 2020, there were no VIEs for which we were the primary beneficiary.

(1) Reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period.

Equity Investments Accounted for Under the Equity Method

We determine at the inception of each arrangement whether an investment or other interest is considered a variable interest entity (“VIE”).

Investments in VIEs for which we are not the primary beneficiary or do not own a controlling interest but can exercise significant influence over the investee are accounted for under the equity method of accounting.

These investments are measured at cost, less any impairment, plus or minus our share of earnings and losses and are included in Other assets on the condensed consolidated balance sheets.

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

During the first quarter of fiscal 2021, we made an equity investment of $ 50 million in a limited partnership, which represents an ownership interest of approximately 6 %.

During 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.

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The investment is accounted for under the equity method of accounting as it is considered to be more than minor and we have the ability to exercise significant influence over the entity.

The carrying value was $ 48 million as of October 31, 2020.

There was no impairment loss recorded on this investment during the three and nine months ended October 31, 2020.

Our share of losses on this investment was $ 2 million and $ 1 million for the three months ended April 30, 2021, and 2020, respectively.

There was no impairment loss recorded on this investment during the periods presented.

Non-Marketable Equity Investments Measured Using the Measurement Alternative

Non-marketable equity investments measured using the measurement alternative include investments in privately held companies without readily determinable fair values in which we do not own a controlling interest or have significant influence.

We adjust the carrying values of non-marketable equity investments based on observable price changes from orderly transactions for identical or similar investments of the same issuer.

No material adjustments were made to the carrying value of the non-marketable equity investments as measured under the measurement alternative during the three and nine months ended October 31, 2020, and 2019.

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

Our impairment analysis encompasses an assessment of the severity and duration of the impairment and a qualitative and quantitative analysis of other key factors including the investee’s financial metrics, market acceptance of the investee’s product or technology, other competitive products or technology in the market, general market conditions, and the rate at which the investee is using its cash.

We also have considered the impacts of the coronavirus pandemic (“COVID-19 pandemic”) in our impairment analysis.

These factors require significant judgment.

We did no t record any impairment losses on non-marketable equity investments for the three months ended October 31, 2020, and we recorded $ 3 million of impairment losses for the nine months ended October 31, 2020.

We did no t record any such impairment losses during the three and nine months ended October 31, 2019.

Non-marketable equity investments that have been remeasured during the period due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold.

The carrying values for our non-marketable equity investments are summarized below (in thousands):

April 30, 2021 January 31, 2021

Total initial cost $ 87,704 $ 65,377

Cumulative net unrealized gains (losses) 13,074 7,765

Carrying value $ 100,778 $ 73,142

We recorded upward adjustments to the carrying values of non-marketable equity investments of $ 8 million during the three months ended April 30, 2021.

No material adjustments were made to the carrying values of these investments during the three months ended April 30, 2020.

Additionally, we recorded impairment losses on these investments of $ 2 million and $ 3 million during the three months ended April 30, 2021, and 2020, respectively.

Marketable Equity Investments

Marketable equity investments were $ 11 million as of October 31, 2020.

We did not have any marketable equity investments as of January 31, 2020.

There were no sales of marketable equity investments during the three and nine months ended October 31, 2020, or the three months ended October 31, 2019.

We sold $ 51 million of marketable equity investments during the nine months ended October 31, 2019, with a corresponding gain recognized of $ 7 million.

We hold marketable equity investments with readily determinable fair values over which we do not own a controlling interest or exercise significant influence.

The carrying values for our marketable equity investments are summarized below (in thousands):

April 30, 2021 January 31, 2021

Total initial cost $ 4,004 $ 5,000

Cumulative net unrealized gains (losses) 5,656 16,300

Carrying value $ 9,660 $ 21,300

We sold marketable equity investments for proceeds of $ 2 million during the three months ended April 30, 2021.

The initial cost of the equity investments sold was $ 1 million.

There were no sales of marketable equity investments during the three months ended April 30, 2020.

Fair Value Measurements

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of October 31, 2020 (in thousands):

Level 1 Level 2 Level 3 Total

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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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Fair Value Measurements of Other Financial Instruments

The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands):

October 31, 2020 January 31, 2020

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

1.50 % Convertible senior notes

$ — $ — $ 244,319 $ 571,057

0.25 % Convertible senior notes

1,053,550 1,732,671 1,017,967 1,587,978

In June 2013, we completed an offering of $ 250 million of 1.50 % convertible senior notes due July 15, 2020 (“2020 Notes”), which were subsequently converted during the second quarter of fiscal 2021.

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

The carrying amounts of the Notes represent the liability components of the principal balances as of October 31, 2020, and January 31, 2020.

The estimated fair values of the Notes, which we have classified as Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of each reporting period.

The if-converted value of the 2022 Notes exceeded the principal amount by $ 493 million.

The if-converted value was determined based on the closing price of our common stock of $ 210.12 on October 31, 2020.

For further information, see Note 10, Debt.

In April 2020, we entered into a credit agreement (“Credit Agreement”) pursuant to which the lenders would extend to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million (“Term Loan,”) and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million (“Revolving Credit Facility”).

As of October 31, 2020, the carrying value of the Term Loan was $ 739 million, and there were no outstanding borrowings under the Revolving Credit Facility.

In April 2020, we entered into a credit agreement (“Credit Agreement”) pursuant to which the lenders extended to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million (“Term Loan”) and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million (“Revolving Credit Facility”).

The carrying value of the Term Loan was $ 720 million and $ 729 million as of April 30, 2021, and January 31, 2021, respectively.

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.

There were no outstanding borrowings under the Revolving Credit Facility during the periods presented.

For further information, see Note 11, Debt.

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

The carrying value of the 2022 Notes was $ 1.1 billion as of April 30, 2021, and January 31, 2021, and the estimated fair value of the 2022 Notes was $ 2.0 billion and $ 1.8 billion as of April 30, 2021, and January 31, 2021, respectively.

The estimated fair value of the 2022 Notes, which we have classified as a Level 2 financial instrument, was determined based on the quoted bid price in an over-the-counter market on the last trading day of each reporting period.

For further information, see Note 11, Debt.

Deferred Costs

Deferred costs, which consist of deferred sales commissions, were $ 342 million and $ 323 million as of October 31, 2020, and January 31, 2020, respectively.

Amortization expense for the deferred costs was $ 29 million and $ 23 million for the three months ended October 31, 2020, and 2019, respectively, and $ 82 million and $ 66 million for the nine months ended October 31, 2020, and 2019, respectively.

Deferred costs, which consist of deferred sales commissions, were $ 389 million and $ 395 million as of April 30, 2021, and January 31, 2021, respectively.

Amortization expense for the deferred costs was $ 32 million and $ 26 million for the three months ended April 30, 2021, and 2020, respectively.

There was no impairment loss in relation to the costs capitalized for the periods presented.

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Property and equipment, net consisted of the following (in thousands):

October 31, 2020 January 31, 2020

April 30, 2021 January 31, 2021

Land and land improvements $ 80,553 $ 37,065

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Property and equipment, net $ 1,155,697 $ 972,403

Depreciation expense totaled $ 58 million and $ 55 million for the three months ended October 31, 2020, and 2019, respectively, and $ 170 million and $ 144 million for the nine months ended October 31, 2020, and 2019, respectively.

No interest costs were capitalized to Property and equipment, net during the three and nine months ended October 31, 2020, or the three months ended October 31, 2019.

Interest costs capitalized to Property and equipment, net totaled $ 6 million for the nine months ended October 31, 2019 .

Depreciation expense totaled $ 63 million and $ 55 million for the three months ended April 30, 2021, and 2020, respectively.

Related-Party Transactions

During fiscal 2021, we entered into an agreement with an affiliate of our Co-Founder, Director, and Chairman Emeritus, David Duffield, for an option to purchase certain leased office space (“Property”) within our corporate headquarters at a price based on third-party appraisals and negotiation between Workday and the affiliated party (“Leased Property Purchase Option”).

In deciding to enter into and subsequently exercise the Leased Property Purchase Option, our Board of Directors considered the benefits to Workday of purchasing the Property, including the importance of obtaining control of the Property, which is part of Workday’s headquarters campus, and the long-term cost savings from ownership as compared to continuing to lease the Property.

Our Board also considered independent appraisals, comparable transaction data, and the extent and nature of Mr.

Duffield’s interest in the transaction.

In the first quarter of fiscal 2022, we exercised the Leased Property Purchase Option at a purchase price of $ 173 million in cash, reduced by a $ 2 million fee paid for the Leased Property Purchase Option in the prior fiscal year.

The carrying value of the Property upon purchase was $ 158 million, calculated as the purchase price less approximately $ 15 million which represents the difference between the carrying values of the right-of-use asset and lease liability of the Property immediately prior to the purchase.

For further information, see Note 12, Leases.

Business Combinations

On March 9, 2021, we acquired all outstanding stock of Peakon ApS (“Peakon”), an employee success platform that converts feedback into actionable insights, for $ 702 million.

With Peakon, Workday will provide organizations with a continuous listening platform, including real-time visibility into employee experience, sentiment, and productivity, to help drive employee engagement and improve organizational performance.

We have included the financial results of Peakon in our condensed consolidated financial statements from the date of acquisition.

The acquisition-date fair value of the purchase consideration transferred consisted of the following (in thousands):

Cash paid to stockholders, warrant holders, and vested option holders $ 683,788

Transaction costs paid by Workday on behalf of Peakon 17,960

Total $ 701,748

Additionally, we granted certain Peakon employees restricted stock awards (“RSA”) with service conditions, which totaled 81,695 shares of our Class A common stock.

The aggregate grant date fair value of the RSAs will be accounted for as post-acquisition share-based compensation expense.

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):

Acquisition-related intangible assets $ 170,500

Goodwill 542,541

Other assets 34,639

Deferred tax liability ( 20,857 )

Other liabilities ( 25,075 )

Total $ 701,748

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

Estimated Fair Values Weighted-Average Useful Lives (in Years)

Developed technology $ 94,000 5

Customer relationships 72,000 13

Backlog 4,000 3

Trade name 500 1

Total acquisition-related intangible assets $ 170,500 8

The goodwill recognized was primarily attributable to the assembled workforce and the expected synergies from integrating Peakon’s technology into our product portfolio.

The goodwill is not deductible for income tax purposes.

Separate operating results and pro forma results of operations for Peakon have not been presented as the effect of this acquisition was not material to our financial results.

Acquisition-Related Intangible Assets, Net

Acquisition-related intangible assets, net consisted of the following (in thousands):

October 31, 2020 January 31, 2020

April 30, 2021 January 31, 2021

Developed technology $ 312,400 $ 218,400

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Acquisition-related intangible assets, net $ 401,220 $ 248,626

Amortization expense related to acquisition-related intangible assets was $ 14 million and $ 16 million for the three months ended October 31, 2020, and 2019, respectively, and $ 46 million and $ 55 million for the nine months ended October 31, 2020, and 2019, respectively.

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

Amortization expense related to acquisition-related intangible assets was $ 18 million and $ 16 million for the three months ended April 30, 2021, and 2020, respectively.

As of April 30, 2021, our future estimated amortization expense related to acquisition-related intangible assets was as follows (in thousands):

Fiscal Period:

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Other assets consisted of the following (in thousands):

October 31, 2020 January 31, 2020

April 30, 2021 January 31, 2021

Non-marketable equity and other investments (1)

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(1) Included in non-marketable equity and other investments are investments in loan receivables of privately held companies, which are carried at amortized cost.

The carrying values of these loan receivables were $ 13 million and $ 16 million as of October 31, 2020, and January 31, 2020, respectively.

As of October 31, 2020, the allowance for credit losses on this balance was immaterial.

The carrying values of these loan receivables were $ 35 million and $ 13 million as of April 30, 2021, and January 31, 2021, respectively.

The allowance for credit losses on this balance was immaterial for the periods presented.

Technology patents and other intangible assets with estimable useful lives are amortized on a straight-line basis.

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

As of April 30, 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 Accumulated other comprehensive income (loss) (“AOCI”) on the condensed consolidated balance sheets and will be subsequently reclassified to the related revenue line item on the condensed consolidated statements of operations in the same period that the underlying revenues are earned.

As of October 31, 2020, we estimate that $ 8 million of net gains recorded in AOCI related to our foreign currency forward contracts designated as cash flow hedges will be reclassified into income within the next 12 months.

As of October 31, 2020, and January 31, 2020, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $ 1.2 billion and $ 908 million, respectively.

As of April 30, 2021, we estimate that $ 14 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 April 30, 2021, and January 31, 2021, we had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $ 1.4 billion and $ 1.3 billion, respectively.

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

All such contracts have maturities not greater than 48 months.

All contracts have maturities of less than 48 months.

Foreign Currency Forward Contracts Not Designated as Hedges

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Cash flows from such forward contracts are classified as operating activities.

As of October 31, 2020, and January 31, 2020, we had outstanding forward contracts not designated as hedges with total notional values of $ 115 million and $ 246 million, respectively.

As of April 30, 2021, and January 31, 2021, we had outstanding forward contracts not designated as hedges with total notional values of $ 100 million and $ 175 million, respectively.

The fair values of outstanding derivative instruments were as follows (in thousands):

Condensed Consolidated Balance Sheets Location October 31, 2020 January 31, 2020

Condensed Consolidated Balance Sheets Location April 30, 2021 January 31, 2021

Derivative assets:

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

Condensed Consolidated Statements of Operations Location Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Condensed Consolidated Statements of Operations Location Three Months Ended April 30,

Total revenues Revenues $ 1,175,033 $ 1,018,385

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Pre-tax gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):

Condensed Consolidated Statements of Operations and Statements of Comprehensive Loss Locations Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Condensed Consolidated Statements of Operations and Statements of Comprehensive Loss Locations Three Months Ended April 30,

Gains (losses) recognized in OCI Net change in market value of effective foreign currency forward exchange contracts $ ( 4,253 ) $ 36,793

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Gains (losses) associated with foreign currency forward contracts not designated as hedges were as follows (in thousands):

Condensed Consolidated Statements of Operations Location Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Condensed Consolidated Statements of Operations Location Three Months Ended April 30,

Foreign currency forward contracts not designated as hedges Other income (expense), net $ ( 192 ) $ 5,413

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 condensed consolidated balance sheets.

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We manage our exposure to counterparty risk by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.

As of October 31, 2020, information related to these offsetting arrangements was as follows (in thousands):

As of April 30, 2021, information related to these offsetting arrangements was as follows (in thousands):

Gross Amounts of Recognized Assets Gross Amounts Offset on the Condensed Consolidated Balance Sheets Net Amounts of Assets Presented on the Condensed Consolidated Balance Sheets Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets Net Assets Exposed

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Counterparty C 867 — 867 ( 867 ) — —

Counterparty D 1,281 — 1,281 ( 1,281 ) — —

Counterparty E 2 — 2 ( 2 ) — —

Total $ 5,265 $ — $ 5,265 $ ( 5,265 ) $ — $ —

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Counterparty C 21,405 — 21,405 ( 867 ) — 20,538

Counterparty D 1,503 — 1,503 ( 1,281 ) — 222

Counterparty E 184 — 184 ( 2 ) — 182

Total $ 53,714 $ — $ 53,714 $ ( 5,265 ) $ — $ 48,449

Outstanding debt consisted of the following (in thousands):

October 31, 2020 January 31, 2020

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

April 30, 2021 January 31, 2020

Term Loan, net of unamortized debt discounts of $ 1,581 and $ 1,682 , respectively, and unamortized debt issuance costs of $ 146 and $ 155 , respectively

$ 720,148 $ 729,413

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1,144,847 1,065,601

Term Loan, net of unamortized debt discounts of $ 1,783 and $ 0 , respectively, and unamortized debt issuance costs of $ 164 and $ 0 , respectively

Total debt 1,864,995 1,795,014

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Total debt, noncurrent $ 673,273 $ 691,913

As of October 31, 2020, contractual repayments and maturities of our outstanding debt are as follows (in thousands):

As of April 30, 2021, contractual repayments and maturities of our outstanding debt were as follows (in thousands):

Fiscal Period:

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2023 1,224,881

Thereafter 468,750

Total $ 1,871,756

Credit Agreement

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.

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 April 30, 2021, we were in compliance with all covenants.

The Term Loan matures on April 2, 2025, and provides for quarterly repayment in installments of the principal amount 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.

As of April 30, 2021, the Term Loan had a carrying value of $ 720 million, of which $ 47 million is classified as current and $ 673 million is classified as noncurrent on the condensed consolidated balance sheet.

As of April 30, 2021, the interest rate on the Term Loan was 1.33 % and the effective interest rate was 1.42 %.

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.

As of April 30, 2021, there were no outstanding borrowings under the Revolving Credit Facility.

Convertible Senior Notes

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

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

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

During the second quarter of fiscal 2021, the 2020 Notes were converted by note holders and we repaid the $ 250 million principal balance in cash.

We also distributed approximately 1.7 million shares of our Class A common stock to note holders during the second quarter of fiscal 2021, which represents the conversion value in excess of the principal amount.

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

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 (together with the 2020 Notes, the “Notes”).

The 2022 Notes are unsecured, unsubordinated obligations, and interest is payable in cash in arrears at a fixed rate of 0.25 % on April 1 and October 1 of each year.

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

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

As a result, the 2022 Notes are convertible at the option of the holders during the fourth quarter of fiscal 2021.

Accordingly, the 2022 Notes are classified as current on the condensed consolidated balance sheet as of October 31, 2020.

From November 1, 2020, through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material.

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

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

The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features.

The carrying amounts of the equity components representing the conversion option were determined by deducting the fair value of the liability components from the par value of the respective Notes.

These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes using the effective interest rate method.

The gross carrying amounts of the equity components recorded were $ 68 million and $ 223 million for the 2020 Notes and 2022 Notes, respectively, and were included in Additional paid-in capital on the condensed consolidated balance sheets upon issuance.

The equity components are not remeasured as long as they continue to meet the conditions for equity classification.

The effective interest rate of the liability component of the 2020 Notes was 6.25 %, and the effective interest rate of the liability component of the 2022 Notes is 4.60 %.

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

In accounting for the issuance costs related to the Notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values.

Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes.

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

Upon issuance of the 2020 Notes, we recorded liability issuance costs of $ 5 million and equity issuance costs of $ 2 million, and upon issuance of the 2022 Notes, we recorded liability issuance costs of $ 14 million and equity issuance costs of $ 4 million.

The 2022 Notes were convertible at the option of the holders during the first quarter of fiscal 2022 and continue to be convertible in the second 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 April 30, 2021, and January 31, 2021.

Accordingly, the 2022 Notes are classified as current on the condensed consolidated balance sheets for the periods presented.

Through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material.

As described in Note 2, Accounting Standards, we adopted ASU 2020-06 effective February 1, 2021, using a modified retrospective method, under which financial results reported in prior periods were not adjusted.

Prior to the adoption of the standard, in accounting for the issuance of the 2022 Notes, we separated them into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2022 Notes.

This difference represented a debt discount that was amortized to interest expense over the term of the 2022 Notes using the effective interest rate method.

The gross carrying amount of the equity component for the 2022 Notes was $ 223 million and was included in Additional paid-in capital on the condensed consolidated balance sheets upon issuance.

The effective interest rate of the liability component of the 2022 Notes was 4.60 %.

Additionally, we separated the total issuance costs incurred into liability and equity components in proportion to the allocation of the initial proceeds, resulting in liability issuance costs of $ 14 million and equity issuance costs of $ 4 million.

Issuance costs attributable to the liability component were amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the 2022 Notes.

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

Upon adoption of ASU No.

2020-06 on February 1, 2021, we recombined the liability and equity components of the 2022 Notes assuming that the instrument was accounted for as a single liability from inception to the date of adoption.

We similarly recombined the liability and equity components of the issuance costs.

The issuance costs are presented as a deduction from the outstanding principal balance of the 2022 Notes, and are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the 2022 Notes.

As of April 30, 2021, the effective interest rate on the 2022 Notes was 0.57 %.

The standard did not impact the accounting for the 2020 Notes since they were converted and repaid prior to the date of adoption.

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.

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

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

The Purchased Options relating to the 2020 Notes gave us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2020 Notes, approximately 3.1 million shares of our Class A common stock for $ 81.74 per share, exercisable upon conversion of the 2020 Notes.

During the second quarter of fiscal 2021, we received approximately 1.7 million shares of our Class A common stock from the exercise of the Purchased Options relating to the 2020 Notes.

These shares are held as treasury stock.

The Purchased Options relating to the 2022 Notes give us the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2022 Notes, approximately 7.8 million shares of our Class A common stock for $ 147.10 per share, exercisable upon conversion of the 2022 Notes.

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

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

During the three months ended October 31, 2020, Warrants related to the 2020 Notes were exercised, and we distributed approximately 0.2 million shares of our Class A common stock to warrant holders utilizing treasury stock.

As of October 31, 2020, there were 2.7 million Warrants outstanding related to the 2020 Notes.

Credit Agreement

In April 2020, we entered into a credit agreement pursuant to which the lenders would extend to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million.

The base rate is defined as the greatest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50 % or (iii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market for a period of one month (but not less than zero) plus 1.00 %.

Actual margins under either election will be based on our consolidated leverage ratio, which is measured by dividing (a) our consolidated funded indebtedness as of the fiscal quarter end by (b) our consolidated EBITDA as defined in the Credit Agreement for the most recently completed four consecutive fiscal quarters.

As of October 31, 2020, 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 lenders on the issuance of the debt are accounted for as a debt discount, while the remaining fees paid to third parties are accounted for as debt issuance costs.

The debt discount and issuance costs are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the contractual term of the arrangement.

As of October 31, 2020, the Term Loan had a carrying value of $ 739 million, of which $ 38 million is classified as current and $ 701 million is classified as noncurrent on the condensed consolidated balance sheet.

As of October 31, 2020, the interest rate on the Term Loan was 1.38 % and the effective interest rate was 1.92 %.

Revolving Credit Facility

The Revolving Credit Facility may be borrowed, repaid, and reborrowed until April 2, 2025, at which time all amounts borrowed must be repaid.

We may request, no more than two times during the term of the Credit Agreement, that each revolving lender extend the maturity date for the revolving loans for one year.

Additionally, we may request an increase in aggregate revolving commitments by up to $ 250 million at any time prior to April 2, 2025.

The Revolving Credit Facility may be prepaid or permanently reduced by Workday without penalty or premium.

We are required to pay each revolving lender a commitment fee on a quarterly basis based on amounts committed but unused under the Revolving Credit Facility that ranges from 0.090 % to 0.225 % per annum, depending on our consolidated leverage ratio.

The commitment fee is expensed as incurred and included within Other income (expense), net on the condensed consolidated statement of operations.

We incurred fees of approximately $ 2 million in connection with entering into the agreement for the Revolving Credit Facility.

The fees are recorded in Other assets on the condensed consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement.

As of October 31, 2020, there were no outstanding borrowings under the Revolving Credit Facility.

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

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 April 30, 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 (in thousands):

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Contractual interest expense $ 3,148 $ 2,631

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

As of October 31, 2020, and January 31, 2020, operating lease right-of-use assets were $ 416 million and $ 291 million, respectively, and operating lease liabilities were $ 437 million and $ 308 million, respectively.

As of April 30, 2021, and January 31, 2021, operating lease right-of-use assets were $ 281 million and $ 414 million, respectively, and operating lease liabilities were $ 295 million and $ 443 million, respectively.

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

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

As of April 30, 2021, and January 31, 2021, finance leases were not material.

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Operating lease cost $ 24,273 $ 20,899

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Cash paid for operating lease liabilities $ 26,622 $ 21,012

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 21,501 38,287

113,219 10,633 183,722 337,654

(1) Prior year activity includes $ 279 million for operating leases existing on February 1, 2019, and $ 59 million for operating leases that commenced during the nine months ended October 31, 2019.

Other information related to our operating leases was as follows:

October 31, 2020 January 31, 2020

April 30, 2021 January 31, 2021

Weighted average remaining lease term (in years) 5 6

Weighted average discount rate 2.42 % 1.73 %

As of October 31, 2020, maturities of operating lease liabilities are as follows (in thousands):

As of April 30, 2021, maturities of operating lease liabilities were as follows (in thousands):

Fiscal Period:

4 unchanged sentences

Total $ 294,674

As of October 31, 2020, we have additional operating leases, primarily for office space and data centers, that have not yet commenced with total undiscounted lease payments of $ 10 million.

These operating leases will commence in the remaining months of fiscal 2021, with lease terms ranging from one to five years .

Related-Party Lease Transactions

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

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

During the three months ended October 31, 2020, we entered into an agreement with this affiliated party for a fee of $ 1.5 million, which gives us the option to purchase these leased facilities at a price based on third-party appraisals and negotiation between Workday and the affiliated party.

In the event we do not exercise the purchase option, which expires on March 1, 2021, the existing lease agreements will be automatically renewed for four years beyond the current lease end dates at rates determined based on independent third-party evaluations.

As of October 31, 2020, we are not reasonably certain that the option to purchase the leased facilities will be exercised.

We accounted for this arrangement, which was approved by our Board of Directors, as a lease modification during the three months ended October 31, 2020.

The operating lease right-of-use assets and operating lease liabilities related to these agreements were $ 139 million and $ 150 million, respectively, as of October 31, 2020, and $ 57 million and $ 70 million, respectively, as of January 31, 2020.

The weighted average remaining lease term of these agreements is 8 years.

The total rent expense under these agreements was $ 4 million and $ 3 million for the three months ended October 31, 2020, and 2019, respectively, and $ 12 million and $ 9 million for the nine months ended October 31, 2020, and 2019, respectively.

As of April 30, 2021, we have an additional operating lease for office space that has not yet commenced with total undiscounted lease payments of $ 3 million.

This operating lease will commence in fiscal 2022 and has a lease term of seven years .

Related-Party Transactions

As discussed in Note 6, Property and Equipment, Net, during fiscal 2021, we entered into an agreement with an affiliated party which gave us the option to purchase certain leased properties within our corporate headquarters.

We exercised the Leased Property Purchase Option in the first quarter of fiscal 2022 at a purchase price of $ 173 million in cash, reduced by a $ 2 million fee paid for the Leased Property Purchase Option in the prior fiscal year.

As of April 30, 2021, we no longer lease any office space from this affiliated party, and the Property is included in Property and equipment, net on the condensed consolidated balance sheet.

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

The total rent expense under these agreements was $ 2 million and $ 4 million for the three months ended April 30, 2021, and 2020, respectively.

Commitments and Contingencies

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

As of October 31, 2020, future noncancelable minimum payments under these agreements were approximately $ 445 million.

As of April 30, 2021, future noncancelable minimum payments under these agreements were approximately $ 401 million.

Legal Matters

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These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter.

In our opinion, as of October 31, 2020, there was not at least a reasonable possibility that we had incurred a material loss, or a material loss in excess of a recorded accrual, with respect to such loss contingencies.

In our opinion, as of April 30, 2021, there was not at least a reasonable possibility that we had incurred a material loss, or a material loss in excess of a recorded accrual, with respect to such loss contingencies.

Stockholders’ Equity

As of October 31, 2020, there were 179 million shares of Class A common stock, net of treasury stock, and 60 million shares of Class B common stock outstanding.

As of April 30, 2021, there were 188 million shares of Class A common stock, net of treasury stock, and 58 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”).

As of October 31, 2020, we had 63 million shares of Class A common stock available for future grants.

As of April 30, 2021, we had 59 million shares of Class A common stock available for future grants.

We also have a 2012 Employee Stock Purchase Plan (“ESPP”).

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Options to purchase shares are granted twice yearly on or about June 1 and December 1, and are exercisable on or about the succeeding November 30 and May 31, respectively, of each year.

As of October 31, 2020, 5 million shares of Class A common stock were available for issuance under the ESPP.

As of April 30, 2021, 4 million shares of Class A common stock were available for issuance under the ESPP.

Restricted Stock Units

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RSUs generally vest over four years .

A summary of information related to RSU activity during the nine months ended October 31, 2020, is as follows:

A summary of information related to RSU activity during the three months ended April 30, 2021, is as follows (in thousands, except per share data):

Number of Shares Weighted-Average Grant Date Fair Value

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RSUs forfeited ( 292 ) 164.50

Balance as of October 31, 2020 14,418,239 152.48

As of October 31, 2020, there was a total of $ 2.0 billion in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately three years .

Balance as of April 30, 2021 14,606 189.48

As of April 30, 2021, there was a total of $ 2.3 billion in unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately three years .

Performance-Based Restricted Stock Units

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These performance conditions were met and the PRSUs vested on March 15, 2021.

During the nine months ended October 31, 2020, we recognized $ 19 million in compensation cost related to these PRSUs.

Additionally, during fiscal 2021, 0.6 million shares of PRSUs were granted to all employees other than executive management that included both service conditions and performance conditions related to company-wide goals.

We expect to grant additional shares related to this program for employees hired in fiscal 2021.

These PRSU awards will vest if the performance conditions are achieved for the fiscal year ended January 31, 2021, and if the individual employee continues to provide service through the vesting date of March 15, 2021.

During each of the three and nine months ended October 31, 2020, we recognized $ 36 million and $ 55 million in compensation cost related to these PRSUs.

A total of $ 54 million in unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately four months .

During the three months ended April 30, 2021, we recognized $ 17 million in compensation cost related to these PRSUs.

Stock Options

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Stock options issued under the Stock Plans generally are exercisable for periods not to exceed ten years and generally vest over five years .

A summary of information related to stock option activity during the nine months ended October 31, 2020, is as follows (in millions, except share and per share data):

A summary of information related to stock option activity during the three months ended April 30, 2021, is as follows (in millions, except number of shares which are reflected in thousands and per share data):

Outstanding Stock Options Weighted-Average Exercise Price Aggregate Intrinsic Value

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Stock options canceled ( 6 ) 32.80

Balance as of October 31, 2020 1,684,415 12.57 333

Vested and expected to vest as of October 31, 2020 1,679,303 12.50 332

Exercisable as of October 31, 2020 1,521,062 10.33 304

As of October 31, 2020, there was a total of $ 13 million in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately one year .

Balance as of April 30, 2021 1,006 14.21 234

Vested and expected to vest as of April 30, 2021 1,004 14.16 234

Exercisable as of April 30, 2021 929 12.46 218

As of April 30, 2021, there was a total of $ 5 million in unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately one year .

Unearned Revenue and Performance Obligations

Subscription services revenue of $ 846 million and $ 722 million was recognized during the three months ended October 31, 2020, and 2019, respectively, that was included in the unearned revenue balances as of July 31, 2020, and 2019, respectively.

Subscription services revenue of $ 1.90 billion and $ 1.60 billion was recognized during the nine months ended October 31, 2020, and 2019, respectively, that was included in the unearned revenue balances as of January 31, 2020, and 2019, respectively.

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

Subscription services revenues of $ 930 million and $ 809 million were recognized during the three months ended April 30, 2021, and 2020, respectively, that were included in the unearned revenue balances as of January 31, 2021, and 2020, respectively.

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

Transaction Price Allocated to the Remaining Performance Obligations

As of October 31, 2020, approximately $ 8.87 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

We expect to recognize revenue on approximately $ 5.94 billion of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.

Revenue from remaining performance obligations for professional services contracts as of October 31, 2020, was not material.

As of April 30, 2021, approximately $ 10.08 billion of revenues are expected to be recognized from remaining performance obligations for subscription contracts.

We expect to recognize revenues on approximately $ 6.59 billion of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.

Revenues from remaining performance obligations for professional services contracts as of April 30, 2021, was not material.

Other Income (Expense), Net

Other income (expense), net consisted of the following (in thousands):

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Interest income $ 2,003 $ 7,867

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Other income (expense), net $ ( 9,051 ) $ ( 10,973 )

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

(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.

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 10, Debt.

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

For further information, see Note 3, Investments.

We compute the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax income or loss and adjust for discrete tax items in the period.

We reported an income tax expense of $ 4 million and an income tax benefit of $ 1 million for each of the nine-month periods ended October 31, 2020, and 2019, respectively.

The income tax expense for the nine months ended October 31, 2020, was primarily attributable to state taxes and income tax expenses in profitable foreign jurisdictions.

There were no intra-period tax allocations for the gains from comprehensive income due to the adoption of ASU No.

2019-12 on February 1, 2020.

The income tax benefit for the nine months ended October 31, 2019, was primarily attributable to the application of intra-period tax allocation rules for the gains from comprehensive income and the excess tax benefits in certain foreign jurisdictions from share-based compensation, partially offset by state taxes and income tax expenses in profitable foreign jurisdictions.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic.

The CARES Act includes temporary changes to income and non-income based tax laws.

We evaluated the applicable provisions of the CARES Act and determined that there is no material impact to our financial results.

On June 22, 2020, the U.S.

Supreme Court declined to hear the appeal of a ruling by the U.S.

Court of Appeals for the Ninth Circuit regarding the treatment of stock-based compensation expenses in a cost-sharing agreement (Altera Corporation & Subsidiaries v.

Commissioner).

Supreme Court decision resulted in an immaterial reduction in our deferred tax assets relative to the total gross deferred tax assets, which was fully offset by our valuation allowance.

As a result, there was no net impact on our condensed consolidated financial statements.

We reported an income tax benefit of $ 1 million and an income tax expense of $ 3 million for the three months ended April 30, 2021, and 2020, respectively.

The income tax benefit for the three months ended April 30, 2021, was primarily attributable to excess tax benefit from stock option deductions in foreign jurisdictions.

The income tax expense for the three months ended April 30, 2020, was primarily attributable to state taxes and income tax expenses in profitable foreign jurisdictions.

We are subject to income tax audits in the U.S.

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The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets.

As of October 31, 2020, we continue to maintain a full valuation allowance on our deferred tax assets except in certain jurisdictions.

As of April 30, 2021, we continue to maintain a full valuation allowance on our deferred tax assets except in certain jurisdictions.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, net of treasury stock.

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

Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, unvested RSUs, PRSUs, and RSAs, 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.

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The following table presents the calculation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share data):

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

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

Three Months Ended April 30,

Class A Class B Class A Class B

Net loss per share, basic and diluted:

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

As of October 31,

As of April 30,

Outstanding common stock options 1,006 2,634

Unvested RSUs and PRSUs 15,062 13,329

Unvested RSUs, PRSUs, and RSAs 14,703 16,888

Shares related to the convertible senior notes 7,817 10,876

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Total 31,760 41,765

Geographic Information

Disaggregation of Revenue

Disaggregation of Revenues and Geographic Information

Disaggregation of Revenues

We sell our subscription contracts and related services in two primary geographical markets:

to customers located in the United States and to customers located outside of the United States.

Revenue by geography is generally based on the address of the customer as specified in our master subscription agreement.

The following table sets forth revenue by geographic area (in thousands):

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Revenues by geography are generally based on the address of the customer as specified in our master subscription agreement.

The following table sets forth revenues by geographic area (in thousands):

Three Months Ended April 30,

United States $ 883,441 $ 762,340

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Total $ 1,175,033 $ 1,018,385

No single country other than the United States had revenues greater than 10% of total revenues for the three and nine months ended October 31, 2020, and 2019.

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

No single customer or country other than the United States represented greater than 10% of our total revenues for the three months ended April 30, 2021, and 2020.

Long-Lived Assets

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Aggregate Property and equipment, net and Operating lease right-of-use assets by geographic area was as follows (in thousands):

October 31, 2020 January 31, 2020

April 30, 2021 January 31, 2021

United States $ 1,218,542 $ 1,169,820

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This report contains forward-looking statements, which are subject to safe harbor protection under the Private Securities Litigation Reform Act of 1995.

All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements.

All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, business strategy and plans, and objectives for future operations, are forward-looking statements.

The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “seek,” “plan,” and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those arising from the impact of the coronavirus pandemic (“COVID-19 pandemic”), as well as those described in the “Risk Factors” section, which we encourage you to read carefully.

We have based these forward-looking statements largely on our current expectations, beliefs, and projections about future events, conditions, and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs.

These forward-looking statements are subject to a number of risks, uncertainties, assumptions, and changes in circumstances that are difficult to predict and many of which are outside of our control, including those arising from the impact of the coronavirus pandemic, as well as those described in the “Risk Factors” section, which we encourage you to read carefully.

Moreover, we operate in a very competitive and rapidly changing environment.

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It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.

In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events.

The events and circumstances reflected in the forward-looking statements may not be achieved or occur.

In light of these risks, uncertainties, assumptions, and potential changes in circumstances, the future events, conditions, and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.

Accordingly, you should not rely upon any forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements.

We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.

We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations, except as required by applicable law.

If we do update any forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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-Q

Item 1. Financial Statements