Workday Announces Fiscal 2023 Second Quarter Financial Results

Fiscal Second Quarter Total Revenues of  $1.54 Billion , Up 21.9% Year Over Year Subscription Revenues of  $1.37 Billion , Up 22.8% Year Over Year 24-Month Subscription Revenue Backlog of  $8.37 Billion , Up 21.7% Year Over Year Total Subscription Revenue Backlog of  $13.47 Billion , Up 27.4% Year Over Year PLEASANTON, Calif. ,  Aug. 25, 2022  /PRNewswire/ --  Workday, Inc.  (NASDAQ:  WDAY ), a leader in enterprise cloud applications for  finance  and  human resources , today announced results for the fiscal 2023 second quarter ended July 31, 2022.

Fiscal 2023 Second Quarter Results Total revenues were  $1.54 billion , an increase of 21.9% from the second quarter of fiscal 2022. Subscription revenues were  $1.37 billion , an increase of 22.8% from the same period last year.

Operating loss was  $34.1 million , or negative 2.2% of revenues, compared to an operating loss of  $1.1 million , or negative 0.1% of revenues, in the same period last year. Non-GAAP operating income for the second quarter was  $301.6 million , or 19.6% of revenues, compared to a non-GAAP operating income of  $291.8 million , or 23.2% of revenues, in the same period last year. 1

Basic and diluted net loss per share was  $0.25 , compared to basic and diluted net income per share of  $0.43  and  $0.41 , respectively, in the second quarter of fiscal 2022. Non-GAAP basic and diluted net income per share was  $0.86  and  $0.83 , respectively, compared to non-GAAP basic and diluted net income per share of  $1.29  and  $1.23 , respectively, in the same period last year. 2

Operating cash flows were  $114.4 million  compared to  $198.5 million  in the prior year.

Cash, cash equivalents, and marketable securities were  $6.29 billion  as of  July 31, 2022 .

Comments on the News

"We continue to see a strong global demand for our products, underscoring how organizations are continuing to drive digital transformation across finance and HR to support the changing world of work," said  Aneel Bhusri , co-founder, co-CEO, and chairman, Workday. "Thanks to our incredible employees and their ongoing commitment to customer service and innovation, I am confident in our ability to deliver continued value to our global customer community and capitalize on the great opportunity in front of us."

"Our continued momentum is a testament to our strategy, which focuses on delivering significant value to our customers and helping them adapt and grow in today's dynamic environment," said  Chano Fernandez , co-CEO, Workday. "As we look to the future, we will continue to invest in key industries and our global opportunity, as well as grow our footprint with existing customers and our partner ecosystem."

"We delivered strong second-quarter results with healthy growth across the business, as enterprises of all sizes increasingly realize the need for a flexible, modern finance and HR solution to navigate their businesses and drive change during these uncertain times," said  Barbara Larson , chief financial officer, Workday. "Our updated outlook reflects the momentum in our business and the mission-critical nature of our solutions, while also balancing the current macro environment. As a result, we are maintaining our guidance for fiscal 2023 subscription revenue to be in the range of  $5.537 billion  to  $5.557 billion , representing 22% year-over-year growth. We expect third quarter subscription revenue of  $1.418 billion  to  $1.420 billion , growth of 21%. We are raising our fiscal 2023 non-GAAP operating margin guidance to 19.0%, reflecting the scalability of our model and our commitment to longer-term margin expansion."

Recent Highlights

Workday  achieved  FedRAMP Authorized status at the Moderate security impact level, marking the company's official entry into the U.S. federal government market.

Workday was  positioned  by Gartner® in the Leaders quadrant of the inaugural 2022 Gartner® Magic Quadrant™ for Cloud ERP for Service-Centric Enterprises based on completeness of vision and ability to execute. 3

Workday  announced  that  Wayne A.I. Frederick , M.D., president of  Howard University , has been elected to its board of directors as an independent director.

Workday was included in  JUST Capital's 2022 Workforce Equity and Mobility Ranking , which highlights companies that perform best on key disclosure and performance metrics that address racial equity and advance workforce opportunity and mobility.

Earnings Call Details

Workday plans to host a conference call today to review its fiscal 2023 second quarter financial results and to discuss its financial outlook. The call is scheduled to begin at  1:30 p.m. PT / 4:30 p.m. ET  and can be accessed via  webcast . The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 90 days.

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

1   Non-GAAP operating income and non-GAAP operating margin exclude share-based compensation expenses, employer payroll tax-related items on employee stock transactions, and amortization expense for acquisition-related intangible assets. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

2   Non-GAAP net income per share excludes share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization expense for acquisition-related intangible assets, and income tax effects. See the section titled "About Non-GAAP Financial Measures" in the accompanying financial tables for further details.

3   Gartner "Magic Quadrant for Cloud ERP for Service-Centric Enterprises," by  John Van Decker ,  Denis Torii ,  Tim Faith ,  Sam Grinter ,  Patrick Connaughton ,  July 12, 2022 .

Required Disclaimer

Gartner does not endorse any vendor, product or service depicted in its research publications and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose. GARTNER and Magic Quadrant are registered trademarks and service marks of Gartner, Inc. and/or its affiliates in the U.S. and internationally and is used herein with permission. All rights reserved.

About Workday

Workday  is a leading provider of enterprise cloud applications for  finance  and  human resources , helping customers adapt and thrive in a changing world. Workday applications for financial management, human resources, planning, spend management, and analytics have been adopted by thousands of organizations around the world and across industries – from medium-sized businesses to more than 50% of the  Fortune  500. For more information about Workday, visit  workday.com .

© 2022 Workday, Inc. All rights reserved. Workday and the Workday logo are registered trademarks of Workday, Inc. All other brand and product names are trademarks or registered trademarks of their respective holders.

Use of Non-GAAP Financial Measures

Reconciliations of non-GAAP financial measures to Workday's financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled "About Non-GAAP Financial Measures." A reconciliation of our forward outlook for non-GAAP operating margin with our forward-looking GAAP operating margin is not available without unreasonable efforts as the quantification of share-based compensation expense, which is excluded from our non-GAAP operating margin, requires additional inputs such as the number of shares granted and market prices that are not ascertainable.

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding Workday's full-year fiscal 2023 subscription revenues and non-GAAP operating margin, third quarter subscription revenue, growth, innovation, opportunities, demand, momentum, pipeline, and investments. These forward-looking statements are based only on currently available information and our current beliefs, expectations, and assumptions. Because forward-looking statements relate to the future, they are subject to risks, uncertainties, assumptions, and changes in circumstances that are difficult to predict and many of which are outside of our control. If the risks materialize, assumptions prove incorrect, or we experience unexpected changes in circumstances, actual results could differ materially from the results implied by these forward-looking statements, and therefore you should not rely on any forward-looking statements. Risks include, but are not limited to: (i) our ability to implement our plans, objectives, and other expectations with respect to any of our acquired companies; (ii) the impact of recent macroeconomic events on our business, as well as our customers, prospects, partners, and service providers; (iii) breaches in our security measures or those of our third-party providers, unauthorized access to our customers' or other users' personal data, or disruptions in our data center or computing infrastructure operations; (iv) service outages, delays in the deployment of our applications, and the failure of our applications to perform properly; (v) our ability to manage our growth effectively; (vi) competitive factors, including pricing pressures, industry consolidation, entry of new competitors and new applications, advancements in technology, and marketing initiatives by our competitors; (vii) the development of the market for enterprise cloud applications and services; (viii) acceptance of our applications and services by customers and individuals, including any new features, enhancements, and modifications, as well as the acceptance of any underlying technology such as machine learning and artificial intelligence; (ix) adverse changes in general economic or market conditions; (x) the regulatory, economic, and political risks associated with our domestic and international operations; (xi) the regulatory risks related to new and evolving technologies such as machine learning and artificial intelligence; (xii) delays or reductions in information technology spending; and (xiii) changes in sales, which may not be immediately reflected in our results due to our subscription model. Further information on these and additional risks that could affect Workday's results is included in our filings with the Securities and Exchange Commission ("SEC"), including our Form 10-Q for the fiscal quarter ended July 31, 2022, and our future reports that we may file with the SEC from time to time, which could cause actual results to vary from expectations. Workday assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

Any unreleased services, features, or functions referenced in this document, our website, or other press releases or public statements that are not currently available are subject to change at Workday's discretion and may not be delivered as planned or at all. Customers who purchase Workday services should make their purchase decisions based upon services, features, and functions that are currently available.

Workday, Inc. Condensed Consolidated Balance Sheets (in thousands) (unaudited)

July 31, 2022 January 31, 2022

Assets

Current assets:

Cash and cash equivalents $      2,486,540 $      1,534,273

Marketable securities

3,806,427 2,109,888 Trade and other receivables, net 1,105,288 1,242,545

Deferred costs

165,012 152,957 Prepaid expenses and other current assets 241,390 174,402 Total current assets 7,804,657 5,214,065 Property and equipment, net 1,233,151 1,123,075 Operating lease right-of-use assets 286,284 247,808 Deferred costs, noncurrent 353,990 341,259 Acquisition-related intangible assets, net 347,875 391,002

Goodwill

2,840,044 2,840,044

Other assets

383,549 341,252

Total assets

$    13,249,550 $    10,498,505 Liabilities and stockholders' equity Current liabilities:

Accounts payable

$           60,710 $           55,487 Accrued expenses and other current liabilities 293,646 195,590

Accrued compensation

374,246 402,885

Unearned revenue

2,888,792 3,110,947 Operating lease liabilities 91,481 80,503 Debt, current 1,148,982 1,222,443 Total current liabilities 4,857,857 5,067,855 Debt, noncurrent 2,974,023 617,354 Unearned revenue, noncurrent 53,938 71,533 Operating lease liabilities, noncurrent 213,537 182,456

Other liabilities

22,387 24,225

Total liabilities

8,121,742 5,963,423 Stockholders' equity:

Common stock

255 251 Additional paid-in capital 7,988,096 7,284,174

Treasury stock

(12,588)

(12,467)

Accumulated other comprehensive income (loss)

62,961 7,709

Accumulated deficit

(2,910,916)

(2,744,585)

Total stockholders' equity 5,127,808 4,535,082 Total liabilities and stockholders' equity $    13,249,550 $    10,498,505 Workday, Inc. Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited)

Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Revenues:

Subscription services

$      1,367,335 $      1,113,454 $      2,639,411 $      2,145,623

Professional services

168,463 146,907 331,044 289,771

Total revenues

1,535,798 1,260,361 2,970,455 2,435,394 Costs and expenses  (1) :

Costs of subscription services 244,982 192,738 477,904 374,946 Costs of professional services 178,103 152,783 348,002 303,628

Product development

547,835 444,251 1,089,344 885,867 Sales and marketing 458,701 358,157 888,002 684,651 General and administrative 140,255 113,552 274,124 225,735 Total costs and expenses 1,569,876 1,261,481 3,077,376 2,474,827 Operating income (loss)

(34,078)

(1,120)

(106,921)

(39,433)

Other income (expense), net (32,789)

102,985 (52,952)

93,934 Income (loss) before provision for (benefit from) income taxes (66,867)

101,865 (159,873)

54,501 Provision for (benefit from) income taxes (2,709)

(3,871)

6,458 (4,713)

Net income (loss)

$          (64,158)

$         105,736 $       (166,331)

$           59,214 Net income (loss) per share, basic $              (0.25)

$               0.43 $             (0.66)

$               0.24 Net income (loss) per share, diluted $              (0.25)

$               0.41 $             (0.66)

$               0.23 Weighted-average shares used to compute net income (loss) per share, basic 254,355 246,943 253,071 245,308 Weighted-average shares used to compute net income (loss) per share, diluted 254,355 260,016 253,071 252,900 (1) Costs and expenses include share-based compensation expenses as follows:

Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Costs of subscription services $           25,090 $           20,421 $           51,320 $           41,138 Costs of professional services 25,838 26,534 53,422 54,226

Product development

147,181 129,892 300,485 259,754 Sales and marketing 59,878 52,168 119,047 102,476 General and administrative 50,020 35,704 95,239 71,760 Total share-based compensation expenses $         308,007 $         264,719 $         619,513 $         529,354 Workday, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)

Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Cash flows from operating activities:

Net income (loss)

$            (64,158)

$           105,736 $          (166,331)

$             59,214 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization 92,695 85,383 182,541 167,846 Share-based compensation expenses 308,007 264,719 619,513 529,354 Amortization of deferred costs 42,258 33,748 81,685 65,362 Non-cash lease expense 22,911 21,069 44,959 43,299 (Gains) losses on investments 16,499 (106,275)

24,579 (100,257)

Other

11,413 (7,009)

12,122 (8,633)

Changes in operating assets and liabilities, net of business combinations:

Trade and other receivables, net (324,841)

(227,511)

138,123 164,608

Deferred costs

(64,742)

(52,834)

(106,471)

(79,104)

Prepaid expenses and other assets (9,885)

(3,531)

(33,882)

(39,097)

Accounts payable

(4,142)

8,060 2,768 7,890 Accrued expenses and other liabilities 25,065 (15,687)

(5,808)

(26,607)

Unearned revenue

63,278 92,605 (239,723)

(132,974)

Net cash provided by (used in) operating activities 114,358 198,473 554,075 650,901 Cash flows from investing activities:

Purchases of marketable securities (1,329,471)

(829,370)

(3,340,090)

(1,594,765)

Maturities of marketable securities 984,887 771,824 1,586,362 1,629,232 Sales of marketable securities 28,237 14,829 33,367 27,286 Owned real estate projects (245)

(71)

(265)

(171,494)

Capital expenditures, excluding owned real estate projects (168,598)

(87,781)

(227,348)

(157,577)

Business combinations, net of cash acquired — — — (679,220)

Purchases of non-marketable equity and other investments (1,900)

(12,039)

(16,923)

(57,806)

Sales and maturities of non-marketable equity and other investments 95 3,270 7,161 3,295

Other

— 6 — 1 Net cash provided by (used in) investing activities (486,995)

(139,332)

(1,957,736)

(1,001,048)

Cash flows from financing activities:

Proceeds from issuance of debt, net of debt discount — — 2,978,077 — Repayments and extinguishment of debt (30)

(9,395)

(693,983)

(18,821)

Payments for debt issuance costs — — (7,220)

— Proceeds from issuance of common stock from employee equity plans, net of taxes paid for shares withheld 83,302 75,844 84,292 74,487

Other

(185)

(151)

(377)

(376)

Net cash provided by (used in) financing activities 83,087 66,298 2,360,789 55,290 Effect of exchange rate changes (145)

(321)

(830)

(135)

Net increase (decrease) in cash, cash equivalents, and restricted cash (289,695)

125,118 956,298 (294,992)

Cash, cash equivalents, and restricted cash at the beginning of period 2,786,738 967,811 1,540,745 1,387,921 Cash, cash equivalents, and restricted cash at the end of period $        2,497,043 $        1,092,929 $        2,497,043 $        1,092,929 Workday, Inc. Reconciliation of GAAP to Non-GAAP Data Three Months Ended July 31, 2022 (in thousands, except percentages and per share data) (unaudited)

GAAP

Share-Based Compensation Expenses Other Operating Expenses  (2)

Income Tax and Dilution Effects  (3)

Non-GAAP

Costs and expenses:

Costs of subscription services $  244,982 $     (25,090)

$    (14,596)

$            — $   205,296 Costs of professional services 178,103 (25,838)

(775)

— 151,490

Product development

547,835 (147,181)

(2,236)

— 398,418 Sales and marketing 458,701 (59,878)

(9,388)

— 389,435 General and administrative 140,255 (50,020)

(628)

— 89,607 Operating income (loss)

(34,078)

308,007 27,623 — 301,552

Operating margin

(2.2) % 20.1 % 1.7 % — % 19.6 % Other income (expense), net (32,789)

— — — (32,789)

Income (loss) before provision for (benefit from) income taxes (66,867)

308,007 27,623 — 268,763 Provision for (benefit from) income taxes (2,709)

— — 53,773 51,064 Net income (loss)

$   (64,158)

$   308,007 $     27,623 $   (53,773)

$   217,699 Net income (loss) per share, basic  (1)

$       (0.25)

$         1.21 $         0.11 $       (0.21)

$         0.86 Net income (loss) per share, diluted  (1)

$       (0.25)

$         1.21 $         0.11 $       (0.24)

$         0.83 (1)

GAAP net loss per share is calculated based upon 254,355 basic and diluted weighted-average shares of common stock. Non-GAAP net income  per share is calculated based upon 254,355 basic and 262,931 diluted weighted-average shares of common stock. The numerator used to  compute non-

GAAP diluted net income per share was increased by $1.3 million for after-tax interest expense on our convertible senior notes in  accordance with

the if-converted method.

(2)

Other operating expenses include amortization of acquisition-related intangible assets of $21.5 million and employer payroll tax-related items  on

employee stock transactions of $6.1 million.

(3)

We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across  the

reporting periods. For fiscal 2023, the non-GAAP tax rate is 19%. Included in the per share amount is a dilution impact of $0.03 from the conversion of GAAP diluted net loss per share to non-GAAP diluted net income per share.

Workday, Inc. Reconciliation of GAAP to Non-GAAP Data Three Months Ended July 31, 2021 (in thousands, except percentages and per share data) (unaudited)

GAAP

Share-Based Compensation Expenses Other Operating Expenses  (2)

Income Tax Effects  (3)

Non-GAAP

Costs and expenses:

Costs of subscription services $  192,738 $     (20,421)

$    (13,132)

$           — $   159,185 Costs of professional services 152,783 (26,534)

(1,215)

— 125,034

Product development

444,251 (129,892)

(3,161)

— 311,198 Sales and marketing 358,157 (52,168)

(9,764)

— 296,225 General and administrative 113,552 (35,704)

(933)

— 76,915 Operating income (loss)

(1,120)

264,719 28,205 — 291,804

Operating margin

(0.1) % 21.0 % 2.3 % — % 23.2 % Other income (expense), net 102,985 — — — 102,985 Income (loss) before provision for (benefit from) income taxes 101,865 264,719 28,205 — 394,789 Provision for (benefit from) income taxes (3,871)

— — 78,881 75,010 Net income (loss)

$  105,736 $   264,719 $     28,205 $   (78,881)

$   319,779 Net income (loss) per share, basic  (1)

$        0.43 $         1.07 $         0.11 $       (0.32)

$         1.29 Net income (loss) per share, diluted  (1)

$        0.41 $         1.02 $         0.11 $       (0.31)

$         1.23 (1)

GAAP and non-GAAP net income per share are both calculated based upon 246,943 basic and 260,016 diluted weighted-average shares of  common stock. The numerator used to compute GAAP and non-GAAP diluted net income per share was increased by $1.6 million and $1.3  million, respectively, for after-tax interest expense on our convertible senior notes in accordance with the if-converted method.

(2)

Other operating expenses include amortization of acquisition-related intangible assets of $19.8 million and employer payroll tax-related items on

employee stock transactions of $8.4 million.

(3)

We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the

reporting periods. For fiscal 2022, the non-GAAP tax rate was 19%.

Workday, Inc. Reconciliation of GAAP to Non-GAAP Data Six Months Ended July 31, 2022 (in thousands, except percentages and per share data) (unaudited)

GAAP

Share-Based Compensation Expenses Other Operating Expenses  (2)

Income Tax and Dilution Effects  (3)

Non-GAAP

Costs and expenses:

Costs of subscription services $   477,904 $     (51,320)

$   (30,922)

$            — $   395,662 Costs of professional services 348,002 (53,422)

(4,674)

— 289,906

Product development

1,089,344 (300,485)

(15,247)

— 773,612 Sales and marketing 888,002 (119,047)

(23,434)

— 745,521 General and administrative 274,124 (95,239)

(3,241)

— 175,644 Operating income (loss)

(106,921)

619,513 77,518 — 590,110

Operating margin

(3.6) % 20.9 % 2.6 % — % 19.9 % Other income (expense), net (52,952)

— — — (52,952)

Income (loss) before provision for (benefit from) income taxes (159,873)

619,513 77,518 — 537,158 Provision for (benefit from) income taxes 6,458 — — 95,601 102,059 Net income (loss)

$  (166,331)

$   619,513 $     77,518 $   (95,601)

$   435,099 Net income (loss) per share, basic  (1)

$        (0.66)

$         2.45 $         0.31 $       (0.38)

$         1.72 Net income (loss) per share, diluted  (1)

$        (0.66)

$         2.45 $         0.31 $       (0.44)

$         1.66 (1)

GAAP net loss per share is calculated based upon 253,071 basic and diluted weighted-average shares of common stock. Non-GAAP net income  per share is calculated based upon 253,071 basic and 263,224 diluted weighted-average shares of common stock. The numerator used to  compute non-

GAAP diluted net income per share was increased by $2.6 million for after-tax interest expense on our convertible senior notes in  accordance with

the if-converted method.

(2)

Other operating expenses include amortization of acquisition-related intangible assets of $43.1 million and employer payroll tax-related items on

employee stock transactions of $34.4 million.

(3)

We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the

reporting periods. For fiscal 2023, the non-GAAP tax rate is 19%. Included in the per share amount is a dilution impact of $0.06 from the conversion of GAAP diluted net loss per share to non-GAAP diluted net income per share.

Workday, Inc. Reconciliation of GAAP to Non-GAAP Data Six Months Ended July 31, 2021 (in thousands, except percentages and per share data) (unaudited)

GAAP

Share-Based Compensation Expenses Other Operating Expenses  (2)

Income Tax and Dilution Effects  (3)

Non-GAAP

Costs and expenses:

Costs of subscription services $   374,946 $    (41,138)

$    (27,336)

$             — $   306,472 Costs of professional services 303,628 (54,226)

(8,168)

— 241,234

Product development

885,867 (259,754)

(22,703)

— 603,410 Sales and marketing 684,651 (102,476)

(26,870)

— 555,305 General and administrative 225,735 (71,760)

(5,319)

— 148,656 Operating income (loss)

(39,433)

529,354 90,396 — 580,317

Operating margin

(1.6) % 21.7 % 3.7 % — % 23.8 % Other income (expense), net 93,934 — — — 93,934 Income (loss) before provision for (benefit from) income taxes 54,501 529,354 90,396 — 674,251 Provision for (benefit from) income taxes (4,713)

— — 132,821 128,108 Net income (loss)

$     59,214 $   529,354 $      90,396 $  (132,821)

$   546,143 Net income (loss) per share, basic  (1)

$         0.24 $         2.16 $         0.37 $        (0.54)

$         2.23 Net income (loss) per share, diluted  (1)

$         0.23 $         2.09 $         0.36 $        (0.58)

$         2.10 (1)

GAAP net income per share is calculated based upon 245,308 basic and 252,900 diluted weighted-average shares of common stock. Non-GAAP  net income per share is calculated based upon 245,308 basic and 260,718 diluted weighted-average shares of common stock. The numerator  used to compute non-GAAP diluted net income per share was increased by $2.6 million for after-tax interest expense on our convertible senior  notes in

accordance with the if-converted method.

(2)

Other operating expenses include employer payroll tax-related items on employee stock transactions of $52.7 million and amortization of acquisition-related intangible assets of $37.7 million.

(3)

We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the

reporting periods. For fiscal 2022, the non-GAAP tax rate was 19%. Included in the per share amount is a dilution impact of $0.05 from the conversion of GAAP diluted net income per share to non-GAAP diluted net income per share.

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Workday's results, we have disclosed the following non-GAAP financial measures: non-GAAP operating income (loss), non-GAAP operating margin, and non-GAAP net income (loss) per share. Workday has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. Non-GAAP operating income (loss) and non-GAAP operating margin differ from GAAP in that they exclude share-based compensation expenses, employer payroll tax-related items on employee stock transactions, and amortization expense for acquisition-related intangible assets. Non-GAAP net income (loss) per share differs from GAAP in that it excludes share-based compensation expenses, employer payroll tax-related items on employee stock transactions, amortization expense for acquisition-related intangible assets, and income tax effects.

Workday's management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate Workday's financial performance. Management believes these non-GAAP financial measures reflect Workday's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in Workday's business. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Workday's operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.

Management believes excluding the following items from the GAAP Condensed Consolidated Statements of Operations is useful to investors and others in assessing Workday's operating performance due to the following factors:

Share-based compensation expenses.  Although share-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude share-based compensation expenses to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. Share-based compensation expenses are determined using a number of factors, including our stock price, volatility, and forfeiture rates, that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients.

Other operating expenses . Other operating expenses includes employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of ongoing operations. Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP measures, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

Income tax effects.  We utilize a fixed long-term projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across the reporting periods. In projecting this long-term non-GAAP tax rate, we utilize a three-year financial projection that excludes the direct impact of share-based compensation and related employer payroll taxes, amortization of acquisition-related intangible assets, and amortization of debt discount and issuance costs. The projected rate considers other factors such as our current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where we operate. For fiscal 2023 and 2022, we determined the projected non-GAAP tax rate to be 19%, which reflects currently available information, as well as other factors and assumptions. We will periodically re-evaluate this tax rate, as necessary, for significant events, based on our ongoing analysis of the 2017 U.S. Tax Cuts and Jobs Act, relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.

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

SOURCE Workday Inc. - Workday Announces Fiscal 2023 Second Quarter Financial Results (prnewswire.com)