Workday Inc (WDAY) 2014 Q1 法說會逐字稿

Welcome to Workday's first-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 this conference.

With that, I will hand the call over to Mike Haase.

Please proceed.

Welcome to Workday's first-quarter fiscal 2014 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.

A 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 annual report on Form 10-K, 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.

The 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 for the fiscal first quarter of 2014, also exclude employer payroll taxes on employee stock transactions.

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 second-quarter quiet period begins at the close of business July 17, 2013.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2013.

With that, let me hand it over to Aneel.

Thanks, Mike.

I will spend a few minutes covering some of the key highlights for Q1 and then turn it over to Mark for discussion of our Q1 results and forward guidance.

The management team was very pleased with the Q1 results as our business continued to do well across all of our key initiatives.

During the first quarter, Workday added significant customers across our major geographies and industries, including Bristol-Myers Squibb and Levi Strauss for Human Capital Management, and University of Miami for the full suite of Workday applications.

More importantly, we continued our pace of successful customer deployments.

Recent go-lives included London Stock Exchange, Cornell University, and Johnson & Johnson.

We ended the quarter with more than 450 customers, of which more than 290 are live on Workday applications.

In April, all customers moved to Workday 19, the first update of fiscal year 2014.

With this update, customers gained the ability to tailor the Workday experience for their unique business environments.

Also with Workday 19, customers received the ability to manage intangible assets, and users can now benefit from new levels of insights into headcount planning.

In total, Workday 19 includes more than 170 new features, many of which come through Workday Brainstorm, a forum that captures and shares customer ideas based on popular vote.

Lastly, we continued our heavy investment in mobile technologies.

To augment our historical support of iOS and HTML5 mobile platforms, we recently delivered Workday for Android, a native Android app which is now available in Google Play.

In April, our employees voted us to the top of the local Best Places to Work list for the Large Companies category.

This is the sixth consecutive year Workday has been ranked on this list published annually by the San Francisco Business Times and the Silicon Valley San Jose Business Journal.

We continue to hire the best and brightest, and ended Q1 with approximately 1950 employees.

Lastly, I wanted to cover three major development efforts -- Big Fin, Big Data Analytics, and Recruiting.

Big Fin, our project to bring our financial applications to the global Fortune 2000 market, is progressing on schedule with major improvements in scalability and functionality coming with each update.

As relates to Big Data Analytics, we signed our first wave of customers this past quarter, and continue to be on track for general availability in the second half of 2013.

Our other new product initiative, Workday Recruiting, continues to be a strong interest to our customers, and it remains on track for first half of 2014 delivery.

That's it for me.

We will now turn it over to Mark.

Thank you, Aneel.

We started fiscal 2014 with a very solid first quarter, generating record revenues and positive operating cash flows and positive free cash flows.

Our business model continues to prove itself from a cash flows perspective, and we continue to make progress on our non-GAAP operating margins, although this is clearly a secondary objective to growth and new customer acquisition.

Fundamental to our business model is the belief that once we win a customer, we keep the customer for years beyond the initial subscription period.

This is driven by a combination of the importance of the applications to our customer's business, our frequent updates with meaningful features, functionality and improved ease-of-use, and of course, very high customer satisfaction.

Our balance sheet remains strong, including over $300 million of unearned revenue and over $800 million of cash and marketable securities.

We are pleased with our first-quarter accomplishments and want to thank our employees, our partners, and our customers.

Now, I will walk you through the financial details of our first quarter.

Total revenues for the first quarter were $91.6 million, an increase of 61% from a year ago.

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

Subscription revenues for our cloud applications were $68.4 million, up 85% from last year.

As Subscription revenues are recognized ratably, our revenue growth represents the services we have provided to our more than 450 customers.

As we mentioned last quarter, and in our S-1, Q1 was a difficult comparable for us, as last year we recognized $2.6 million in Subscription revenue, plus $2 million of Professional Services revenue related to the expiration of delivery obligation for a 2009 customer arrangement.

Normalizing the current quarter results, total revenue growth was 75%, and Subscription revenue growth was 99%.

The weighted average duration of contracts signed in our first quarter was just over three years.

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

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

We're very pleased to see solid demand in the US and internationally.

Our Services revenue was $23.2 million, an increase of 17% compared to last year and up 30% normalized for Q1.

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

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

Total unearned revenue at quarter end was $301 million, up 41% from a year ago.

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

Short-term unearned revenue was $224 million, an increase of 13% sequentially and 74% from last year.

Long-term unearned revenue was $77 million, down 11% sequentially and down 9% 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 deemphasize multiple-tier upfront cash collection to finance the business.

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

This change negatively impacts the comparisons to our unearned revenue, calculated billings in cash flows; but in the long-term, we believe it improves the economics of our business.

Looking ahead to the second 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 second quarter.

Total revenues for the second quarter are expected to be within a range of $97 million to $101 million, or growth of 55% to 61% as compared to the prior year.

Subscription revenue is anticipated to be within a range of $74 million to $76 million, reflecting year-over-year growth of 75% to 80%.

We anticipate total fiscal 2014 revenues of approximately $425 million to $440 million, or growth of approximately 55% to 61%.

The guidance assumes Professional Services revenue of approximately $100 million to $105 million for the year.

As imperfect a measure as it is, calculated billings are used by many in the investment community to gauge the health of the business.

I won't provide color on billings every quarter, but to help you calibrate, we don't expect annual calculated billings to exceed $530 million in fiscal 2014.

We anticipate Q2 billings to increase sequentially from Q1, and in fact to be slightly ahead of last Q4's calculated billings.

We also expect a sequential increase in Q3 and a more significant seasonal increase in Q4.

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 press release tables and posted on the IR website.

Our total headcount was approximately 1,950 people at the end of the first quarter.

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

About two-thirds of our total expenses are employee-related.

Our first-quarter gross margin was 61.1%, up slightly from the fourth quarter given by our mix of Subscription revenues growing faster than Professional Services.

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

Although the mix shift between Subscription and Services will continue, we anticipate lower Professional Services margins as we invest in programs to ensure ongoing customer success post-deployment.

The first quarter Subscription gross margin was 78.6%, and includes the costs related to providing our cloud applications, compensation, and related expenses for the operations staff and data center networking and depreciation.

The Subscription gross margin was down slightly sequentially, due largely to the provisioning of incremental co-location data center capacity, including rent expense and supplies as we prepare for growing customer demand.

Our first-quarter operating loss, measured on a non-GAAP basis, was $24.5 million, or negative 27%.

This was better than we had anticipated and largely the result of the operating leverage received on increased revenue.

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 first quarter was $34.1 million, up 18% sequentially and up 67% 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 $37.2 million, up 5% sequentially and up 52% 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 $9.1 million, down 10% sequentially and up 64% year-over-year.

The sequential decline was due largely to year-end corporate expenses, including expenses associated with operating as a public company, which impacted our fourth quarter.

The net loss per share was $0.15 on 168 million weighted-average shares.

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

The IPO lockup expired on April 10.

It was a much-anticipated event internally and it seems in the market, as well.

After the lockup, approximately 4.6 million employee stock options were exercised, and are now included in our weighted average share count.

We did see employees and pre-IPO investors convert their class B shares to class A shares, but they did not necessarily sell those shares into the market.

In addition to the 4.6 million options exercised, Flextronics exercised its warrant of approximately 1.35 million shares.

Taking into account our adjustments to GAAP operating income that Mike referenced at the start of the call, we currently expect our fiscal second-quarter non-GAAP operating margin to be within a range of negative 28% to negative 32% of total revenue; and for the year, to be approximately negative 25% to negative 30%.

The GAAP operating margin for the fiscal second quarter is expected to be 10 to 11 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 to our balance sheet and statements of cash flows.

Cash and short-term investments at quarter end were $806 million, up $15 million from year end.

Operating cash flows were $17.3 million for the first quarter, and $15.8 million for the trailing 12 months.

First-quarter operating cash flows benefited from nearly $17 million of taxes and other remittances relating to stock option exercises in April.

Most of these were related to employee stock sales outside the US.

We don't expect this to repeat at these levels in future quarters.

Adjusting for this, first-quarter operating cash flows were approximately breakeven, and for the trailing 12 months, slightly negative.

These items reverse in our second quarter, and will be a negative to Q2 cash flows.

Free cash flows for the first quarter were a positive $15.3 million and for the trailing 12 months, a negative $18.4 million.

Likewise, after adjusting for taxes related to stocks option exercises in April, free cash flows for the quarter would have been closer to breakeven and a larger negative for the trailing 12 months.

We think looking at cash flows on a trailing 12 month basis is a better indicator of progress than quarterly results, as cash flows can be volatile quarter to quarter.

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.

For the balance of the year, we anticipate quarterly capital expenditures to increase significantly from the first quarter level, and expect total CapEx of approximately $80 million for fiscal 2014.

To summarize, we are very pleased with our solid first quarter.

Looking ahead, we are 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, let's begin the Q&A process.

Before we take the first question, I also wanted to call to your attention that we issued a correction about 40 minutes ago or so to our earnings release.

The correction was to a calculation in the guidance growth.

With that, let's take the first question.

(Operator Instructions)

Heather Bellini, Goldman Sachs.

Thank you, Aneel and Mark.

I just wanted to know, I guess, Aneel -- really interested in the new product offerings that you've been mentioning.

The recruiting and everybody is focused on financial.

I was just wondering if you could kind of rank order for us, the impact that you think these new offerings will have on your deferred group.

If you were to just look out over the next one to two years instead of looking out longer than that.

Is it possible that BI and recruiting could actually be a bigger ramp faster than we could see financials ramp?

Thank you.

Thanks, Heather.

In terms of deferred, I'd probably defer that to Mark.

In terms of size of market, the financials market dwarfs the recruiting market and the Big Data Analytics market.

Our product is getting better every update, and the pipeline is getting bigger every quarter.

So, I would still suspect that especially if you look over a two-year time horizon that financials is the much bigger of those three product areas.

But, would you think that for BI and recruiting you could actually have shorter sales cycles than financial?

BI is still so new, in terms not just our offering, but also in terms of customers understanding what big data means to them, that one is harder to predict.

I think on the recruiting front, I think those will be fairly short sales cycles.

We asked for 8 design partners, and we had something like 65 customers ask to be design partners.

So, there's a lot of pent-up demand for that product.

I suspect that will get very quick take-up through our install base.

Okay.

Great.

Thank you.

John DiFucci, JPMorgan.

Question for Aneel and Mark, I think.

It has to do with financials.

I think last quarter you said you had 50 customers with 18 live.

Can you update those numbers and for us -- also, how many of those are public companies?

Curious, because is there any way that there is more onerous financial controls required of companies might be a gauge to see how the applications are progressing.

We're not going to update that number on a regular basis.

That 50 was a milestone that we hit, the 50 -- we might update it again at the end of the year.

In terms of public companies, yes, we do have a handful of public companies -- more than a handful of public companies live on financials.

But not just have selected, but actually live on the product.

Okay.

Great Mark, I had a question on sales and marketing expense.

It was 41% of revenue, I think, which is below what we were looking for in below the spend.

I think -- just curious -- is what we are seeing there, is it just leverage as you grow?

Or was hiring a little below what you anticipated this quarter?

Is this something in that number we should be thinking about?

I think, John, the main thing is we are getting leverage since we have now 450 customers in which we are recognizing subscription revenue.

We also were down seasonally on calculated billings, as we called out in the fourth quarter -- that Q1 would be down seasonally.

It's a combination of the two.

Okay.

Great.

Actually, when I look at the calculated billings and I look at annualized billings, the growth rate there actually was about what it was last quarter, actually a little bit better.

So, it's something we do.

Anyway, it looked pretty good to us.

Thanks a lot.

Jennifer Loew, Morgan Stanley.

Mark, when you gave the guidance, you made a comment that you were cognizant of the macro -- certainly, you just put up a fairly strong quarter.

Are you seeing any impacts on your business from forward spending cycles or budgets or anything like that?

I think, particularly in Europe, as we go through our sales cycle, and we have long sales cycles.

We're selling enterprise applications, and so these cycles can last numbers of quarters and years.

There's always caution when the overall economy is cautious.

So, we are seeing some in Europe.

Great.

And maybe just one for Aneel.

On the Workday 9 rollout, one of the new features that you flagged was this capability to do more customization work.

What's the feedback been like from your customers at this point?

I know it's early, but are you finding that their taking advantage of that capability and it's generating a lot of interest?

Or is it still too early to tell?

This is been a common request over the last couple of years.

Again, I think there was a lot of demand for this feature.

We actually rolled it out last fall and in a test way with our customers, and there was great reception.

Now people are putting it into production.

So, it's been very positive in the type of feedback we've gotten.

I would expect that, over time, we just bring that customization capability, for lack of a better term, to a broader set of business objects.

Great.

Thank you.

Jason Maynard, Wells Fargo.

I had two questions.

So, first question, I'm curious -- just on the -- some of the customer wins that you announced.

What were the application portfolios they were running previously?

Maybe talk a little bit about if you've seen any change, in terms of, if you will, the source of where your new logos are coming from?

Then I have a follow-up on that.

The primary source are the two legacy vendors, SAP and Oracle.

That really hasn't changed.

I don't think that will change.

One we did not mention on the call, which was clearly a big win for us in Europe was Phillips.

We recently landed that account, as well.

So, all of these large multinationals are typically running SAP, Peoplesoft or Oracle.

Sometimes they're running Lawson, but that's generally a small fraction of the marketplace.

That dynamic hasn't changed for the better part of three or four years.

Then, the follow-up I had on the financials -- you talked a little bit about it.

But, if you have to sort of look now 90 days later from last quarter, where would you still tag the financial application relative to the maturity of the HR applications?

That's a hard -- the HR applications are not a static target.

They're moving very rapidly.

I would peg financials probably at 80% to 85% on a functional comparison to the legacy systems.

That's the targets that are not moving at all.

Those are fairly static targets.

The big investment on scalability is continuing to happen, and we are seeing the benefits of that.

I feel like we are going to go into next year with a very competitive set of financial products that are competitive today, they get more competitive over the next 12 to 15 months, pretty much exactly what I said during the IPO roadshow.

Nothing has really changed.

We are on track.

If there is an area I'd highlight, the first area where we made investments in financials from our industry-specific area has been in the higher-end market, and not surprisingly as a result, we won a lot of name-brand higher-ed institutions who are either going live in our financials or have purchased our financials.

That list includes places like Brown and Yale, and those are effectively the top tier institutions that are choosing our financials.

It's a clear takeaway, that as we mature the product and add industry-specific capabilities, it opens up those markets.

It's been a great test bed for us from that perspective.

Maybe if I can squeeze one more in on recruiting.

Just as you really start to work with your design partners.

Are you looking at this as US first?

Or is your plan to maybe make recruiting a global addition for the entire base, as you roll it out?

How are you thinking about this one?

It will be a global product.

NGA will be a global product.

In the early releases, the pre-GA version, we might be more focused on US use cases.

But, as part of the general availability, everything we build from that perspective on the HR side is built to be global other than payrolls, which by definition are local.

Got you.

Fantastic, I appreciate it.

Thank you, guys.

Brendan Barnicle, Pacific Crest Securities.

Thanks so much guys.

During this quarter, we saw some company success and had some issues with implementation.

They didn't have quite enough implementation [parkers], and that slowed down some business in some cases, at least on the implementation side.

How do you guys feel about your scale on the partner side and whether you've got enough folks and can ramp that quickly enough for the growing demand?

At this point, we feel pretty good about where we are.

It is definitely something we monitor on a regular basis.

I think we've had some very positive developments in the last six to nine months.

Historically, we've had a series of boutiques that have been investing in Workday practices, and then we had [Extensure] and Deloitte, and recently we had IBM and PWC and Hewitt and Towers, all -- actually, Towers was early.

All of them are beginning to invest.

Now, we've seen a step up from the big SI firms along with the boutiques.

I see a lot of scales coming online in the next six to nine months.

One of the ways to look at that, if you look at our own professional services, it's something that's growing at a slower rate, normalized 30% growth this quarter.

We didn't change our guide on professional services for the year.

So, we feel like our ecosystem is being built out as we planned at the beginning of the year.

Great.

Then, Aneel, just following up on recruiting.

As you go to market, do you anticipate any difference in the way you go to market with that product?

Will you have a dedicated sales force or change any of the quota patterns around that when it comes in to market?

In terms of a dedicated sales force, I doubt it.

We will definitely have presales folks that are very well-versed on the new product.

In terms of taking it to market, we are trying to match, over time, the best degree of capabilities of the point solutions, but offer the integration of all of the pieces coming from one vendor.

In a very typical use case, in a slow job growth environment, many companies are looking to recruit from internal candidates, as well as external candidates.

The point solutions don't have visibility into that internal pool database.

In the case of Workday, since the recruiting system is tied into the core HR system, it's one in the same, and you can valuate internal and external candidates together.

That's a huge thing that hasn't been available on the market before.

They're going to be areas like that from a product perspective that will be first in the marketplace and will make it a very differentiated product offering.

I suspect that -- and we have a lot of salespeople from some of the point solutions vendors of the past.

I suspect a lot of our existing customers are just going to sign up as soon as the product's available.

Terrific.

Thanks, guys.

Richard Davis, Canaccord.

Just a quick drill down on payroll.

I think you are exactly right, the payroll is at least regional.

But to put together a multinational platform, is that more about pounding out a bunch of workflow rules?

And therefore this is simply just takes time?

Or is there something that I'm missing that will make it harder to become a multinational?

I know you can do it regionally and stuff like that.

When you think about that effort, maybe you could help me think that through.

Payrolls are very, very local.

They are tied to things like union rules, and in the German and French markets, things like worker councils.

Taxation is different.

Taxation is different across the 50 states.

So, the way that the payroll market has evolved historically has been on country payroll solutions.

Today, we have a US solution.

We have a Canadian solution.

Over time, you can see us add a few other solutions.

In other markets, we will tend to partner.

We can partner with Ceridian, we can partner with an ADP, most of our customers will choose these vendors for market, in markets where their employee populations are less than 5000, they will choose an outsourced solution anyway.

We tend to partner in some of the markets that we are not building local payrolls for.

But, I would expect over the next three to five years, you'll see our portfolio of local payroll products grow over time, but it will never be 100 -- it might be 10 to 15 over time.

Even that is a guess at this point.

Great.

Thank you very much.

That's helpful.

Peter Goldmacher, Cowen and Company.

Guys, can you talk a little bit about what Oracle and SAP are doing to compete?

How are they trying to keep you guys out of their accounts?

Really nothing has changed.

Very aggressive pricing.

That's really the number one tactic.

I would say the second piece is give us time to build a cloud product.

That's probably more the case of SAP with success factors, give us time to build success factors and to record system of record.

So when -- I'm sorry.

But those tactics have been the same ones for the last 15 months.

Some of those acquisitions happened.

So, can you give us a sense of what's happening with your win rates?

Are people losing patience with those guys?

We don't comment on win rates.

I was just -- look at our growth rate and you'll get a sense of how well we are doing.

The world's moving to the cloud.

There's no question about it.

I heard about that, yes.

But, for a number of years, legacy vendors fought it.

Now, everyone is saying -- the future is the cloud.

Yet, we're the one vendor, we're the youngest vendor, but we have the most mature solution.

Every year that goes by, there's more companies that are on a legacy platform that are just out of time on either maintenance or have to do a forced upgrade.

The market just keeps growing for us.

Okay.

Thank you.

Pat Walravens, JMP Securities.

Aneel, as we look out three to five years, what percentage of revenue would you like to see coming from financials?

How should we think about that?

Three to five years, I'm going to defer that to Mark.

Pat, it's an interesting question.

On the one hand, we think there's an awful lot of opportunity left in HR.

When you look at our total Tam and as we think about potential customers having employees of 1000 or more, that's a big population.

It's over 10,000 companies in the US, alone, and we have 450 customers.

So, my hope is that financials grows at triple digit rates.

But at the same time, HR is growing -- continuing to grow so much, that it still isn't as significant as HR.

That crossover point will be later in time.

I think, the revenue -- trying to clarify the revenues is harder than maybe bookings.

Given the lag effect of revenues.

I would hope in five years that the financial product line is approaching HR in terms of new bookings.

I think that would be a reasonable target, and that market is 3 times the size of the HR market.

We went through the same phenomenon at Peoplesoft, and at some point along the way, financials took over from HR as the main product line.

Great.

That's helpful.

Thank you.

Brent Thill, UBS.

Aneel, you mentioned higher-ed.

Given the success you had at Peoplesoft, are you seeing customers come to an end of life?

Or are they just wanting to move on?

Can you give us a sense of what you are seeing in that market?

Maybe contrasted from the commercial sector and what you are seeing in your pipelines?

I think the higher-ed market faces the same issues as the commercial marketplace.

They are running Peoplesoft, SAP, Oracle for their legacy HR and accounting systems.

I'd say there is probably a higher propensity that they are running -- higher percentage chance they are running Peoplesoft.

This particular market, my cofounder Dave is very well-known and he's very well known across markets.

But he started in higher-ed.

So, we go into a very friendly environment in the higher-ed marketplace.

Given the requirements that you have to add to the products for higher-ed, whether it's grants or endowment support or encumbrance accounting, that stuff is an investment that we've made that no other cloud vendor has made.

So, we have a unique advantage there from the product side.

Okay.

Great.

Just a quick follow-up from Mark.

I know you don't talk about average selling prices, but can you just give us a sense of what you are seeing on initial commitments this quarter versus what you saw, maybe the beginning of last year?

Just help us at a high level kind of shape of what you are seeing?

Well, one of the trends that we continue to see is that the initial contracts are coming closer to the three years than they had been historically, which even a year or so ago, we were closer to four years than to three years on the initial contract value.

We continue to see a blend of very large accounts such as Phillips, Levis, but also mixed with middle market accounts and uptake in a lot of confidence in smaller companies than the Fortune 200 that are implementing Workday.

It's really been a blend.

Thanks.

Walter Pritchard, Citigroup.

This is Robert Chen for Walter.

My first question is about the mid market.

I think last quarter you talked about pretty significant traction driving some strength in Q4 there.

Are you seeing that strength in the mid market continue this quarter?

We did.

We had actually several ultimate replacements that at some point will be able to announce when we get the okay from customers.

We are seeing strength, not just in legacy replacement, but also other cloud solution replacement.

Great.

Secondly on the Big Data product.

Could you give us some background on what the use cases are there?

Where you expect to build your pipeline, in terms of end-user solution there?

I would think about the Big Data products, really as the next generation of data warehouses.

A place where you can take a whole bunch of data from your corporate systems, from third-party systems, from data outside your enterprise and effectively dump it into a warehouse and analyze against it.

We are able to take advantage of some of the modern technologies that are out there, counter databases, platforms, put it in the cloud and deliver a much easier to deploy, easier to use solution at a fraction of the cost of legacy systems.

So, what you will see, over time, is that we will continue in the same way we've taken a bite out of the HR market, you will start seeing us take bites out of the enterprise data warehouse market with this offering.

It's still early days, but that's the course that will take.

Thank you.

Operator, we are going to take two more questions.

Ross McMillan, Jefferies.

Aneel, you mentioned you're on target for both functionality and scalability of the financial deck.

I'm just curious about the latter comments on scalability.

Can you just talk to that and maybe contrast what you have to do to get financials to scale, relative to the HR solution?

Then, I had one follow-up.

Just by the nature of products, if you think about HR, HR is primarily a record-keeping app with workflow.

But it's not a high-volume transaction processing application.

You then move into payroll, which is batch processing, and then you move into financials, which is true online transaction processing.

Much like we did at Peoplesoft, we had to continue to invest in the technology to take on these different solutions and the characteristics of these different solutions.

In the case of our financials, we came to the conclusion that to scale to the Fortune 500 type requirements in areas like payables, receivables, ledger postings, we needed this capability called AOD, which is effectively a fast way of running transactions and pre-summarizing data and running transactions.

We built that technology, and now we are basically selling it into different parts of the application to reach scale.

You wouldn't need that technology in the HR world, and wouldn't need that technology in the payroll world.

Those are different computer science problems, and again, it's sort of akin to Peoplesoft going from a two-tier to three tier architecture when we move from being an HR company to an HR financial -- HR financials company, it puts more processing requirements on it.

We've been on this project now for a year, and in another year will have pretty much covered the basis of where we need to touch the financial products from the scalability perspective.

That's very helpful.

Then, just a follow-up for Mark.

You gave me some helpful color on your thoughts around deferred revenues this year.

Just on the long-term deferred, is that going to continue to scale down sequentially, as we go through this year?

Should we expect to see long-term deferred decline sequentially each incremental quarter?

Thanks.

The element around long-term deferred is the fact that we are doing closer to one year of billing and collection upfront.

What was driving long-term deferred is when we had multiple years of billing and collection.

So, as we move closer to one year, which was the pattern that we experienced again in this quarter, there will be a crossover point, which is at least a couple of quarters out, where there should be some stability around it.

But, for the time being, I think you should just expect a longer-term deferred to continue to decline sequentially.

Thanks a lot.

Brian Schwartz, Oppenheimer.

Just one here for Aneel from a high-level.

Just wondering if you could share some color on trends that you are seeing around the tax rates.

As you see in the press release, you mentioned that the U bought the full suite of apps.

When you look at your pipeline and compare it to say 6 to 12 months ago, are you seeing any shifts to prospects starting out with multiple products, or a full suite, as opposed to a single application and then adding on in the future?

Thanks.

We don't have many SKUs to begin with.

We've taken a different path than some of the legacy vendors, where they tend to nickel and dime the customers.

So, our core HR application covers talent and HR and benefits as part of one app.

That's historically the place people start.

The payroll tax rate continues to be very healthy.

We haven't talked about percentages, but I think it ends up being around half, historically.

I don't know what it was this past quarter.

Nothing really changed.

I'd say the only thing that changed from an attach rate is it increased interest in financials, and I hope that manifests itself in bookings over the upcoming quarters and years.

Then, if I could just squeeze one in for Mark, here.

Just on the revenue guidance here for the year, you did mention the Big Data Analytics product is on track to be a GA in the second half of the year.

Just wondering if your current annual guidance assumes any revenue contribution from this product cycle, or we should think about that more as a next year revenue.

Thanks.

Well, when you think about the dynamics of revenue recognition, to the extent that there's anything for any of the new products, it's very small.

It's not a significant part of the model.

Great.

Thank you for taking my question.

Okay.

Thanks everyone.

That wraps up the call.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone may now disconnect and have a great day.