Workday Inc (WDAY) 2013 Q4 法說會逐字稿

Welcome to Workday's fourth-quarter earnings call.

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of the conference.

I will now hand it over to Mike Haase.

Welcome to Workday's fourth-quarter fiscal 2013 earnings conference call.

On the call, we have Aneel Bhusri, our Chairman and Co-CEO, and Mark Peek, our CFO.

Following their prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast.

Statements made on this call include forward-looking statements, such as those with the words will, believe, expect, anticipate, and similar phrases that denote future expectation or intent regarding our financial results, applications, customer demand, operations, and other matters.

These statements are subject to risks, uncertainties, and assumptions.

Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

In addition, during today's call we will discuss non-GAAP financial measures.

These non-GAAP financial measures, which are used as measures of Workday's performance, should be considered in addition to, not as a substitute for or in isolation from, GAAP results.

Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation and an equity grant to the Workday Foundation.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and on the investor relations page of our website.

Also, the customers' page of our website includes a list of selected customers and is updated at the beginning of each month.

The webcast replay of this call will be available for the next 45 days on our Company website under the investor relations link.

Our first-quarter quiet period begins at the close of business April 16, 2013.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2012.

With that, let me hand it over to Aneel.

I want to start by welcoming everyone to our fourth-quarter earnings call.

I'm going to offer some brief comments on our business before turning it over to Mark for the bulk of the discussion, so let's get started.

Fiscal-year 2013 was a great year for Workday.

We successfully delivered three updates, Workday 16, 17, and 18, providing our customers with hundreds of enhancements and new features for the Workday HCM, financials, and payroll applications.

Importantly, all of our customers are on the current update, Workday 18.

And as a result, all of Workday's development energy is devoted to our next update.

This emphasizes what Dave and I refer to as the Power of One, one code line, one version, one community.

We also delivered two new applications during the year.

The first one, Workday Time Tracking, is an application that allows enterprises to collect, process, and manage time and labor for their global workforce.

Our second new application was Grants Management, delivered for the education and government markets.

In fiscal-year 2013, we also continued our heavy investment in the mobile capabilities of our applications, bringing major enhancements to the Apple iPhone and iPad platforms.

For other mobile platforms, such as Android, BlackBerry, and Windows Phone, we introduced a new touch-optimized interface built on HTML 5. Our mobile efforts are of strong personal interest to me and will continue to be a big area of focus for Workday.

And lastly, this past November we announced two new applications, Workday Big Data and Workday Recruiting.

The development efforts for both of these new applications are well underway and on track, with Workday Big Data scheduled for general availability in the second half of this year and Workday Recruiting on schedule to be generally available in early calendar 2014.

From a customer perspective, we added 150 net new customers in fiscal-year 2013, and more than 50 just in the fourth quarter.

Some of our notable fourth-quarter wins include Nissan Motor Company, Primark, Thiess, Del Monte, SunTrust Banks, and Travelex.

And we continue to gain traction with Workday Financials.

In the fourth quarter, we welcomed our 50th financial management customer.

Other new financial management customers signed in fiscal-year 2013 include the University of Rochester, as well as J.B. Hunt, an existing Workday HCM customer that later decided to add Workday Financial Management.

This is a trend we expect will continue.

Of course, customer wins are only part of the story.

It's really all about getting customers up and running on Workday and delivering a great experience for them.

As of the end of the fourth quarter, 265 customers were live with their HCM products and 18 customers were live on our Financials applications.

We have built a great ecosystem of deployment partners and are turning our own professional service efforts to supporting this ecosystem, improving tools to speed customer deployments and to ongoing customer success and satisfaction.

It is just easier for companies to deploy Workday applications.

Turning our attention to fiscal-year 2014, you can expect continued focus on innovation, customer satisfaction, and employee happiness.

At a more fundamental level, Workday continues to execute against our strategy to be the leader in enterprise Cloud applications for human resources and finance globally.

Significant wins in Japan with Nissan, Australia with Thiess, and Europe with Primark highlight our increasing traction outside the United States and the growing number of suite deals where we sell both HCM and financials demonstrates that organizations are seeing the value of having HR and finance in one unified system.

To be clear, we have a lot of execution in front of us to deliver on our ambitious goals and we are still in the early days.

But we are off to a great start and we are very pleased with the early returns from these efforts.

I will now turn it over to Mark Peek to review our fourth-quarter and full-year results and provide insight into fiscal-year 2014.

Thanks, Aneel.

We finished an outstanding fiscal 2013 with a great fourth quarter, generating record revenues, billings, and positive operating cash flows.

Before I get into the fourth-quarter details and our outlook for Q1 and fiscal 2014, let's spend a little time looking back on our fiscal-year accomplishments.

Fiscal 2013 was a year of tremendous success financially and across our operating metrics.

Total revenues increased 104% to $273.7 million and subscription revenue increased 115% to $190.3 million.

Total unearned revenue for the year increased 52% to $285.3 million, and we generated positive operating cash flows for the year.

Our business model proved it can sustain itself from a cash flows perspective, and this allowed us to change our sales incentives away from terms that helped finance the business to those that provide better long-term economics.

Fundamental to our business model is the belief that once we win a customer, we keep the customer.

This is driven by a combination of the importance of the applications, the frequent product upgrades, and very high customer satisfaction.

Of course, we also went public in October, raising $685 million in cash.

We added 680 employees during the year, a 62% increase from the beginning of the year, and we finished the year with just over 400 customers, including 150 net new customers added during the year.

We are pleased with our fiscal 2013 accomplishments and want to thank our employees, our partners, and our customers.

Now I'll walk you through the financial details of our fourth quarter.

Total revenues for the fourth quarter were $81.5 million, an increase of 89% from a year ago.

The vast majority of our sales are currently in US dollars, so there is minimal impact from exchange rates.

The subscription revenues for our Cloud applications were $59.6 million, up 105% from last year.

As subscription revenues are recognized ratably, our revenue growth represents a subscription service we have provided to our more than 400 customers.

The weighted average duration of contracts signed in our fourth quarter was just over three years, as compared to closer to four years over the past several quarters.

As a reminder, we focus our selling efforts on, and have a strong preference for, three-year terms on contracts.

We believe we will have very high renewal rates and that the economics of shorter-term contracts are better for us in the long run.

We were very pleased to see solid demand across regions, including significant wins in Asia-Pacific, EMEA, and the US.

Our professional services revenue was $21.9 million, an increase of 55% compared to last year.

Our primary objective with our professional services business is to maximize customer satisfaction and is therefore not a primary revenue growth driver.

Professional services benefited positively from recognition of $2 million from one customer that had been deferred until acceptance.

We do not expect a similar circumstance next quarter.

As a reminder, Workday's strategy is to rely on system integrator partners for the bulk of our customer deployments and we are very pleased with the customer adoption from our partner-led deployments.

Total unearned revenue at quarter-end was $285 million, up 52% from a year ago.

Over 90% of our unearned revenue is from subscription fees.

Short-term unearned revenue was $199 million, an increase of 21% sequentially and 74% from last year.

Non-current unearned revenue was $86 million, down 2% sequentially and up 17% from last year.

As we've discussed in the past, as our balance sheet strengthened during fiscal 2013, we changed our sales compensation structure to de-emphasize multiple-year upfront cash collection to finance the business.

So the percentages of the contract billed upfront is comparably less than in prior periods.

This change negatively impacts the comparisons to our non-current unearned revenue, calculated billings, and cash flows.

But in the long term, we believe it improves the economics of our business.

I also want to provide you with color on our backlog.

As a reminder, most of our subscription agreements are for three years and are noncancelable.

In a typical contract, the first year of a multiyear contract is billed and recorded on our balance sheet as unearned revenue.

The noncancelable unbilled portion of the contract remains off our balance sheet as backlog until billed.

Total subscription backlog as of the end of fiscal 2013 was $434 million.

Backlog was approximately $325 million as of the end of our second quarter and approximately $240 million at the end of our fiscal 2012.

Total future subscription revenue, which includes total unearned subscription revenue plus a subscription backlog, was $695 million as of the end of fiscal 2013.

Looking ahead to the first quarter and our fiscal 2014, we are mindful about the challenging macroeconomic environment and the muted expectations for IT spending.

However, the strength of our business model and continued momentum provide very good revenue visibility, and we expect a solid first quarter.

As we described in our S-1, during the first quarter of fiscal 2013 we recognized $2.6 million in subscription revenue and $2 million of professional services revenue related to the expiration of a delivery obligation for a 2009 customer arrangement.

With that backdrop, we expect total revenues for the first quarter to be within a range of $83 million to $87 million, or growth of 46% to 53%, or 59% to 67% normalized for last Q1.

Subscription revenue is anticipated to be within a range of $64 million to $66 million, reflecting year-over-year growth of 73% to 79%, or 86% to 92% normalized for last Q1.

As mentioned during our earnings call in November, we also anticipate calculated billings in our fiscal first quarter to be down sequentially from our fourth quarter by at least 10%.

For the year, we anticipate total revenue of $420 million to $435 million, or growth of 53% to 59%.

I want to emphasize that our strategy around professional services is to build an ecosystem and ensure customer success in deployments.

Our professional services revenue is largely designed to fill in for any gaps in the ecosystem.

The annual revenue guidance assumes professional services revenue of approximately $100 million to $105 million for the year.

Let's spend a few minutes on operating expenses and our results of operations.

Unless otherwise noted, all references to our expenses and operating results are on a non-GAAP basis, which are reconciled in the investor relations section of our IR website.

Our total headcount was 1,776 as of the end of our fiscal fourth quarter.

This reflects increases of 156 in the quarter and 680 since the beginning of the fiscal year.

For 2014, we anticipate adding more people than we did last year as we build out our global market expansion efforts and product development teams.

Approximately two-thirds of our GAAP expenses are employee related.

Our fourth-quarter gross margin was 61%, up two percentage points from the third quarter, driven by our mix of subscription revenues growing faster than professional services.

We don't anticipate further improvements to our gross margin over the next year.

Although the mix between subscription and professional services will continue to shift towards subscription, we anticipate lower professional service margins as we invest in programs to ensure ongoing customer success post deployment.

The fourth-quarter subscription gross margin was 79% and includes the costs related to providing our Cloud applications; compensation and related expenses for operations, staff, and data center networking; and depreciation.

Our fourth-quarter operating loss was $25.2 million, or a negative 31%.

This was significantly better than we had anticipated and was largely the result of the timing of our hiring during the quarter, modestly slower-than expected-hiring, and most of our capital spending occurring at the end of the quarter, resulting in lower-than-expected depreciation charges.

We expect Q1 2014 operating margins to decline over Q4 2013 and anticipate that the full year will be around negative 30% as we continue to invest in growth.

Long-term profitability and cash flow generation are important goals, but we believe that our focus today needs to be on market expansion, continued product innovation, and growth.

Research and development expense in the fourth quarter was $29 million, up 8% sequentially and up 62% from a year ago.

We continue to invest in our product development as we strengthen and extend our suite of applications, particularly in financial management.

Our HR and financial management applications are enterprise systems of record at the core of our customers' business.

We are building solutions for large, complex global enterprises, and we believe continued investment in our applications will be a key driver of future growth.

Sales and marketing expense was $35.5 million, up 12% sequentially and up 59% from last year.

We plan to make significant investments over the next several years to leverage our global market expansion efforts.

General and administrative expense was $10.1 million, up 25% sequentially and 124% year over year.

The increase is primarily a result of adding staff to support the needs of a public company.

The net loss per share was $0.16 on 162 million weighted average shares.

Given our net loss, all outstanding stock options and common stock equivalents are anti-dilutive and not included in the loss-per-share calculation.

In April, the lockup of shares outstanding just prior to the IPO will expire.

Approximately 63 million shares, including more than 14 million exercisable stock options not currently included in our share count, will be available to trade after the lockup expires.

These totals exclude shares held by insiders and those subject to Rule 144.

Due to the large number of exercisable options becoming available in April, we are not providing share count guidance for the quarter.

However, since we are in a loss position, additional shares outstanding serve to reduce the loss per share.

Taking into account our adjustments to GAAP operating income that Mike disclosed at the start of the call, we currently expect our fiscal first-quarter non-GAAP operating margin to be within a range of a negative 34% to 38% of total revenue and for the year to be approximately negative 30%.

The GAAP operating margin for the fiscal first quarter is expected to be 9 to 10 percentage points lower than the non-GAAP margin, and the full-year 2014 GAAP operating margin is expected to be approximately 13 to 15 percentage points lower than the non-GAAP operating margin.

Now onto our balance sheet and statement of cash flows.

Cash and short-term investments at quarter-end were $790 million, down $7 million from Q3.

Operating cash flows were $5.9 million for the fourth quarter and $11.2 million for the year.

Free cash flows for the quarter were negative $4 million and for the year a negative $23.4 million.

As a reminder, when calculating free cash flows we conservatively subtract the gross value of all equipment, even when acquired under capital leases, so we can evaluate our progress on free cash flows independent of our capital financing decisions.

Capital expenditures during fiscal 2014 are anticipated to be approximately $80 million.

To summarize, we're very pleased with our solid fourth-quarter performance and our accomplishments during fiscal 2013.

Looking ahead, we're investing for the long term and see a very large opportunity in front of us.

You should expect us to continue making significant investments in our product development and global market expansion to maximize our long-term growth opportunities.

With that, we will now open it up for Q&A.

(Operator Instructions).

Adam Holt, Morgan Stanley.

Hi, thanks, and congratulations on a terrific end to the year.

Two questions on the quarter.

First, in the customers that you signed, can you talk through what the common denominators were, if there were any, in terms of product and service usage?

And then, secondly, while we understand renewals are still a fairly small amount, can you talk through what you saw in the renewal activity in the quarter?

Hi, Adam.

It's Aneel.

On the first part of the question, the characteristics that drove customers' decisions, they're really the same as they've been over the last few years.

These were large global companies, in many cases looking to consolidate down to one single instance, one employee view -- sorry, one view of all employees, and on a global basis, and getting the cost savings of moving to the Cloud model, and then the big step up in usability that they experienced when moving to a Cloud solution like Workday versus a legacy system.

So, really more of the same than anything else.

And Adam, it's Mark.

With respect to renewals, again more of the same.

Our fundamental belief in the business model is that once we have a customer, they will stay a customer, and so the renewals activity during the quarter reflected that.

The couple of accounts that we did lose came through either consolidation or some other dissolution of the business.

And so, it was a solid quarter on renewals with an uptick in the overall revenue.

If I could just ask a quick follow-up on your distribution, you've had a significant increase in capacity.

How are the sales folks ramping that you have hired and where will you make your investments in sales heading into next year?

Thanks very much.

They're ramping well.

They're ramping pretty much on plan.

I think as you look forward, we are really focused on building a company for the long run, so we are making some big investments outside of North America.

If I were to come back to your first question, one of the things that we took away from the large customers we signed outside the US is that the same value proposition that had worked with US multinationals is working outside the US.

So you're seeing us put additional resources at a faster clip in Asia, in Europe, and that's really the big new focus for us from a sales deployment perspective.

And to echo that, I think that as you look ahead to fiscal 2014, our expectation is that overall sales productivity will be flatter, tipped down a bit, as a result of putting people in new geographies and the fact that we have to build out the sales motion, and it will just take a little bit more time for the sales force to be productive in new geos.

That's very helpful.

Thank you.

Heather Bellini, Goldman Sachs.

Hi.

Thank you very much.

I was just wondering if you could talk a little bit about the competitive dynamic and kind of how you saw win rates this quarter and who you're seeing as your primary competition and whether you've seen that change.

Where are you getting the majority of your customers from at this point?

Are they replacements from people like Oracle and SAP, or are you also adding from people who are using vendors outside of those?

And then, I guess the follow-up question would be kind of if you're thinking about your expense management -- I'm trying to think about some of the modules that you are offering, where do you see -- which module do you think you're having the biggest success with as an add-on at this point?

So on the first part of the question, I'd hate to say more of the same, but it is more of the same.

I don't think anything really changed in the fourth quarter in terms of competitive dynamics.

We continue to compete with the two large legacy players and we continue to replace predominantly those two large legacy players.

If I were to highlight one trend from last year that in the fourth quarter was particularly strong, it's our midmarket effort, which really began in earnest last year.

This is the segment between 1,000 and 3,000 employees.

And in some cases in that segment of the market, we are competing with more midmarket solutions or replacing midmarket solutions.

And we had a very, very strong year in that category.

And that's one where we really had not put a dedicated focus on in the previous year.

And then, in terms of the add-ons?

I'd say probably the most popular add-on at this point is payroll, and that's largely tied to the maturity of the product.

And expenses is doing well, but so is time tracking, a relatively new module, but that ends up being an add-on to payroll and to HR.

Frankly, on the financial suite we're more focused on selling the whole suite, rather than selling expenses module separately.

And on the HR suite, we have a big installed base now, so it has a different cadence to it where we are able to go back and sell payroll, time tracking, or even the financial suite as an add-on.

Great.

Thank you.

John DiFucci, JPMorgan.

Thank you.

Congrats on a real strong quarter here.

I mean, if we look at the annualized subscription billings, a calculation of that, we get something around 80% growth, which is much better than we were looking, much better than we had modeled.

But the revenue guidance is a little bit below what the Street was expecting, I guess.

Can you comment on that?

And then, I just have a follow-up on the lockup.

Yes.

Sure, John.

I think overall in the revenue, and we tried to call it out in the prepared remarks is around professional services.

And our professional services strategy is really to build out an ecosystem.

And to the extent that the ecosystem is successful, we don't want to do as many of the -- be the prime on as many deployments, and we'd rather focus our efforts on helping the ecosystem, build IP around it, and also touching each customer to make sure that they have each of the steps to having a successful deployment, but then also to stay involved with our customers' post-deployment so that they can successfully do the updates and that they are getting the most bang for the buck.

And as a result, the professional services revenue number in our annual guidance is about $100 million to $105 million, which is, from a mix perspective, a little bit quicker change to subscription versus overall professional services.

Okay.

That's fair enough.

I see actually for next quarter when you gave the subscription guidance, essentially a little bit above the Street.

Yes.

And professional services is implied as $19 million to $21 million in Q1.

Okay, great.

Thanks, Mark.

And I guess just a follow-up on the lockup.

I think you said that 63 million shares come off lockup, excluding insiders.

I just want to make sure I understand this because I have something like twice that number.

I guess that includes insiders.

Are those insiders restricted, I guess, is the first question?

And then, can you comment at all on your perception of the intent of your early investors, and, well, the restricted, the insiders, the founders.

Obviously, Aneel is on the phone here.

But also, thoughts on how you might facilitate the distribution of these shares in an orderly fashion.

Sure.

Just starting at the top and the comments in the prepared remarks, we have 63 million shares, which includes 14 million vested and unexercised stock options that are currently subject to the lockup.

And those will expire on April 10.

That excludes any of the insiders or affiliates that are subject to volume trading rules under Rule 144.

Across the board, people are -- this is a long-term Company and we are looking ahead to the long term.

That said, the co-founders will sell a nominal number of shares under a trading plan.

And then, we don't really have insight as to some of the early investors and to what their intent is.

However, we don't plan on having an organized distribution or a secondary offering at this time.

Okay.

Thanks a lot, Mark.

Walter Pritchard, Citigroup.

Thanks.

Mark, I was just wondering, you talked about the $695 million in total subscription backlog, including the unearned.

Could you give us the number for a year ago so we can compare that?

And then also, looking forward, do you expect that -- we understand the dynamics between the short-term billings and the long term, given the change in the comp plan and the impact on the longer-term collection, but could you help us set expectations of whether or not we should think about the backlog growing slower or faster than what you bill on the short term?

Sure.

Walter, the backlog a year ago -- and the way that we -- the backlog is the noncancelable subscriptions, so it doesn't include any professional services in that number.

It was $240 million at the end of -- at the beginning of this fiscal year.

And then, you have the unearned revenue numbers just flat off the balance sheet.

Overall, professional services as a percentage of total unearned revenue has been declining, and that's just further dematuration of our contracting process and the overall revenue recognition over time.

So what I'd fully expect to happen over time is that all of the -- or a vast majority of the unearned revenue, and it's 90% today, ends up being subscription revenue with very little professional services revenue.

I'm sorry, and the second part of your question?

Yes.

The second part was just understanding the trends.

It looks like backlog, actually, if I have the numbers right here, backlog grew a little bit slower than the short-term billings, and I'm trying to understand how we should think about the relationship between the backlog and the short-term billings.

Yes, and if you look in the registration S-1 process, we gave a midpoint in the year backlog number of $325 million.

So that was the July number.

And so, the growth in each six-month period was relatively close.

I think the biggest dynamic in the backlog is the fact that we -- this quarter is the fact that we had 3.1 years as the average contract life, and that's down from where we were at about 3.6.

So there is -- just in the quarter alone, it's a half a year decline.

And we think that that's good for the long-term health of the business to be around the three-year point.

Okay, great.

Thank you very much.

Jason Maynard, Wells Fargo Securities.

Good afternoon, guys.

I had two questions, actually, on the product side.

First up, I'd love to just get your take as you look into 2013, how you think the financials product is ramping, how you're maturing it, and what your sort of expectations are from that standpoint.

And the second is I'd love to get any color or commentary you can share on where you stand with some of the new modules that you talked about coming, obviously later -- or actually in the next year, around recruiting and some of the big data analytics programs.

Thanks.

Okay.

You know, on financials, it's right on track.

The project we have internally is dubbed big fin, for big financials, and it's much like we talked about on the road show.

It's taking our financial products, which are increasingly feature-rich and getting very close to parity with the legacy companies, and bringing our AOD capability, the analytic object data source capability, to different parts of the application to scale it to large-scale Fortune 500 companies.

So, that project is on track.

It's going to carry through for all of this year and into next, and each update that comes out, we scale to a bigger and bigger customer.

So given where we are right now, we're largely continuing to sell to midmarket or the small -- the smaller of the large companies, and that's going very well.

As I said in the prepared remarks, 50 customers.

So it's really is pretty much where we expected it to be.

And I'd say the same thing for our new products.

We've been at this model for a while now, and so new products are fairly predictable.

Recruiting is right on track.

It's a longer build, just given the huge scope of building a recruiting product.

But it's right where we hope it to be.

And big data is on track to be available this late fall -- I'm sorry, late summer, early fall, exactly like we had announced at Rising.

So right on track, and if anything, in some cases maybe even further ahead than we had hoped for.

And I would just add that big data in particular, we've gotten more interest and reception than even, frankly, I had expected, and I think it's because customers are looking at this platform not just as a big data platform, but more as a way to take advantage of all the data that's not Workday data and be able to find a place to put it and then report against it with the Workday data.

So it's actually hitting a need that's existed for several years, and as a result, there has been a lot of interest in that product.

You kind of opened a door there a little bit.

Are you going to position your analytics product much more general purpose in the long run, or how do you think you're going to roll that messaging and targeting of the customer base out?

Will it stay within your confines or will we start to hear more of you putting this into the customer bases, kind of a next gen, if I will, BI replacement type of product?

So I don't think we'd ever sell it as a standalone data warehouse if a customer wasn't using HR and financials.

But if they're using one of those modules or one of those suites, and they already have that Workday data, they can put whatever data they want into this warehouse.

And in most cases, we run into customers that have financial data warehouses, and ideally this would be a replacement for those financial data warehouses.

And if you think about the data -- financial data warehouse, it's pretty much everything.

Okay.

I've got more to ask, but I'll pass the mic back, so thank you.

Brent Thill, UBS.

Thanks.

Aneel, just to follow up on Jason's question on financials, when you talk about the midmarket to large enterprise, are you still thinking about a year and a half to two years out before you're successfully selling into the Global 2000 or are you thinking a shorter-term duration to when you're starting to hit stride there?

I would feel comfortable now -- I mean, it was a year and a half to two years out in November, and so we're six months later, so you can just deduct it.

I mean, really, we're exactly on the same plan as we talked about during our IPO and then our earnings call.

So I'd say less than two years at this point.

Okay, that's great.

Mark, just on the backlog, are there any anomalies we need to keep in mind as we go into 2014?

I think the big -- the important factor that you think about backlog, and we have been providing the metric with respect to the average contract length in terms of number of years and that we've moved from nearly four and closer to three in this last quarter.

But for the most part, it's calculated fairly cleanly.

It's the total contract value of the noncancelable subscription, and then we just back out what we have actually billed, and so it's either been recognized as revenue or reported on the balance sheet.

So it's pretty clean.

From time to time, there will be something that accelerates a contract, or if there's an add-on, it could change the mix and when that rolls out a bit, but other than that, it's a fairly simple calculation that you'll get (multiple speakers)

Great, thanks, Mark.

Brendan Barnicle, Pacific Crest Securities.

Thanks so much.

Aneel, when you think about the move to APAC and to EMEA, is there going to be anything fundamentally different about the go-to-market strategy and sales strategy in those markets than what you've done here in North America?

From a sales strategy, I don't think there's anything that's different.

I do think that that what we need is to find local service partners, much like we have.

We've got the big companies like Accenture and Deloitte and IBM working with us on a global basis, but we also have companies like DayNine and Collaborative and OmniPoint that are more, I would guess -- or call them boutiques.

We need to find those same boutiques in Europe and in Asia, and that's very much what we're doing.

And then, just following up on the financials another time, aside from market size, have you noticed anything in terms of vertical markets or use cases that have been particularly consistent among these first 50 customers?

You know what, I'd say that we're probably furthest along in reaching parity with the legacy systems in the public sector market, in particular higher education.

And much like we saw with HR, when you get closer to parity with the legacy systems, the business begins to pick up.

So it's not a surprise that of our first 50, there is quite a few that are higher education institutions.

Not only do we have a lot of features there, but we actually build specific capabilities for them in the case of Grants Management and fund accounting.

And so, as we layer on some of those industry-specific features in other industries, I would expect a similar reaction.

Got it.

And then, Mark, just one for you.

Cash flow was much better than any of us expected.

As we think about that for next year, are there any anomalies we should be considering in that that gave us such robust cash flow here in the fourth quarter?

Not particularly.

Again, we have made a shift in how much cash we're billing upfront and when we start a contract, and that -- we'll still have a couple of quarters where that is a negative comp for us until we hit probably Q3 of next year.

If you look at accounts receivable relative to billings outstanding, we had a good quarter even with all of the activity that we had through the summer and through the IPO.

We just improved our collections, and so we had better performance on accounts receivable during this quarter.

Great.

Thank you, guys.

Richard Davis, Canaccord.

Thanks.

Among the things that you can control, where do you see the most relevant gating issue to your growth?

Is it sales hires?

Is it product development?

Or is it -- I hope you don't say all of the above, but just when you kind of -- you have to put wood behind certain things, how do you think about that?

I feel like we're hiring as well as we can in the two areas that you mentioned.

The area that we continue to invest in is actually building out the ecosystem for delivery.

And that's an area where we have covered some control, but as you can see from our model, we're relying more and more on external partners.

And that continues to be a big area of focus for us.

But in terms of ramping up development, we're right on track from where we want to be in sales people.

We have a bar for culture and for talent, and so for both areas we need to hold to those bars, but are feeling very good about the hiring.

And I think as we look at fiscal 2014, as Aneel mentioned, there's only so many people you can absorb over a given amount of time and maintain the quality and the culture.

And we're making our bets more towards the international markets where we think the sales productivity will be a little bit less just as we ramp up in those geos.

Great.

Thank you very much.

(Operator Instructions).

Mark Murphy, Piper Jaffray.

Yes, thank you.

Aneel, how do you think Workday financials compares to Oracle Fusion financials in the Cloud right now?

And I'm also curious, what are the product development milestones that you'd like to hit in the next couple of years for financials?

If it's scalability, then what exactly is the scalability bottleneck?

And if it's functionality, then I am curious which functions at this point you think will be holding you back from the Fortune 500 type adoption of financials.

So on the first part of your question, candidly, I didn't really know there was an Oracle financials on Fusion.

If there is, we don't come across it yet.

We definitely see Fusion on the HR side, but we haven't seen it on the financial side.

On the financials, we typically compete against the legacy on-premise products, much like we have historically on the HR side.

From our own product perspective, if I were to guess we're 80% of the way there on functionality, on scalability.

We scale to companies that are probably up to 10,000 employees on an average transaction basis.

And we're looking to get to the Fortune 500 going into next year.

That's a big leap in terms of scalability.

The other piece is global.

We need to continue to round out the product with global features so we can sell it to multinationals not just based in the US, but in Europe and Asia as well.

So you add all those things together, it's that same 18-month journey to get the scalability and the global capabilities.

And once we've accomplished those two, we'll then begin to attack specific industry functionality.

Like we've done with public sector, we'll bring that to financial services, we'll bring it to healthcare.

In financial services, you need average daily balance; in health care, you get into lot tracking issues.

All those things are down the road, but in 18 months we've got the scalability and global platform that I think will open up a lot of opportunities for us.

Operator, we're going to take two more questions, please.

Understood.

Steve Ashley, Robert W. Baird.

Thank you very much.

I was going to ask on the 50 new customers, if any of those were brought by non-HCM, if they were -- if the other modules were bringing new customers to the table as well.

You know, Steve, I don't know exactly.

There is a combination of -- each of them have HCM as part of the module, so these are all net new customers.

And they would all have HCM, and then a few of them are sold as suites where there is sort of multiple products or the entire product line across them.

Okay, thanks.

I would add that what we began to see in the second half of last year was this suite sale where a customer would buy all of our financials and all of our HCM products.

And when you do the suite sales, those are driven by financials much more than by HR, and that's a really positive trend for us.

Most of the suite sales happen in what I would define as the midmarket, the 1,000 to 5,000 employee segment.

Thank you.

Laura Lederman, William Blair.

Thank you for taking my question.

I've got two, actually.

Can you talk about the impetus you see most often, or the impetuses, if there is such a word, you see most often where people decide they want to make a switch?

Is it that they're facing an upgrade?

Is that the most common?

Can you kind of go through some of the most general things that you see in terms of what prompts somebody to decide to look at Workday?

Sure.

Actually, that is the biggest driver, Laura.

I was actually out on some sales calls yesterday in the Midwest, and the biggest issue is facing an upgrade of a legacy system, looking at the next version of that legacy system, and coming to the conclusion it's a very expensive upgrade and you don't get very much for it.

At that point, they look at alternatives, and at that point, hopefully, Workday pops on their list and that really has been the same pattern, really, for the last several years.

If there is any other driver, I do think in a world where there are certain sectors that are very, very focused on employees and hiring and maintaining the best employees is a challenge, that they're looking at these systems as improving employee engagement and bringing a much better experience to their employees and managers.

And that's -- I'd say that's a newer driver over the last 12 months.

Cool.

One final question from me, which is you mentioned that you're now doing well in the middle market and you're replacing different vendors there.

Can you talk about the different types of vendors that you're seeing?

Maybe just rattle them off.

Well, to name names, I would say that we will replace companies where they were using potentially a Payroll Service Bureau solution, and now they want -- and minimal HR, and now they want a full HR.

Or they're using a midmarket on-premise system.

It might be, candidly, a Great Plains.

It might be a Lawson; while it is not a Tier 1 ERP system, it is still a good on-premise system.

In most of those cases, they bought the full suite and so they'd like to buy a full suite in the Cloud to replace that, which is why the suite sale works so well for us.

Thank you so much.

Okay, thank you, everyone.

That concludes the call.

We thank you for your participation in today's earnings call.

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