Workday Inc (WDAY) 2014 Q3 法說會逐字稿

Welcome to Workday's third-quarter earnings call.

(Operator Instructions)

With that, I will hand it over to Mike Haase.

Welcome to Workday's third-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.

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 and documents filed with the Securities and Exchange Commission, including our most recent 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 and 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 fiscal 2014, also exclude employer payroll taxes on employee stock transactions and non-cash interest expense associated with our convertible notes.

The fiscal 2013 non-GAAP measures also exclude a donation of shares 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 fourth-quarter quiet period begins at the close of business January 17, 2014.

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.

Thank you to everyone on the call that joined our first Analyst Day held Workday Rising in September.

It was really nice to see all of you and, hopefully, while you were with us outside of San Francisco, you had the opportunity to talk with some of our customers about their Workday experiences.

Customer successes most important to us, so I will start there.

In the third quarter, we announced that Thomson Reuters brought Workday live for 60,000 employees in 100 countries on a single day.

We also announced in October that Sanofi, one of the largest companies in France, joined us as a brand new Workday customer.

Additionally, Diageo, the world's leading premier drinks business, went live with the first phase of its Workday deployment in July.

I'm also excited to share that Morgan Stanley, one of our largest financial services customers, went live on Workday for its entire employee population earlier this month.

Workday now has more than 550 customers globally and, of those, approximately two-thirds are live on the system.

At Workday Rising we announced a 97% customer satisfaction rate based on the most recent customer survey.

This is a number we are certainly very proud of and we remain focused on maintaining super-high levels of customer satisfaction as we continue to grow and bring companies live on Workday's broadening suite of applications.

In the third quarter, we announced the on time general availability of Big Data Analytics.

Workday recruiting is progressing as planned, and we announced that we began building an entirely new application, Workday Student, to change the way colleges manage students from prospecting through graduation.

We also remain extremely focused on broadening and scaling Workday Financial Management.

I perceive our monthly meetings with the financials team, bringing together the development, product management, marketing, services and sales leaders for the financials product line to quickly solve issues that maintain the feeling of a fast-moving start-up, much like we were in the early days of selling human capital management.

In fact, sales grew nicely in the third quarter, with 10 new financial management customers, our best quarter we've ever had for this suite.

We have increased development resources in this area and we look forward to sharing more positive customer success stories as enterprises continue to move finance to the cloud.

Finally, today we announced that Jerry Yang has joined the Workday Board of Directors.

As a technology visionary and global business leader, Jerry has great perspective to offer.

And as we continue our global growth, he will be a tremendous asset to Workday.

I will now turn it over to Mark.

Thanks, Aneel, and good afternoon, everyone.

We're very pleased with our financial results for the quarter and with the progress we have made in our product and market expansion.

In the third quarter, we generated record quarterly revenues, continued to make progress towards profitability, and added more than 50 new customers, including 8 global 2000 customers, and 10 new financials customers.

We were also very pleased with the attendance and excitement at our annual user conference, Workday Rising in September.

The event was a big success with more than 3,500 attendees compared to 2,500 last year.

During the quarter, our Big Data Analytics solution became generally available and we are making significant progress building out our financial solutions.

We are also on track for the release of our recruiting product in the spring of 2014.

Operationally, we continue to execute well as we expand our footprint globally.

We've made significant investments in our data centers, new product initiatives and expansion of our office facilities to accommodate our growth.

We are able to fund these investments because 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 a customer for years beyond the initial subscription period.

This is driven by a combination of the importance of the application 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, with nearly $1.3 billion of cash and marketable securities and over $350 million of unearned revenue.

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

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

Total revenues for the third quarter were $127.9 million, an increase of 76% 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 $93.9 million, up 82% from last year.

As subscription revenues are recognized ratably, our revenue growth represents the service we have provided to our more than 550 customers.

The weighted average duration of new contracts signed in our third quarter was approximately 3.4 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 very high renewal rates and that the economics of shorter-term contracts are better for us in the long run.

Professional services revenue was $33.9 million, an increase of 61% compared to last year.

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

The accelerating rate of growth in professional services was largely due to increased activity from financial customer engagements, including platform customers who have purchased both HCM and financials products.

We anticipate an increased percentage of middle-market and financials customers will migrate to our partner ecosystem, over time, as we experienced with HCM customer engagements.

Total unearned revenue at quarter-end was $352 million, up 8% sequentially and 40% from a year ago.

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

Short term unearned revenue was $279 million, an increase of 13% sequentially and 70% from last y ear.

Long-term unearned revenue was $72 million, down 7% sequentially and down 17% from last year.

As we have discussed in the past, as our balance sheet strengthened during our fiscal 2013, we changed our sales compensation structure to deemphasize multiple-year upfront cash collection, which was previously used to finance the business.

So the percentage of the contract billed up front is typically lower than in the periods prior to the change.

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

During the third quarter, that trend continued, and on average, we collect just over one year of the total contract value.

Looking ahead to the fourth quarter, the strength of our business model and continued momentum provide very good revenue visibility and we expect a solid fourth quarter.

Total revenues for the fourth quarter are expected to be within a range of $133 million to $138 million, or growth of 63% to 69% as compared to the prior year.

Subscription revenue is anticipated to be within a range of $105 million to $108 million, reflecting year-over-year growth of 76% to 81%.

When we report our fourth-quarter results, we expect to provide revenue and operating margin guidance for our fiscal year ending January 2015.

However, as we develop our operating plans for next year, we are building our investment and hiring models assuming approximately 50% revenue growth for fiscal 2015.

With respect to drive to billings, or the sum of revenue and the change in unearned revenue, we now expect the total for the current fiscal year will be no more than $570 million.

And we expect the first quarter of fiscal 2015 to be down sequentially from the fourth quarter of the current fiscal year, and approximately flat to this current third quarter.

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 on the tables posted on our IR website.

We had just under 2,400 employees as of the end of our fiscal third quarter.

Last quarter, I mentioned that we were a bit disappointed that we had been unable to hire to our operating plan, but that we were expecting to make up for lost ground, and we have.

We not only caught up to our hiring plan as of the end of the third quarter, but we increased our hiring budget for the remainder of the fiscal year.

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

As you consider our operating expenses for our fiscal fourth quarter and fiscal 2015, it is important to know that we are ramping hiring across geographies and plan to make significant investments in our market expansion efforts.

Our third-quarter gross margin was 64%, up 68 basis points from the second quarter.

The subscription gross margin was 81.6% and includes the costs related to providing our cloud applications, compensation and related expenses for operations, staff and data center networking and depreciation.

The subscription gross margin improved 122 basis points sequentially, due largely to increased sales volumes and scale efficiencies.

We expect subscription revenue will increase as a percentage of total revenue over time, and that our gross margin will likely fluctuate from quarter to quarter.

Our professional services gross margin increased 432 basis points sequentially, driven by strong utilization rates of our consultants and a concerted drive by our customers to go live before year end.

We expect utilization rates and the professional services gross margin to decrease in the fourth quarter, driven by normal holiday season slowing.

We are also continuing to invest in programs to ensure ongoing customer success post-deployment and to support implementation of new products as they are brought to market.

Our third-quarter operating loss was $19.9 million, or a negative 15.6%.

This was significantly better than we had anticipated and largely the result of the operating leverage received on increased revenue and the very strong professional services margins.

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

Product development expense in the third quarter was $41.9 million, up 12% sequentially, and up 57% from a year ago.

We continue to invest in our product development for new solutions as well as strengthening and extending our suite of HR, payroll, and in particular, financial management applications.

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

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 $49.4 million, up 17% sequentially and up 56% from last year.

Our customer outreach programs were very active during the quarter, including Workday Rising, HR Tech and various other trade shows and customer events.

General and administrative expense was $10.4 million, up only slightly from Q2, and up 28% year over year.

In Q3 of last year, we ramped up for our IPO and made significant investments to build staff levels to support a growing public Company.

The net loss per share was $0.12 on 174 million weighted average shares.

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

Taking into account our adjustments to GAAP operating income that Mike referenced at the start of the call, we currently expect our fiscal fourth-quarter non-GAAP operating margin to be within a range of a negative 17% to 21% of total revenue and for the year to be approximately negative 20% to 21%.

The GAAP operating margin for the fiscal fourth quarter is expected to be 16 to 18 percentage points lower than the non-GAAP margin.

And the full-year 2014 GAAP operating margin is expected to be approximately 13 to 14 percentage points lower than the non-GAAP operating margin.

Other expenses increased in the quarter to $1.1 million, due primarily to having a full quarter of interest expense associated with our convertible notes offering issued in June.

For your modeling, our quarterly non-GAAP interest expense from the converts is approximately $1.6 million.

From a GAAP perspective the Q4 interest expense, including approximately $5.8 million of non-cash amortizations reflecting the discount and issuance costs, is approximately $7.4 million.

The interest payments on the notes are made during our fiscal second and fourth quarters.

Now, on to our balance sheet and statements of cash flows.

Cash and marketable securities at quarter end were nearly $1.3 billion, down $12 million sequentially.

Operating cash flows were $7.1 million for the third quarter, and $17.4 million for the trailing 12 months.

Free cash flows for the third quarter were a negative $9.7 million, and for the trailing 12 months, a negative $41 million as we continue to build out data centers and expand our office space.

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.

We anticipate total CapEx of approximately $75 million for fiscal 2014.

To summarize, we are very pleased with our solid third 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 to make 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.

(Operator Instructions)

John DiFucci, JPMorgan.

Aneel and Mark, can you talk a little bit more about those 10 new financial management customers?

Give a little bit about their character, are there any public companies in there?

Any Fortune 1000s?

Maybe verticals?

There are no Fortune 1000s.

In terms of the names, we can't disclose those right now.

Consider them to be a combination of well-known educational institutions and medium-sized corporations.

Okay, great.

If I might, just a quick follow-up on the services.

Mark, I think you mentioned that the financial customers and the big uptick this quarter and that actually affected the professional services.

Is that because it's relatively new out there and the partners still have to come up to speed in helping customers with the financial solutions?

Or, is there something else there?

I will take that, John.

We are at the stage with our financial products as we are ramping up new functionality quickly and bringing out new capabilities, that we just wanted to stay closer to these first wave of very large deployments.

We have got about 25 customers live.

We have got another wave coming online of bigger companies.

We wanted to just make sure we were connecting services back to our development organization, and having a bigger footprint until the product really is a mature product the way the HCM product is.

Even in the guidance, Aneel, I think the top end of the guidance anyway, implied for professional services was at about the same rate.

When do think you'll start to see that come down a bit?

John, this is Mark.

Part of the guide for the fourth quarter really reflects the fact that we have some seasonality in the fourth quarter with the holiday season.

We are not expecting the sequential uptick that we might normally get.

But I wouldn't expect professional services revenues to decline significantly over time.

As we continue to build the business, add more customers, we are still doing HCM customers, as well as financials customers.

And more and more customers that are in the middle market, as well.

We will take prime on those.

Okay.

Great.

Thanks a lot.

Impressive job this quarter, guys.

Heather Bellini, Goldman Sachs.

Just wanted to follow-up on financials.

The question is, do they already tend to be HCM customers?

Maybe if you could break down between the 10 new adds you added this quarter.

Also, in terms of the sales process, do financials and HCM customers -- is the approach different?

Are you often pitching them together?

Just in general, what are the synergies between the two sales approaches for financials and HCM?

We are not going to break them down by where they came from.

But in terms of the synergies, there's quite a bit of synergies for companies.

The administrative function of HR and finance work very closely together in most businesses.

So, the synergies are obviously very high.

We have really three organizations focusing on selling financials.

We have our mid-market, and they sell it as a suite.

This is the 1000 to 3000 segment.

We then have a financials-only sales organization that sells the 3000 and above.

All they do is sell financials, live or die by selling financials.

The E&G organization sells financials with HR as a dedicated industry business unit.

Last quarter, all three did well.

Okay.

Great.

Also, last quarter you talked about focusing more on the 1000 to 3000 employee segment.

I was hoping for an update there.

Maybe sales headcount you added or customers you added.

We are not breaking out specifically the way that we are segmenting our go to market.

We continue to have really good traction in the mid-market accounts.

It's also reflected, frankly, in the professional services revenues that we saw this quarter, where we did more of the primes on the mid-market, as we build out the IP for that part of the market, as well.

Just to be clear, we started the direct sales focus on 1000 to 3000 a while ago.

We just highlighted the last quarterly update.

Okay.

Great.

Thank you.

Brent Thill, UBS.

Thanks.

Mark, when you look at ASPs versus the past.

I know it's hard to give us a lot of metrics.

Could you give us a sense what you are seeing, as you roll out these new solutions, in terms of your initial ASP?

And how you see the user counts trending?

Just give us a high-level sense of what these look like.

I know everyone respects that you guys are keeping some the cards close to your vest.

But if you could help us understand how you are seeing that playing out, we'd appreciate it.

Brent, I think it's not so much how we are disclosing the information, it's just that we have a real broad diversity of customers in our customer base, from the very largest global enterprises, Fortune 500 companies, to companies with as few as 1000 people.

When we look at overall ASPs, we take really into account the discounting levels that we have in place on off of our pricing algorithms.

The thing I will say, is that we are very disciplined and continue to make progress with respect to the discounting that we have.

But that said, it varies really from geography to geography and from market to market, as well as competitive dynamics.

So, it's just hard to peg, if you will, an average revenue per headcount for Workday.

It's partly the diversity of our customer base.

I would say that ASPs in general are impacted by the new product introductions.

They are all doing well and we expect good things out of Recruiting coming into next year.

In the case of the government business unit, we tend to sell HR and financials together in one sales cycle.

That's a very positive driver, as well.

The ASPs are impacted both by discounting, but also by the growing product portfolio, which we are really beginning to see the benefits from.

Okay, Aneel, if I can follow up quickly on higher education.

It seems like given the legacy there, in terms of your success in that market, can you give us a sense of how you are having an impact there?

It seems like you are seeing an uptick a little bit faster, maybe than some of the other verticals or maybe I am misreading that.

There's two pieces to it.

About three years ago, we started building out specific HR and financials capabilities for the education and government marketplace.

They have unique requirements.

In the case of financials, there's things like grants that you have to cover and we've built that.

Then at Rising, we announced the student system initiative that really Dave is driving.

We've gotten great reception to that initiative.

And we have, I think, eight design partners now signed up who are actively involved in helping us shape that product line.

So, I think it's a great test bed for Workday diving deeper into an industry.

Given PeopleSoft's heritage and Dave's heritage, higher ed is a great place for us to start.

Great.

Thanks.

Ross MacMillan, Jefferies.

Aneel, I wondered if you could talk a little bit about the Big Data Analytics product.

Where you are seeing the early adoption?

What sort of data is being brought into that from external sources?

Thanks.

You know, it's interesting.

It really started out as a platform that was being sold with HR.

But as we've started to gain traction with financials, the use cases are, frankly, far broader and more powerful in financial.

You can imagine any kind of data that's being created, we can effectively store.

So, I would say, if you look at the early customers, those are mostly HR use cases, the two we announced, Spectrum and McKee Foods are both using it for HR cases, bringing in third-party either compensation data or third-party data from other transactional systems.

So, those would be the typical use cases.

When we get into the financials world, people are looking at a lot of things around customer profitability, segmentation, industry segmentation, geographic segmentation.

Those use cases, frankly, are still developing right now.

The product's really been only available for a few months, and so we are learning along with the customers.

Would you expect stand-alone sales with Big Data Analytics?

Or is it always going to be in tandem with another application you sell?

For the time being, I would expect it's always in tandem with either the HR suite or the financial suite.

Ideally, with both suites.

The ideal situation, which I think we will see more and more of, is people will just buy the full HR suite, the full finance suite.

And then the Big Data piece, actually, effectively becomes their enterprise warehouse, as opposed to just an HR warehouse or a financial warehouse.

Okay.

That's great.

Maybe one quick follow-up for Mark.

Just wanted make sure I had this.

Your comment on Q1, I think it was with reference to billings, and you said it would be down sequentially and about flat with the Q3 numbers.

Did I hear that correctly?

That's correct.

Perfect.

Down sequentially from Q4.

Yes.

Thanks very much.

Great job, guys.

Karen Russillo, Wells Fargo.

Thank you.

In the past, you talked about when you came out with the recruiting product, and thought about that was in response to requests from customers that wanted you to build this product.

Coming out of Workday Rising, can you give us a feel for what the early read looks like for you and how we should think about that next year?

Is this going to be something that you expect to ramp even faster than the financials product?

It's hard to compare.

I think the buying pattern around recruiting will be tied to existing HR customers that generally have a recruiting system and are looking at retiring that legacy, either on premise or cloud system.

The reception at Rising was fantastic.

It's not just because it's Workday building recruiting.

It's because we really re-thought and re-imagined recruiting around two core concepts.

We thought about it from a manager's perspective and we thought about it from a mobile perspective.

As a result, it doesn't look like any traditional recruiting system.

It looks like the recruiting system you'd build, like we did, with a clean sheet of paper.

It hits the market in the spring as a first release.

But I suspect that people won't really use it to retire legacy until the following August release.

I could see customers signing up for the subscription in the early half of next year.

But, not really taking it into production until the August update is out.

The late summer update will largely be a good platform for replacement of legacy and other on-demand recruiting systems.

Okay.

Great.

Congratulations on the quarter.

I was going to say, I expect a pretty high attach rate of new sales with recruiting, once it's viewed as a core module.

Jennifer Lowe Swanson, Morgan Stanley.

John Prager calling in for Jennifer.

I want to echo everyone else's comments.

Great quarter and great results out there.

Aneel, maybe this first question for you.

Can you talk a little bit about the competitive environment?

Clearly your results are showing that you guys are continuing to really rise to the top.

Obviously, you have some competitors that have been talking about their products and SAP with success factors and traction there.

Tell me what you are seeing in the environment?

You're holding pricing tight, but changes you are hearing out there would be great.

I don't think we are seeing anything new in the competitive environment.

I think the only thing that's changing, is we're beginning to get real traction with financials.

The neither of the legacy vendors really has a solution built for medium and large companies, for financials and the cloud, with a clear cloud architecture.

We are translating our success in HR and moving in into financials.

In the HR world, nothing has really changed.

It's the same two and at ultimate at the lower end of the market.

Their tactics really haven't changed and their products are not changing quickly enough.

Maybe for Mark.

I know you guys haven't really had a major renewal cycle come up, given the duration of your contracts and how you're ramping.

As we head into 2014, we start to see that base of renewals start to pick up a little bit.

I'm kind of curious how you guys are thinking about the opportunity in your base, given all the new products that you guys are having in the market and how you're thinking about getting your sales guys aligned, with those renewals.

Any commentary you could provide in helping us thinking about that opportunity.

How you guys are going to capitalize it would be great as well.

Thanks a lot.

Sure.

Your renewals will, as you point out, will continue to ramp, just as we move forward in our maturity as a Company.

But that's that it's still small, relative to net new customers and new bookings.

As we look at renewals with customers, one thing to keep in mind is that we keep really strong engagement with our customer base throughout the life of the contract with them.

So, we are consistently communicating with them.

Our customer network is really strong.

Our customers actually collaborate together and work well together.

So, we don't see the renewal cycle, necessarily, as a single opportunity to sell new things to our customers.

Because we always have contact with them and they have a good connection with what we're doing as a Company and the new products that we have.

Great.

Thanks a lot, guys.

Peter Goldmacher, Cowen.

Thanks.

Just a quick question on the billings number.

That billings number was, I think, a lot stronger than we were all thinking about.

Can you help us understand some of the parts in play on that number?

Like, now that I think you've anniversaried the wholesale shift in invoice duration, and maybe the impact of some larger deals and quantified if there were larger deals or if you are seeing deal sizes tick up?

You talked a little bit earlier about more product impacting deal sizes positively.

But any more detail would be great.

Well, Peter, when we guided last quarter, we had indicated billings to be approximately flat to the second quarter, which would have indicated mid-70%s growth.

We continue to see a trend of having closer to 1 year ACV on cash upfront.

Certainly, billings is impacted by that.

This quarter, to an extent, may have been slightly above where was in the second quarter, and had some modest impact on overall billings.

But it was really just a trend around volumes during in the quarter, with the number of customers that we had.

We are seeing more of a steady state on looking at billings tying more closely to ACV.

That said, it will take a couple of years before it cleanly fleshes out, because we did have contracts a year or two years ago, in which all three years were included upfront.

It's going to be a bit volatile from quarter to quarter.

Okay.

Thanks a lot.

Walter Pritchard, Citigroup.

Thanks.

Mark, I wondered if you talk a little bit about your hiring plans, as you go into Q4 here and look at it next year.

Should we think about a ramp up to build a lot of capacity?

Or do you feel like you've got a lot of the capacity you need on board here to start fiscal 2015 at the level you'd like?

Walter, we will continue to hire into the fourth quarter and through the fourth quarter into the first quarter for next fiscal year.

Particularly internationally.

As you know, our focus from one of the key initiatives that we have from a go-to-market perspective is our expansion in Europe and in Asia-Pacific.

To that extent, we will be hiring at levels that are above, maybe where from a productivity or efficiency perspective, you might expect in a more mature market like we have in North America.

I think our guidance for Q4 reflects, on operating margin, reflects our headcount plans.

Then, as we exit the fourth quarter and talk to you about our results for the full fiscal year, we will talk more about Fiscal 2015 and our expectations around some of our investments.

For Aneel, on the professional services side with financials, I'm wondering, do you need to bring on new partners or new practices within partners that you have, where they are relationships that you may have to still build at this point?

Or, do you have the relationships in place either with existing partners or existing folks at those partners to be able to ramp the professional services relationships on the financial side?

I would say for the most part, we are just going to our existing partners and they're very excited about our financial products.

We are not really needing to add any new partners.

They're just building a sister practice for financials.

It is a different skill set.

They might seed it with one or two Workday people that know the HR product from an technology perspective.

But generally, they're bringing accounting people into the mix.

They are all ramping nicely.

Great, thank you.

Raimo Lenschow, Barclays.

Just following on on the hiring comments.

Talk me through how you are planning to ramp up the guys on the financial side of the business here?

You mentioned earlier, Aneel, that you have a specialized sales force there.

Given where the product is, and at the Analyst Day you were not quite sure when you basically hit that milestone where you see the acceleration.

How do I have to think about your plans on filling that out?

Are you just pre-hiring, basically at the moment, full-gear?

And by the time they get productive anyway, then new product is ready?

How do I have to think about that process?

Thank you.

The product is ready.

The product has been ready for a bit.

It's about what markets it can go into.

So, today, a mid-market services company, a midsize company, up to several billion dollars in revenues, we are a great solution for them.

We are a great solution for education and government institutions.

The scalability project that we had undertaken a year and a half a go is now two-thirds of the way done.

For a global Fortune 500 company, we are not there yet.

That's probably a year away.

But there's a big chunk of the market that is available to us today, which is why we are beginning to get traction.

We have, by the end of last quarter, I think we had 25 live customers.

We will at least hopefully double that by the end of next year, if not a lot higher than that.

It's more about, like HR, we started out in the mid-market and moved up-market.

We're doing the same with financials.

It's a market-ready product today.

As our product adds more scalability, adds more functionality, the salespeople just call on bigger and bigger customers.

They are not really just hanging out.

They're out there being productive today.

Okay, perfect.

So, the guys that are selling at the moment, they are basically scaling them up into the bigger accounts and you are ready for that?

Yes.

We have some flagship big accounts.

We had announced JB Hunt a while ago.

We're working on their deployment as a customer.

So, when we see a customer that is a good fit for where our product will be in the next 12 months, and we have a reasonable chance of signing them, our salespeople will go out and sign those today.

In the case of higher education, we are ready have some very large institutions live.

Brown is live on financials, as an example.

In education and government, in particular, we are already well into the larger organizations in that marketplace.

Perfect.

Okay.

Thank you.

Brendan Barnicle, Pacific Crest Securities.

Aneel, I wanted to follow up on Walter's question on commercial services.

We've seen a lot of SaaS companies over the last year have some challenges and not having the capacity for all the demand in terms of new deals that they are selling.

You guys have seemingly kept on top of that.

Have you been able to stay on top of that?

And how do you continue to plan around that, given the high volume of new deals you are signing?

Well, I would say there are two pieces.

We do a very rigorous job planning with our partners about bringing people online, whether it's Accenture or Deloitte or IBM or PWC.

We plan with them about the capacity we need them to bring online to help us scale the ecosystem.

Our smaller boutique vendors are doing the same.

The DayNines of the world, the Appirios of the world.

They're all doing a great job ramping up.

I'd say the unique part of Workday is that we have a great team and a great leader in Jim Bozzini.

And an orientation that we will fill in the gaps wherever we need to.

Jim ran a 4,000 person professional services organization at PeopleSoft and that's not our goal.

But when we need to flex up to meet the demand, we will flex up and we know how to bring on people very quickly.

We measure the Company and measure the success based on the customer satisfaction rating.

So, we get a sense of when the ecosystem might be running a little thin on new resources, and at that point we will flex up our ability as well, to fill the gap.

Great.

That leads to my following question for Mark.

Mark, the initial outlook for next year is terrific.

That's very helpful.

As we think about the services piece, would you expect that that business grows about at the rate that it was this past year?

Should we start to think about some deceleration in that growth, given it's not necessarily what you want to have as a longer-term emphasis?

Again, we will get a little bit more into guidance for the full year when we talk to you again at the end of February or early March.

But, I would expect it to grow at a little slower rate, certainly, in Fiscal 2015 than it grew this year.

That said, we are going to expect it to, as a business, to likely grow sequentially, once we get through the Q4 seasonality.

I think that as we look ahead to Fiscal 2015 and do our planning, as I mentioned in the guidance, we expect billings for the first quarter to be down sequentially from the fourth quarter.

So we expect really, the seasonality to follow that curve and be a little bit different than it has been historically, really reflective of our size at this point.

So we don't expect sequential increases in Q1, for example, and billings, as we had last year.

Great.

Thanks, guys.

Richard Davis, Canaccord.

Aneel, I know you have your API partners relationships with ISVs.

Talk about how you think about going to market at all with other ISVs.

The genesis of the question was, I was at Dreamforce along with 120,000 of my closest friends.

I noticed you guys had a small booth, but it doesn't seem like you are super tight with Salesforce other than just both you guys are cloud.

Just trying to get a sense of how you think about partnerships with other ISVs.

I know you work with service providers, but how that fits in your thinking.

Thanks.

Well, I would consider ourselves very close to Salesforce.

We don't have a big booth there because there are not HR and finance people coming to Dreamforce.

There's some IT folks, but it's largely CRM folks and some IT.

It doesn't map perfectly to our buyer.

We tend to do well at the HR shows and finance shows.

We have a presence there because of the partnership with Salesforce.

I think when you look at the partnership we have with them, and they are first and foremost as an ISV partner, it's all about taking integration costs out of the equation for customers and making sure that our systems work together seamlessly.

It's the same with Cornerstone when we partner for learning.

We basically try to do some of the integration work in a prepackaged way.

That shows how the cloud is -- the cloud is very different than the on-premise systems.

The cloud vendors all are looking to inter-operate to make the customer lives easier.

That really is the key message.

That inter-operability will extend to collaboration systems like Dropbox over time and Box and others.

I think we live in a world of APIs.

The Workdays and Salesforces get that, because we've grown up at the same time as a consumer internet.

The legacy guys don't get that.

Great.

That's helpful.

Thank you very much.

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

We will now take two more questions.

Mark Murphy, Piper Jaffray.

Aneel, when you dissect the booking strength that's being reported here for Q3, to what extent would you attribute it to a greater volume of net new core HR purchases?

And to what extent would you possibly attribute it to an upward inflection in the attach rates of all of your various add-on modules?

I think Mark is probably better to answer that question.

Mark, I think it's really a combination of both.

Certainly, as we have more geographic expansion, and you saw it by the announcement of Sanofi this quarter, we have a broader market to play in.

So we're just getting more net customers.

But on top of that, we have strong attach rate with products like time tracking, like payroll and our largest quarter for new financials customers.

So, it really is a combination.

But most of our new customers, I think we may have had one financials-only customer this quarter.

Most of our new customers include HCM then with some attachment on top of it.

Mark, just as a quick follow-up.

Are you still viewing payroll as your number one add-on module?

Whether you are or not, can you comment on from which vendors are you displacing payroll business?

If you could specifically comment on ADP and Oracle and SAP, maybe any other payroll vendors that you think are relevant to that discussion?

Thank you.

I would say payroll still is our number one attached product.

In many cases, I don't even think of it as attached product, because it's part of a core HR payroll sale that includes taking out both of those legacy systems.

The top two systems we are taking out, not surprisingly, are the two legacy vendors of SAP and Oracle, and Oracle representing PeopleSoft.

In the case of ADP, from time to time we will replace them.

But we also have a good partnership with them.

It's really a market segmentation.

If the customer wants full outsourced payroll including cutting checks and tax filings, we don't do that part.

We just to the software piece.

If they are larger, and/or already running payroll in house, wither on PeopleSoft, or Oracle, or SAP payroll, then we tend to be a really good replacement.

I would say ADP is sometimes a competitor, sometimes a friend.

We won business together, we've replaced them.

I don't know what they would say about us, but I think they would hopefully say the same things.

Most of the time when payroll in the large companies, we are replacing one of the legacy vendors.

Thank you.

Derrick Wood, Susquehanna Internation Group.

Another question on the billings growth upside.

Have you seen any change in terms of the time to ramp to productivity for new reps?

Not significant change.

Certainly as the sales force gets more experienced and has longer tenure, the existing reps are more productive.

But with respect to new reps, it's about the same.

We have very rigorous training for our reps.

And the sales cycles in this business are long.

Okay.

And one other.

You've seen pretty impressive leverage on the G&A side, about 8% of revenue in the quarter.

Anything particular that's driving that?

That's pretty impressive for a high-growth company.

Should we think that that 8% level to be a good medium-term run rate from here?

Yes.

Since most of the G&A reports to me and I haven't submitted my budget yet, I'm not going to make a commitment, with my boss sitting next to me on 8%.

I think part of it was just a year ago, we were gearing up the IPO and to be a public Company.

As a result in G&A, we had a relatively easy comp.

And we run on Workday which makes things a lot more cost-effective.

(laughter)

Yes.

That's really true.

Okay.

Thank you.

Okay, everyone, thank you very much.

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

You may now disconnect.

Have a great day.