Workday Inc (WDAY) 2014 Q4 法說會逐字稿

Welcome to the Workday's fourth-quarter earnings call.

(Operator Instructions)

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

Please proceed.

Welcome to Workday's fourth-quarter FY14 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, not as a substitute for, or an isolation from GAAP results.

Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, and for FY14, also exclude employer payroll taxes on employee stock transactions and non-cash interest expense associated with our convertible notes.

The FY13 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.

A 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, 2014.

Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our FY13.

With that, let me hand it over to Aneel.

Thanks, Mike.

I'll spend a few minutes on a look back at FY14 and our very brief outlook on FY15 before handing things over to Mark.

Over the past year, we experienced a significant amount of growth, with the addition of 200 customers, bringing year-end numbers to over 600.

In particular, we have experienced increased adoption of our financials product, ending the fiscal year with more than 70 customers.

The fourth quarter was the second quarter in a row that we experienced double-digit new customer growth in financials.

We attribute much of this momentum to market readiness and product maturity, and expect this trend to continue.

In FY14, we also added two key members to the Workday leadership team; Ashley Goldsmith joined as Chief Human Resources Officer, and Chano Fernandez joined as President of EMEA.

With more than 2,600 employees and an exciting growth plan, Workday is already benefiting from Ashley's leadership in employee development programs and recruitment, as we continue to open offices and attract top talent around the world.

Chano's vision and guidance will be instrumental to Workday's future as more European companies make the shift to bring HR and finance to the cloud.

Even as we scale, we continue to earn top rankings from our employees and customers, earning the number one spot on two Bay Area best place to work lists last year.

And receiving a 97% customer satisfaction rating in our annual customer survey.

Shifting to innovation, we delivered three updates over the past year: Workday 19, 20 and 21.

Major highlights included the general availability of Workday Big Data Analytics and a completely redesigned new user experience for the browser built on HTML5.

We made significant progress in Workday Financial Management and Workday Human Capital Management.

And in total, across the three updates, delivered more than 600 new features for HR and finance.

Notably, approximately one-third of those features came from Workday Brainstorm, a form that captures and shares customer ideas based on popular vote.

We also increased our presence in education and government.

Last September, we announced that we are building Workday Student.

Development remains on track, with the first components of the application expected in the second half of calendar year 2014 as an add-on application sold separately.

Release of the full product is expected to be completed by the end of calendar year 2016.

And as we near the general availability of Workday Recruiting, which remains on track for this spring, we are seeing strong demand from both existing and perspective customers.

This application is being sold as an add-on to Human Capital Management.

And as of January 31, we had signed 39 customers.

And lastly on the product front, I want to note that just last week, Workday completed the acquisition of Identified.

A company that, since 2010, has been building technology that uses big data from social web to uncover insights and relationships that change the way companies pursue talent, manage their work forces and improve their competitiveness.

While we are not continuing the Identified offering in its current form, we intend to build this technology into the Workday platform to further enhance our search capabilities, and to accelerate the delivery of predictive analytics and machine-learning capabilities.

The result will be a big win for our customers, and we are excited to welcome the Identify team to Workday.

In summary, we enter FY15 with an optimistic view of our business and marketplace.

We have a strong and expanding suite of native cloud applications, a highly talented and motivated workforce, and a growing and satisfied customer base.

I will now turn it over to Mark to review our fourth-quarter and full-year results, and provide insight into FY15.

Thank, Aneel, and good afternoon, everyone.

We finished an outstanding FY14 with a great fourth quarter, generating record revenue, billings, and trailing 12-month operating cash flows.

Before I get into the fourth-quarter details and our outlook for Q1 and FY15, let's spend a little time looking back on our accomplishments this past year.

FY14 was a year of tremendous success financially and across our operating metrics.

Total revenue increased 71% to $468.9 million.

And subscription revenue increased 86% to $354.2 million.

Total unearned revenue for the year increased 45% to $413.6 million.

And we generated positive operating cash flows for the year.

Non-cancelable subscription backlog at year end was $636 million.

So combined with unearned subscription revenue, we have over $1 billion of subscription revenue to be recognized in future periods, or nearly 3 times our FY14 subscription revenue.

The year-over-year increase in total unearned subscription revenue, plus backlog, was 47%.

We raised net proceeds of $1.1 billion during the year from our convertible debt and follow-on common stock offerings.

And ended the year with nearly $1.9 billion of cash.

Operating cash flows for the year were $46.3 million.

And free cash flows were a negative $29.6 million.

Included in our calculation of free cash flows is $10 million we invested in a 95-year ground lease for potential future expansion of our primary Product Development Center in Pleasanton.

For the full year, we significantly improved our operating margin.

We are making a conscience decision to invest in product and market expansion, and do not anticipate this pace of margin improvement in the near future.

We still believe we are several years away from positive non-GAAP operating margins.

However, we expect continued progress in cash flow generation in 2015.

We also added more than 800 net new employees during the year, a 47% increase from the beginning of the year.

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

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

We are pleased with our FY14 accomplishments, and want to thank our employees, our partners and our customers.

And as Aneel mentioned, we started FY15 with the acquisition of Identified.

Let me add my welcome to the Identified team.

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

Total revenues for the fourth quarter were $141.9 million, an increase of 74% from a year ago.

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

Subscription revenues for our cloud applications were $110.7 million, an increase of 86% from last year.

The weighted average duration of new contracts signed in our fourth quarter was approximately 3.5 years.

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

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

Our professional services revenue was $31.2 million, an increase of 42% compared to last year.

The primary objective with our professional services business is to maximize customer success in deployment of our software services.

We continue to emphasize our partner ecosystem, led by such firms as Deloitte, Aon Hewitt and IBM.

Total unearned revenue at quarter end was $413.6 million, up 18% sequentially, and 45% from a year ago.

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

Short-term unearned revenue was $332.7 million, an increase of 19% sequentially, and 67% from last year.

Long-term unearned revenue was $80.9 million, up 12% sequentially, and down 6% from last year.

As we have discussed in the past, as our balance sheet strengthened during our FY13, we changed our sales compensation structure to de-emphasize multiple-year up-front cash collection, which was previously used to finance the business.

For the percentage of the contract build up-front, it's 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 fourth quarter, that trend continued.

On an average, we billed just over a year of the total contract value.

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 non-cancelable.

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

The non-cancelable unbilled portion of the contract remains off our balance sheet as a backlog until billed.

As mentioned in my opening remarks, total subscription backlog, as of the end of FY14, was $636 million, up 46% from $434 million at the end of FY13.

Total future subscription revenue, which includes total unearned subscription revenue plus subscription backlog, was just over $1 billion, a 47% increase from approximately $700 million as of the end of FY13.

Looking ahead to the first quarter and our FY15, the strength of our business model and continued momentum provide very good revenue visibility, and we expect a solid first quarter.

Total revenues for the first quarter are expected to be within a range of $148 million to $153 million, or a year-over-year growth of 61% to 67%.

Subscription revenue is anticipated to be within a range of $117 million to $120 million, or growth of 71% to 75%.

For the year, we anticipate total revenue of approximately $710 million to $740 million, or growth of approximately 51% to 58%.

Subscription revenue is anticipated to be within a range of $565 million and $585 million, reflecting year-over-year growth of 60% to 65%.

Drive billings for the year are anticipated to be approximately $850 million to $870 million, with seasonality comparable to 2014, and approximately 60% of total billings expected in the second half of the year.

We expect first-quarter derived billings to be approximately $165 million.

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, and are reconciled in the tables posted on our Investor Relations website.

We ended the year with just over 2,600 fulltime employees, an increase of over 800 for the year.

During FY15, we anticipate adding yet again more people than we did in FY14.

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

Our fourth-quarter gross margin was 66.4%, up 244 basis points from the third quarter, driven by our mix of subscription revenues drawing 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 services margins as we invest in programs to insure ongoing customer success post-deployment.

The fourth-quarter subscription gross margin was 82.9%, and included 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 135 basis points sequentially, due largely to increased volumes and scale efficiencies.

Our professional services gross margin decreased by 756 basis points sequentially.

As guided last quarter, fourth-quarter utilization rates and the professional services gross margins decreased from the third quarter, driven by normal holiday season slowing.

That said, we anticipate professional services margins to be lower in FY15 as compared to FY14, as we invest in deploying new customers in financial management applications, medium enterprise, and E&D, where the partner ecosystem is still maturing.

Professional services margins could be in the mid- to low-single digits in the first half of FY15.

Our fourth-quarter operating loss was $21 million, or a negative 14.8% of revenue.

This was better than we had anticipated, and it was largely the result of operating leverage received on increased revenue, and strong subscription gross margins.

Taking into account our adjustments to GAAP operating income that Mike disclosed at the start of the call, and the impact of the Identified acquisition, we currently expect our fiscal first-quarter non-GAAP operating margin to be within a range of a negative 15% to a negative 19% of total revenue.

For the year, we plan to ramp up our investments, and expect a modest improvement in our 2015 non-GAAP operating margin, perhaps in the low to mid teens for the year.

The GAAP operating margins for the first quarter and full year of FY15 are expected to be approximately 18 to 20 percentage points lower than the non-GAAP margins.

Long-term profitability and cash flow generation are important goals.

But we believe our focus today needs to be on market expansion, continued product innovation and growth.

Product development expense in the fourth quarter was $45.5 million, up 8% 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.

Sales and marketing expense was $55.7 million, up 13% sequentially, and up 57% from last year.

The sequential increase was driven largely from higher variable comp.

General and administrative expense was $14 million, up 35% sequentially, and 38% year over year.

The sequential increase is largely a result of seasonal corporate expenses, including audit fees, a donation to the Workday Foundation, increased professional fees and investments, and employee-related programs.

The net loss per share was $0.13 on 175 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.

Other expenses were $1.1 million, approximately flat compared to the third quarter.

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

From a GAAP perspective, the Q1 interest expense, including approximately $5.9 million of non-cash amortizations reflecting the discount and issuance costs, is approximately $7.5 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 short-term investments at quarter-end were $1.9 billion, up $604 million sequentially, driven largely by net proceeds of approximately $592 million from our follow-on stock offering of 6.9 million Class A shares in January.

Operating cash flows were $34.8 million for the fourth quarter, and $46.3 million for the year.

Free cash flows for the quarter were $7.5 million, and for the year, a negative $29.6 million.

During the quarter, we purchased a land lease in Pleasanton for potential future expansion.

Capital expenditures during FY15 are anticipated to be approximately $100 million, as we continue to build out our data centers to support customer growth and expand our office space.

This does not include any significant capital expenditure for a new facility in Pleasanton.

To summarize, we are very pleased with our solid fourth-quarter performance and our accomplishments during FY14.

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.

(Operator Instructions)

Jennifer Lowe from Morgan Stanley.

I wanted to drill into the financials component.

And this seems like it's the second quarter in a row now where you've talked about adding double digits in terms of new customers there.

Are you starting to see an inflection in that business now?

And to the extent that you are seeing an uptick there, is that a function of now your functionality being more comprehensive than it was 12 to18 months ago?

Or is it a bigger push from your sales force?

Or more customer demand?

What are the factors playing into the stronger adds that you've seen the last couple quarters?

Yes, I'm not sure I'd use the word inflection.

I would say increasing momentum around financials.

And I think that it's really due to three things.

Number one, the product continues to mature, both from a feature and function perspective, and from a scalability perspective.

Number two, we do have a dedicated financial sales force that did a terrific job last year.

And goes into this year with a lot more experience selling the product line, and confidence that they can do well.

And I would say lastly, the market is definitely moving in that direction.

We have quite a few large companies where the success with the HR products have caused the CFOs to want to evaluate Workday for the finance side.

And that's -- not surprisingly -- very similar to the pattern of adoption that we saw in the late 1990s with client server add -- PeopleSoft, where we went from HR opening up doors in financials.

So I think it's a lot of things.

But it's just gaining momentum anyway, in many ways like HR did four or five years ago.

Great.

And tied to that, Mark, in your guidance, you mentioned that financial management and the investments that you're making to get the implementation force up there is one of the impacts on professional services gross margins for this year, for fiscal 2015.

Is it reasonable to think that, as you look out a year from now, that we should continue to see that strong momentum building in the financials?

Or is it just too early to make that statement yet?

Jennifer, I was trying to talk towards professional services, and the fact that we were making a ramp investment in professional services to handle financials customers while we train the ecosystem.

But certainly as we look ahead to fiscal 2015 and beyond, part of our plan is that financials continues to grow at an accelerated ramp.

Great, thank you.

Heather Bellini.

Heather, your line is open.

Operator, let's move to the next one, please.

John DiFucci.

Aneel, can you talk to us a little bit more about Identified, and how it feeds into predictive analytics?

That's what was described in the press release.

And the Workday customer experience overall.

And then, Mark, if you could, on the same subject, it's a $15 million purchase.

Realize that's relatively small.

But what's this mean going forward?

And in the same context, talk a little bit about the purpose of the equity raised in the quarter.

You did a convert before that.

And now, as you mentioned, your cash flow from operations positive, but not free cash flow positive.

But you did say you're going to see continued progress in cash flow generation in 2015.

Thanks.

Sure.

On the Identified side -- if the last five or seven years were about the emergence of the cloud as a new platform, for us I think the next five to seven years are about the analytics that can get built on top of that cloud platform.

You're going to continue to see investment, whether it's our own Big Data Analytics offerings that we've rolled out, or acquisitions like Identified.

So it's very consistent with that.

Identified had some unique technologies in search and machine learning capabilities that we are going to take and build into the core Workday platform.

So it won't be adjunct, it will be built into the Workday platform.

Most importantly, they had -- and now we have -- very talented people in these two domains, in search and in machine learning and predictive analytics.

That will leverage the Workday platform into the HR and finance areas for these kinds of capabilities.

So I'd say that more than anything else, the acquisition was about the people that we were able to get.

They're truly fantastic and have very unique skill sets.

And with respect to moving forward, we did the capital raise, raised over $1 billion this past year.

And part of it was to put the balance sheet where we wanted it from a customer perspective.

From time to time, some of our larger competitors will reach out in customer engagements and question the viability of Workday.

And with the cash on our balance sheet, those are questions we don't have to answer any longer.

And at the same time, there are opportunities for us to continue to fill in the technology, to find great teams of people that can help us accelerate our growth.

Great, that's very helpful.

Thank you, guys.

Nice job.

Heather Bellini from Goldman Sachs.

I was wondering if you could actually share with us, Aneel -- can you give us an update on what add-on products you think are ramping the fastest?

And which ones do you expect to ramp the fastest, if you look out for this calendar year?

That on products for HCM -- my apologies.

Sure.

So I think payroll continues to be a very strong add-on in the markets where we offer payroll, like the US and Canada.

There are other markets outside the US and Canada where we're introducing payroll -- in UK and France in the next years.

But in other places, we don't have that add-on capability.

The one that has global applicability and to date has been super-strong in terms of early adoption is obviously recruiting.

Quite honestly, the number of customers that signed up was a pleasant surprise, given that the product is not yet generally available.

We've also had strong traction around time tracking.

Again, it all depends on the workforce.

But that is more of a global offering.

So I would say that payroll is continuing to be a strong add-on in the markets where we offer it.

But the one that looks like it's going to be the strong one going forward will be recruiting.

Just to follow up, are any of those -- do you see those -- the pace of the expansion -- do you see those accelerating?

Because payroll has been a top performer, I think, for a while as an add-on.

Are some of the others catching up to that?

You mean like expenses and time?

Yes.

Exactly.

The basic pattern as the product matures and as customers hit moments in time where they hit a re-up for their legacy systems that we can replace it.

So in the case of both time tracking and expenses, yes, the adoption rates have increased over time.

But candidly, the recruiting one is in its own league so far.

Great, thanks so much.

Brent Thill from UBS.

Brent, your line is open.

Brent, you have an open line.

Operator, let's move to the next one please.

Raimo Lenschow.

The first one is on the competition front.

Are you seeing SAP or Oracle trying to respond more strongly, given the ongoing momentum you have in financials?

You know, candidly, we don't see much of either of them on the financial front right now.

I think we still see them consistently on the HR front.

On the SAP side, I'm not sure which product they would compete with.

It's unclear what's happening with Business ByDesign, the financial offering, and there really isn't anything else.

And in the case of Oracle Fusion, we just don't see it very much in the competitive situations in the financials.

Right.

So just following on it, just are there any particular verticals that really stood out for you in Q4?

Perhaps some verticals that haven't been earning past this [as call] but have been gaining a lot of traction from your competitors?

You know, when you look at our wins in Q4, there's no real new patterns.

We're definitely gaining strength in education and government.

But that's been the case for several quarters now.

In the HR world, there's really not a sector that we aren't selling into effectively, whether it's manufacturing or financial services or tech or business services.

We're starting to get good wins in healthcare.

So it really is across the board.

Not surprisingly, in financials, it's -- since we aren't focused on product-based industries, it's much more on the services areas.

We had a very strong quarter in the tech world in selling financials.

Which, by the way, is very similar to our early ramp-up in HR.

We had good success with financials.

That's where the early adopters are.

And we're beginning to get really good wins with our financial products in the financial services category.

Okay, great.

Thank you.

Karl Keirstead from Deutsche Bank.

This question is for Mark, and it relates to the expected uptick in renewal activity as deals signed three years ago come up for renewals.

So I know you probably don't want to be exact in terms of categorizing new billings and renewals.

But as you think about your billings growth guidance of $850 million to $870 million for fiscal 2015, how would you encourage us to think about the new billings and renewal mix?

We're still at the stage where there is -- just given the growth that we've had over the last four years, that an awful lot of the billings is coming from the multi-year that is rolling off the deferred revenue, not the backlog.

And also we just continue to have great opportunity in new billings.

And so predominantly, the numbers that we're shooting for this year in bookings is heavily weighted by net new customers and net new bookings.

Certainly renewals is a growing focus.

And at this stage, we have the assumption -- just based on the history that we've had over the last couple years -- that the renewal rates will continue to be strong.

But we're still predominantly a net new bookings business.

Got it.

Thank you.

Walter Pritchard from TT.

This is Robert for Walter.

I do have a question about recruiting.

You talked about being unprecedented strength there.

Curious about the go-to-market there, in terms of how you're penetrating those accounts.

And some of the deal sizes that you're seeing in those early customers.

Well, again, the product is not in general release yet.

That happens in the spring.

Which is why, I think, we had the pleasant surprise of all of the add-ons.

At this point, we didn't have a dedicated sales force selling recruiting.

It was part of the core HR suite deals in Q4.

And I'd say the two reasons that customers are buying into the vision, and they're timing it with when their Taleo or other recruiting applications are coming due for renewal.

And saying at the time of that, we want to be on to the Workday Recruiting.

Workday Recruiting is really a leap forward from the past recruiting systems in, I'd say, really two dimensions.

One, in the usability and mobile capabilities.

It really is geared towards the people and managers doing the recruiting.

And then the second piece is the concept of unifying recruiting with core HR.

It's a theme that, if you listen to LeAnne, our Head of HCM, talk about it, it just provides a very unique way to recruit, where you can look at internal candidates as well as external candidates.

That just hasn't been possible when the recruiting apps have been bolt-ons.

And in a job environment where there's low growth, in many cases the best candidates are internal.

And the Workday product is unique in being able to surface those candidates alongside external candidates.

So we're just seeing a lot of demand.

In most cases, it's a replacement of an existing recruiting system.

Most companies had purchased one.

And so that's a good early sign for us.

Great.

And then secondly, on the Big Data product.

I know it's still relatively early there.

But can you talk about some of your larger deals there?

And use cases and the deal sizes that you're seeing?

You know, we're continuing to sell the Big Data application.

I would say candidly that there's more of a queue of large customers building up for when Workday brings us into its own data center.

In the mid-market, we're able to position AWS effectively since the Big Data offering is on AWS.

In the high-end of the market, most customers want it directly from the Workday data center, where there's no hand-off between the Workday apps and our Big Data offering in terms of data centers.

So it's tracking.

The use cases are similar in terms of customers figuring out how to bring in third-party data.

And I'd say at this point, most of the data is still structure data, as customers are learning what they can do with some of the unstructured data.

Like social media data -- I'd say those are still evolving use cases.

And frankly, we're learning about them as well.

But as we head into the second half of this year, I expect as we roll it into the Workday data center, to have some pretty big uplift.

Thanks so much.

Richard Davis from Canaccord.

I know it's in the future, but it seems that from your comments, that Workday Student is aimed at recruiting, communications and analytics.

Do you eventually see the functionality [then] diagram of that business inching towards areas where we've historically seen firms like Blackboard or Moodle on the open source side?

Or private companies like Desire2Learn?

Because they oftentimes focus on learning tools.

Thanks.

You know, I'd probably defer comment on that until we get the core student platform to a place where we can really replace the data tails and the PeopleSoft student systems first.

The areas you described could definitely be areas of extension.

But I'd say the first focus is just to be able to be a replacement platform for the legacy student system platforms.

Great.

That makes sense.

I appreciate it, thanks.

Pat Burton from Winslow.

I must have inadvertently hit a number.

Congratulations on the quarter.

Thank you.

Samad Samana from FBR Capital.

For the recruiting deals, you said they were about 39 customers that signed up.

Could you tell us how many of those were replacements of legacy systems, versus companies for the first time adopting a formal recruiting platform?

And what the size of those deals were?

We're not disclosing size of the deals at this point.

I mean, again, the product is not in general availability yet.

I don't have the stats handy in terms of what was replacement versus just a net new recruiting opportunity.

My guess is that two-thirds of the market is already penetrated by recruiting systems, that they're mostly replacement.

But for the next -- for a follow-up call, we'll get that data.

Okay.

And then one follow-up question.

The sales force is more seasoned and customers are more and more accepting of SaaS and HR and finance at the enterprise.

Are you seeing a change in sales cycles?

Is it getting easier to sell to enterprise customers?

How has the length of sales cycles tracked for the Company?

You know, I don't think the sales cycle length has changed.

Most of the sales cycles that we were participating in a few years ago, we had already vetted out whether cloud was an option or not.

So I'd say that what has changed is the likelihood that we'll win.

Because we have great referenceable customers, and our two large legacy competitors struggle with referenceable customers of any scale.

And there really is not an option for deploying new systems on-premise.

So it's everyone's cloud against each other.

And I think that just simplifies things.

That just simplifies the messaging and the market.

And so I think, if anything, the market is just growing faster, rather than sales cycles happening quicker.

Enterprise is just by software or software as a service -- historically, in six- to nine-month sales cycles.

That just hasn't really changed.

Okay, great.

Thanks for taking my questions.

Pat Walravens from JMP.

You know, Aneel, I think SAP is now making the argument that financials require more industry-specific, country-specific functionality than HR does.

So while HR makes sense being multi-tenant, their single-tenant approach is better for financials.

I'd just love to hear what your perspective is on that -- what key points you would make.

It sounds a lot like the arguments the legacy vendors said about HR four or five years ago.

So two things.

First of all, the uniqueness country by country is much tougher in HR than it is for financials.

Especially as you get near areas like absence and payroll because of workers' councils.

When you look at accounting models, there's not dozens of accounting models.

There's US GAAP, and you've got the Continental European accounting model.

With a push to IFRS, which we're in the path of supporting, that goes away.

So I don't see that, frankly, at all.

I think there's more commonality in financials than there is in HR across the globe.

As it relates to industry capabilities, I do agree with that component.

And if you look at our road map, as we think about our focus on service industries, we're adding capabilities, like professional services automation for software and professional services, average daily balance for financial services.

We've added a lot of capabilities specifically for E&G in terms of capabilities like grants and endowments.

And lastly, we announced our intent to build inventory, which would open up the market for healthcare.

So they are industry-driven.

We're at a place now where we have most of the global core.

We've got a great financial footprint, and we're beginning to add that industry layer that makes it more attractive to the various industry segments.

Thank you.

Brendan Barnicle from Pacific Crest.

I wanted to follow-up on John DiFucci's question on Identified.

Given the proprietary infrastructure that you guys have built, what does that do in terms of the integration or the depth of integration?

And with that, how do we think about acquisitions as a result of that?

Well, proprietary in what way?

Well, you've built in memory databases on your own.

You haven't done standard off-the-shelf infrastructure, which a lot of companies have.

And so as you integrate those, does that become a challenge?

No.

So when you think about a technology like Identified, we'll probably take some of the -- we look at our underlying tool set.

It's all written in Java.

We just have our own database.

That's just your object-oriented in-memory database that you describe.

But for most things that integrate into Workday, we integrate both through our open set of web service APIs, as well as our own integration broker, that was the former Cape Clear that's now our web services design center.

In the case of Identified, those would just be built into the core platform.

I'm going to guess those are going to be Java development projects.

And we'll see how much of the code we can reuse.

Terrific.

And then on the pricing side, we picked up survey work recently suggesting there's a little bit more emerging pricing pressure in some areas of software.

I was wondering if you are seeing pricing changes during the quarter.

The legacy vendors have been pricing very aggressively for as long as I can remember.

I don't think its changed.

It continues to be -- their best way of competing with us is to cut price -- in some cases, cut price aggressively.

But I don't think -- there's nothing new in that front that we've seen.

Great.

Thanks a lot.

Great.

We're going to take two more questions, please.

Brent Thill from UBS.

Aneel, I just want to go back to Heather's question about the add-ons.

And I'm curious if you're seeing new customers stepping up with a broader portfolio in the Workday platform out of the gate.

Realizing these products have matured, are you still seeing steady progression where they start with HR, they're adding a few products on over time?

Any dynamics change there?

And a quick follow-up for Mark, as well.

We definitely see that today, as we've had a broader HCM footprint, that more and more customers are just buying the full footprint.

Whether it's payroll or time tracking or expenses or now, recruiting, more and more customers are buying the full suite.

And that's not a surprise.

In the early days, we really just had core HR, then we added on payroll.

And if there's an opportunity to include it as part of one sales cycle, we would much rather do it, and so would the customer.

Frankly, we haven't spent a ton of time until more recently putting an effort to sell the add-ons back into the install base.

That will change over time, but that has not been a key focus.

It's much more been around getting new accounts.

So if you can sell the full suite to a new account, that's obviously a better way to go.

And that definitely is the trend line we're seeing.

Okay.

And Mark, just to follow-up from a client.

When you look at the guidance this year, it's about a $30 million range.

Last year I think it was about a $15 million range.

And I understand you're on a bigger base, so you probably have a bigger variance.

Is that all there is?

Or is there something else in terms of the guidance that you're giving that we should think through, that's a little different this year than last year?

Brent, it's just really about being a larger Company.

And then also providing a little bit broader range on professional services as we fill in some gaps from a product perspective that the ecosystem currently doesn't have.

Okay, terrific.

Thank you.

Peter Goldmacher from Cowen and Company.

Congrats on the quarter.

It's Joe for Peter here.

I was wondering if you guys could give us a little bit of color on the kinds of new customers you're signing on?

And how much of the growth is from new versus existing customers?

And any sort of color in the mix would be great.

Thanks.

We're still in the phase where we're more focused on acquiring new customers.

Mark has talked about in the past, there are 23,000 companies across the globe that fit our profile, and we've now passed 600.

So we definitely focus more on new customer acquisition.

We are, over time, going to build the team though.

And have been building a team that will sell back into the install base.

But that's not nearly as big a focus for us.

Okay.

Thank you very much.

Okay, thank you.

That concludes the call.

Ladies and gentlemen, that concludes today's conference.

You may now disconnect.

Have a great day.