You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors."

Overview

Workday provides enterprise cloud-based applications for human capital management (HCM), payroll, financial management, time tracking, procurement and employee expense management. We offer innovative and adaptable technology focused on the consumer Internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources.

We were founded in 2005 to deliver cloud-based applications to global enterprises. Our applications are designed around the way people work today - in an environment that is global, collaborative, fast-paced and mobile. Our cycle of frequent updates, which we currently provide three times per year, has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our Human Capital Management (HCM) application in 2006. Since then we have continued to invest in innovation and have consistently introduced new services to our customers, including our Financial Management application in 2007, our Procurement and Employee Expense Management applications in 2008, our Workday Payroll and mobile applications in 2009, our Talent Management application in 2010, and our native iPad application and Workday integration platform in 2011.

We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with three year terms and with subscription fees based on the size of the customer's workforce. We generally recognize revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription revenues from subscriptions to our Workday HCM application. We market our applications to enterprise customers primarily through our direct sales force.

We have achieved significant growth in a relatively short period of time. Our diverse customer base includes large, global companies and our direct sales force targets organizations with more than 1,000 workers. As of October 31, 2012, we had more than 350 customers and our applications were available in more than 20 different languages. A substantial majority of our growth comes from new customers choosing to use our services and entering into contracts with us. Our current financial focus is on growing our revenues and expanding our customer base. While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to our significant growth in employees. We had 1,620 and 941 employees as of October 31, 2012, and October 31, 2011, respectively.

We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our application development efforts to deliver additional compelling applications and to address customers' evolving needs. In addition, we plan to continue to expand our sales and marketing organizations to sell our applications globally. We expect to continue to make significant upfront investments in our data center infrastructure and personnel to service our growth in customers. The level of these upfront infrastructure investments will vary based on the rate at which new customers are added and the scale of such deployments. These investments will increase our costs on an absolute basis in the near-term. Many of these investments will occur in advance of experiencing any direct benefit from them and will make it difficult to determine if we are allocating our resources efficiently. As a result of these investments, we do not expect to be profitable in the near future. We expect our research and development, sales and marketing, and general and administrative expenses as a percentage of revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs and by utilizing more of the capacity of our data centers. As a result of this increased operating leverage, we expect our gross and operating margins will improve in the future.

Since inception, we have invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. More recently, we have expanded our professional services partner ecosystem to further support our customers. We believe our investment in professional services, including partners building their practices around Workday, will drive additional customer subscriptions and continued growth in revenues. In addition, over time we expect professional services revenues and the cost of professional services as a percentage of total revenues to decline as we increasingly rely on third parties to deploy our applications and as the number of our existing customers continues to grow.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). GAAP requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical towards fully understanding and evaluating our reported financial results include our polices on revenue recognition, deferred costs, and share-based compensation. We have reviewed these critical accounting policies and related disclosures with the audit committee of our board of directors.

During the three months ended October 31, 2012, there were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933 with the SEC on October 15, 2012 provides a more complete discussion of our critical accounting policies and estimates.

Components of Results of Operations

Revenues

We primarily derive our revenues from subscription fees and professional services fees. Subscription revenues primarily consist of fees that give our customers access to our cloud-based applications, which include routine customer support at no additional cost. Professional service fees include deployment services, optimization services, and training.

Subscription revenues accounted for 71% of our revenues during the quarter ended October 31, 2012 and represented approximately 90% of our total unearned revenue as of October 31, 2012. Subscription revenues are driven primarily by the number of customers, the number of workers at each customer, the number of applications subscribed to by each customer, the price of our applications, and to a lesser extent, renewal rates. To date, only a small percentage of our subscription agreements have come up for renewal and most of those agreements relate to early customers with a relatively small number of users. Therefore, revenues from renewals have not been a substantial component of revenues.

The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Compared to our other offerings, our HCM application has been available for a longer period of time, is more established in the marketplace and has benefited from continued enhancements of the functionality over a longer period of time, all of which help us to improve our pricing for that application. However, new products or services offerings by competitors in the future could impact the mix and pricing of our offerings.

Subscription fees are recognized ratably as revenues over the contract term beginning on the date the application is made available to the customer, which is generally within one week of contract signing. Our subscription contracts typically have a term of three years and are non-cancelable. We generally invoice our customers in advance, in annual installments. Amounts that have been invoiced are initially recorded as unearned revenue and are recognized ratably over the subscription period. Amounts that have not been invoiced represent backlog and are not reflected in our consolidated financial statements.

Our consulting engagements are typically billed on a time and materials basis, and revenues are typically recognized as the services are performed. We offer a number of training options intended to support our customers in configuring, using and administering our services. Our typical professional services and training payment terms provide that our customers pay us within 30 days of invoice. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As Workday's professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription revenues, we expect professional services revenues as a percentage of total revenues to decline over time.

Approximately 7% of our revenues for the quarter ended October 31, 2012 were derived from multiple-deliverable arrangements that were accounted for as a single unit of accounting, because some of our professional services offerings did not have standalone value when the related contracts were executed. In these situations, all revenue is recognized ratably over the term of the contracts. Additionally, in these situations, we defer the direct costs of the related professional services contract and those direct costs are amortized over the same period as the professional services revenues are recognized. As of October 31, 2012, 11% of our total unearned revenue balance represented multiple-deliverable arrangements accounted for as a single unit of accounting. For contracts executed during the current fiscal year, there was standalone value for all deliverables.

Costs and Expenses

Costs of Revenues. Costs of subscription revenues primarily consist of employee-related expenses (including salaries, benefits and share-based compensation) related to hosting our applications and providing support, the costs of data center capacity, and depreciation of owned and leased computer equipment and software.

Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. We are intensely focused on our customers' success and have invested in our professional services ecosystem in order to promote seamless deployments and robust customer adoption. The percentage of revenues derived from professional services was 29% in the quarter ended October 31, 2012. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscriptions.

Research and Development. Research and development expenses consist primarily of employee-related expenses. We continue to focus our research and development efforts on adding new features and applications, increasing the functionality and enhancing the ease of use of our cloud-based applications.

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs and travel related expenses. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities. Commissions earned by our sales force that can be associated specifically with a noncancelable subscription contract are deferred and amortized over the same period that revenues are recognized for the related noncancelable contract.

General and Administrative. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees and other corporate expenses.

Results of Operations

The following tables set forth selected consolidated statement of operations
data and such data as a percentage of total revenues for each of the periods
indicated:



                                                  Three Months Ended                        Nine Months Ended
                                           October 31,          October 31,          October 31,          October 31,
                                              2012                 2011                 2012                 2011
                                                                         (in thousands)
Revenues:
Subscription services                     $      51,576        $      23,868        $     130,698        $      59,603
Professional services                            21,042               12,582               61,440               31,666

Total revenues                                   72,618               36,450              192,138               91,269
Costs and expenses:
Costs of revenues:
Costs of subscription services                   10,179                6,040               26,767               15,631
Costs of professional services                   20,015               11,639               56,782               29,407

Total costs of revenues                          30,194               17,679               83,549               45,038
Research and development                         28,075               16,404               72,413               43,727
Sales and marketing                              32,584               18,215               87,051               47,774
General and administrative                       22,633                3,594               36,310               10,083

Total costs and expenses                        113,486               55,892              279,323              146,622

Operating loss                                  (40,868 )            (19,442 )            (87,185 )            (55,353 )
Other income (expense), net                        (364 )               (243 )             (1,036 )               (574 )

Loss before provision for income taxes          (41,232 )            (19,685 )            (88,221 )            (55,927 )
Provision for income taxes                           78                   46                   25                  116

Net loss                                  $     (41,310 )      $     (19,731 )      $     (88,246 )      $     (56,043 )


                                                  Three Months Ended                        Nine Months Ended
                                           October 31,          October 31,          October 31,          October 31,
                                              2012                 2011                 2012                 2011
Revenues:
Subscription services                              71.0 %               65.5 %               68.0 %               65.3 %
Professional services                              29.0                 34.5                 32.0                 34.7

Total revenues                                    100.0                100.0                100.0                100.0
Costs and expenses:
Costs of revenues:
Costs of subscription services                     14.0                 16.5                 13.9                 17.1
Costs of professional services                     27.6                 31.9                 29.6                 32.2

Total costs of revenues                            41.6                 48.4                 43.5                 49.3
Research and development                           38.7                 45.0                 37.7                 47.9
Sales and marketing                                44.9                 50.0                 45.3                 52.3
General and administrative                         31.2                  9.9                 18.9                 11.0

Total costs and expenses                          156.3                153.3                145.4                160.6

Operating loss                                    (56.3 )              (53.3 )              (45.4 )              (60.6 )
Other income (expense), net                        (0.5 )               (0.7 )               (0.5 )               (0.7 )

Loss before provision for income taxes            (56.8 )              (54.0 )              (45.9 )              (61.3 )
Provision for income taxes                          0.1                 0 .1                   -                  0 .1

Net loss                                          (56.9 %)             (54.1 %)             (45.9 %)             (61.4 %)

Revenues



                                        Three Months Ended                         Nine Months Ended
                                            October 31,                               October 31,
                                         2012          2011       % Change         2012          2011       % Change
                                                            (in thousands, except percentages)
Revenues:
Subscription services                 $   51,576     $ 23,868           116 %    $ 130,698     $ 59,603           119 %
Professional services                     21,042       12,582            67         61,440       31,666            94

Total revenues                        $   72,618     $ 36,450            99      $ 192,138     $ 91,269           111

Total revenues were $72.6 million for the three months ended October 31, 2012, compared to $36.4 million during the prior year period, an increase of $36.2 million, or 99%. Subscription services revenues were $51.6 million for the three months ended October 31, 2012, compared to $23.9 million for the prior year period. Subscription revenues accounted for 71% of total revenue for the three months ended October 31, 2012, compared to 65% of total revenues for the three months ended October 31, 2011, an increase of $27.7 million, or 116%. The increase in subscription revenues was due primarily to the addition of new customers as compared to the prior year period. Professional services revenues were $21.0 million, or 29% of total revenues, for the three months ended October 31, 2012, compared to $12.6 million, or 35% of total revenues, for the prior year period. The increase in professional services revenues was due primarily to a greater number of customers requesting deployment and integration services.

Total revenues were $192.1 million for the nine months ended October 31, 2012, compared to $91.3 million during the prior year period, an increase of $100.8 million, or 111%. Subscription services revenues were $130.7 million, or 68% of total revenues, for the nine months ended October 31, 2012, compared to $59.6 million, or 65% of total revenues, for the prior year period. The increase in subscription revenues was due primarily to the addition of new customers as compared to the prior year period. Professional services revenues were $61.4 million, or 32% of total revenues, for the nine months ended October 31, 2012, compared to $31.7 million, or 35% of total revenues, for the prior year period. The increase in professional services revenues was due primarily to a greater number of customers requesting deployment and integration services. In addition, in the current year-to-date period, we recognized $2.6 million in subscription revenues and $2.0 million in professional services revenues related to the expiration of a delivery obligation for a 2009 customer arrangement.

Costs and Expenses



                                         Three Months Ended                          Nine Months Ended
                                             October 31,                                October 31,
                                          2012          2011        % Change         2012          2011        % Change
                                                              (in thousands, except percentages)
Costs of revenues:
Subscription services                  $   10,179     $  6,040             69 %    $  26,767     $ 15,631             71 %
Professional services                      20,015       11,639             72         56,782       29,407             93

Total revenues                         $   30,194     $ 17,679             71      $  83,549     $ 45,038             86

Costs of revenues were $30.2 million for the three months ended October 31, 2012, compared to $17.7 million for the prior year period, an increase of $12.5 million or 71%. The $4.1 million increase in costs of subscription services was primarily due to an increase of $1.6 million in employee compensation costs related to higher headcount, an increase of $1.2 million in depreciation and amortization expenses, and an increase of $0.8 million in service delivery costs, primarily due to our efforts to increase data center capacity.

The costs of professional services were $20.0 million for the three months ended October 31, 2012 and $11.6 million for the three months ended October 31, 2011, an $8.4 million increase. This increase was primarily due to additional costs of $7.3 million to staff our deployment and integration engagements. Due to the increase in demand for our professional services, we have increased the usage of third party consultants to supplement our professional services staff. We expect costs of professional services as a percentage of total revenues to decline as we increasingly rely on third parties to deploy our applications and as the number of our existing customers continues to grow.

Costs of revenues were $83.5 million for the nine months ended October 31, 2012, compared to $45.0 million for the prior year period, an increase of $38.5 million or 86%. The $11.1 million increase in costs of subscription services was primarily due to an increase of $4.0 million in employee compensation costs related to higher headcount and an increase of $3.2 million in depreciation and amortization expenses for additional data center equipment. In addition, we had an increase of $1.9 million in service delivery costs and $1.0 million in facilities costs due to our efforts to increase data center capacity.

The costs of professional services were $56.8 million for the nine months ended October 31, 2012 and $29.4 million for the nine months ended October 31, 2011, a $27.4 million increase. This increase was primarily due to additional costs of $24.4 million to staff our deployment and integration engagements. Due to the large increase in demand for our professional services versus the prior year-to-date period, we have increased both our internal professional service staff as well as third party supplemental staff.

Research and Development



                                         Three Months Ended                          Nine Months Ended
                                             October 31,                                October 31,
                                          2012          2011        % Change         2012          2011        % Change
                                                              (in thousands, except percentages)

Research and development expenses were $28.1 million, or 39% of total revenues, for the three months ended October 31, 2012, compared to $16.4 million, or 45% of total revenues, for the prior year period, an increase of $11.7 million. The increase was primarily due to an increase of $8.6 million in employee compensation costs due to higher headcount and $0.8 million increase in consulting costs as we supplemented our internal development professionals. We expect that in the future, research and development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.

Research and development expenses were $72.4 million, or 38% of total revenues, for the nine months ended October 31, 2012, compared to $43.7 million, or 48% of total revenues, for the prior year period, an increase of $28.7 million. The increase was primarily due to an increase of $21.3 million in employee compensation costs due to higher headcount and $1.8 million increase in contracted labor costs.

Sales and Marketing



                                        Three Months  Ended                          Nine Months Ended
                                            October 31,                                 October 31,
                                         2012           2011        % Change         2012          2011        % Change
                                                              (in thousands, except percentages)

Sales and marketing expenses were $32.6 million, or 45% of total revenues, for the three months ended October 31, 2012, compared to $18.2 million, or 50% of total revenues, for the prior year period, an increase of $14.4 million. The increase was primarily due to increases of $10.7 million in employee compensation costs due to higher headcount, and $1.0 million in higher travel expense. We expect that sales and marketing expenses will continue to increase in absolute dollars in the future as we continue to invest in sales and marketing by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events.

Sales and marketing expenses were $87.1 million, or 45% of total revenues, for the nine month period ended October 31, 2012, compared to $47.8 million, or 52% of total revenues, for the prior year period, an increase of $39.3 million. The increase was primarily due to increases of $28.1 million in employee compensation costs due to higher headcount, $2.7 million in advertising, marketing and event costs, and $2.5 million in travel expense.

General and Administrative



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