Workday Inc (WDAY) 2015 Q2 法說會逐字稿

Welcome to Workday's second-quarter earnings call.

(Operator Instructions)

With that I will hand it over to Mike Haase.

Welcome to Workday's second-quarter FY15 earnings conference call.

On the call we have Aneel Bhusri, our 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 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 share-based compensation, employer payroll taxes on employee stock transactions, non-cash interest expense associated with our convertible notes and for FY14, also exclude amortization of acquisition-related intangible assets.

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 in our Company website under the investor relations link.

Our third-quarter quiet period begins at the close of business October 17, 2014.

Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our FY14.

Lastly, before I hand it off to Aneel, Workday Rising is coming up in early November and falls within our quiet period, so we are not able to host the investment community at Rising this year and we expect to hold our Analyst Day during the spring of 2015.

We will provide more specific details as we get closer to the date.

With that let me hand it over to Aneel.

Thank you, Mike, and hello, everyone, on the call.

Thank you for joining us.

I'm happy to say that we had another great quarter across the board.

In the second quarter, our customer count for Human Capital Management far surpassed the 700 mark and we're closing in on 100 customers for our Financial Management application.

Due to the increasing size of our business and the diverse mix of very large to medium size customers, we decided that we will no longer share specific customer counts on a quarterly basis.

Going forward we will share new customer counts only as we reach significant milestones, so when we reach 100 Financial customers, for example, we will let you know.

While our new customers come from a wide range of industries, we have recently seen particularly strong adoption from Financial Services.

In June we announced Unum, a Fortune 500 Company and leading provider of financial protection benefits throughout the workplace selected Workday for both HR and Finance.

In the second quarter, we welcomed two more extremely notable Fortune 500 Financial Services companies, the one we can mention is Banc of America, one of the nations leading financial institutions and our new largest customer to date.

We also had a particularly strong quarter in Europe, adding several global customers who we'll be able to discuss the upcoming months.

Despite the rumors out there, I feel it's worth clarifying that McDonald's is not a customer.

We would be extremely honored to have them though and if they do join Workday we will serve Happy Meals at our next Analyst Day.

Mark assures me we that have enough cash to cover this.

Now I'd like to transition from new customers to live customers because the real measure of success is the value those customers get from Workday when they use it to transform their businesses.

As of the end of the second quarter, more than two-thirds of our total customer base was live and all of them are using the same version, Workday 23.

Thank you to the Workday team including our excellent partners for remaining so incredibly focused on customer success.

We're also seeing some really positive growth in our services ecosystem.

On our last call, I shared that HP went live as our largest customer in production.

Since then in Q2, HP announced enterprise application services for Workday.

HP will leverage its expertise in cloud, mobile, analytics and big data combined with the hands-on experience it gained from rolling out Workday internally to offer deployment services to new Workday customers.

And another Workday customer, CSC, a global leader in IT services and solutions with more than 70,000 employees, recently announced it will establish a Workday deployment practice.

We believe strongly in doing business with our customers and we thank HP and CFC for their continued investments in our partnership.

To support our increasing customer demand in Europe, we continue to grow our local employee base.

In June we announced plans to create 200 new positions in Ireland over the next three years.

Over the summer I spent time with our employees and customers in our Dublin, London and Paris offices and I was proud to experience firsthand the consistency in our unique employee culture and laser customer focus.

Before I end, I'd like to extend a warm welcome to a very new and special member of the Workday team, former IBM executive Randy Hendricks has joined us as President of our Education and Government business.

Reporting directly to Dave, Randy will be responsible for sales services and strategy of our HR, finance and student applications for our education and government customers.

And now over to you Mark.

Thanks, Aneel, and good afternoon, everyone.

We closed the first half of FY15 with a very successful quarter generating record quarterly revenues and trailing 12 months operating cash flows.

Operationally, we continue to execute well.

Although still a small part of our volume, our customer renewal rates were once again very strong.

Total ACV on Q2 renewals exceeded $10 million for the first time.

We continue to focus on customer satisfaction and believe once we sign and deploy a customer, we keep that customer.

We also increased the investments in our data centers, new product initiatives and expansion of our office facilities to accommodate growth.

Our balance sheet remains strong with more than $1.8 billion of cash and marketable securities, over $480 million of unearned revenue and our trailing 12 months operating cash flows continue to be positive.

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

I'll now walk you through the financial details of the second quarter.

Derived billings for the quarter were once again very strong and exceeded our expectations.

This was largely driven by several large contracts that closed during the quarter.

Looking forward, we expect total derived billings for the third quarter to be approximately $225 million to $230 million.

For the year, we anticipate derived billings to be approximately $940 million to $960 million.

Total revenues for the second quarter were $186.8 million, an increase of 74% from a year ago.

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

Subscription revenues for our cloud applications were $143.7 million, up 77% from last year.

The over achievement in Q2 billings provided modest upside to subscription revenues.

The weighted average duration of new contracts signed in our second quarter was approximately 3.3 years.

This was down sequentially due to fewer deals with extended contract terms as compared to the prior quarter.

Professional services revenue was $43.1 million, an increase of 63% compared to last year.

Job one in professional services continues to be the successful deployment of our cloud applications whether by our ecosystem partners or us.

Professional services revenue and margins can be a bit lumpy particularly with education and government customers.

Revenue from large E&G deployments can fluctuate quarter to quarter depending on customer specific terms.

We have found professional services to be the biggest variable in forecasting our quarterly gross and operating margins.

However, we are comfortable with the fact that professional services are a critical enabling force of our core cloud application business.

Total unearned revenue at quarter end was $481 million, up 4% sequentially and 48% from a year ago.

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

Short-term unearned revenue was $409 million, an increase of 5% sequentially and 65% from last year.

Long-term unearned revenue was $72 million, down 2% sequentially and down 7% from last year.

During the second quarter, we continued to average about one year of the total contract value being billed up front at signing.

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

Total revenues for the third quarter are expected to be within range of $200 million to $205 million or growth of 56% to 60% as compared to the prior year.

Subscription revenue is anticipated to be within a range of $155 million to $160 million reflecting year-over-year growth of 65% to 70%.

For the year, we anticipate total revenue of approximately $760 million to $770 million or growth of approximately 62% to 64%.

Subscription revenue is anticipated to be within a range of $592 million and $602 million reflecting year-over-year growth of 67% to 70%.

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 tables posted on our investor relations website.

We had approximately 3150 employees at the end of our second quarter and continue to anticipate adding more people in FY15 than we did in FY14.

Remember that approximately two-thirds of our total expenses are employee related.

Our second-quarter gross margin was 67.6%, up nearly 150 basis points from the first quarter.

Subscription gross margin was 84.2% and includes the costs related to providing our cloud applications, compensation and related expenses for the operation staff and data center networking and depreciation.

This subscription gross margin improved by approximately 70 basis points sequentially due to increased revenue and the ongoing economics of our subscription model.

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

The professional services gross margin was higher than expected driven largely by higher utilization rates.

Our second-quarter operating loss was $19.1 million, or a negative 10.2%.

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

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 second quarter was $59.9 million, up 12% sequentially and up 60% from a year ago.

We continued 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 $70.9 million, up 16% sequentially and up 69% from last year driven by our expanding marketing programs, increased head count and increased variable compensation.

General and administrative expense was $14.6 million, up 8% from Q1 and up 42% year over year.

The net loss per share was $0.11 on 184 million weighted average shares.

The share count includes 6.9 million weighted average shares from our January follow on offering.

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 referred to at the start of the call, we currently expect our fiscal third-quarter non-GAAP operating margin to be within the range of a negative 6% to a negative 9% of total revenue, and for the year to be a negative high single-digit percentage.

The GAAP operating margins for the fiscal third quarter and the full year 2015 are expected to be approximately 21 to 23 percentage points lower than the non-GAAP operating margins.

We will provide FY16 guidance during our fourth-quarter earnings call.

However, next quarter in addition to the Q4 outlook, we'll provide some directional color for Q1 2016.

It's perhaps tempting to update FY16 models now, but I'd caution that you we are in the midst of our planning cycle and we fully expect to keep the pedal down on investments and do not expect non-GAAP profitability in FY16.

Other expenses were just under $1 million.

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

From a GAAP perspective, the Q3 interest expense including $6.1 million of non-cash amortizations reflecting the discount and issuance cost is expected to be approximately $7.7 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 $1.8 billion, down $44 million sequentially.

We increased our capital expenditures in the second quarter and also had a one-time payout of $18 million from the change in our US PTO policy that we mentioned last quarter.

Operating cash flows in the second quarter were negative $9 million and included the one-time PTO pay out of $18 million.

For the trailing 12 months, operating cash flows were a positive $55 million.

Free cash flows for the second quarter were a negative $37 million and for the trailing 12 months, a negative $28 million.

We expect to invest approximately $100 million to $110 million in CapEx during FY15.

As mentioned before, we acquired a leasehold interest in land in Pleasanton adjacent to our existing office space.

We're actively evaluating our alternatives for this site but potential development costs are not yet factored into our CapEx guidance.

To summarize we're very pleased with our solid second quarter.

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

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

With that, let's begin the Q&A process.

(Operator Instructions)

Your first question comes from the line of Jennifer Lowe with Morgan Stanley.

I want to talk a little bit about the ecosystem build out around implementations and partnerships on that front.

Can you talk a little bit about what the trend has been in terms of capacity on trained people to help with the implementations for your partners?

And then related to that given that you're closing in on the 100 signed customers mark for Financial -- mark for your Financials business, when do you start -- when do you expect to start seeing some of the Financials implementations move into the ecosystem?

So on the first question, over the last I would say 24 months, we've seen big investments from the large SIs.

Historically, we had small boutiques of some integrators who have been terrific partners from really from day one be the majority of the implementations.

But in the last few years starting with Deloitte, followed by Accenture, then IBM, now Pricewaterhouse, now HP, now CSC, we really have most of the key SIs building out fairly large practices in Workday.

So we're very pleased with the development in the general ecosystem.

On the Financial side, we now feel conformable we've got -- as we near 100 customers we've got a significant number of them live that we're ready to rollout services into the ecosystem.

So you'll see more and more of the Financial Management work done by our ecosystem partners and they are all anxious to invest in that practice as well.

Great and then one last one for me.

Any update on the recruiting product now that you're a little further along with that in terms of that being in market?

It's not really any change directionally from the last quarter.

It continues to be a very attractive and positive driver for HCM and also a pretty typical add-on these days.

So with 23, we added quite a bit more functionality in recruiting; that will continue to be the case.

And as we had more over time it makes it easier and easier to turn off some of the legacy recruiting systems.

Great, thank you.

Your next question comes from the line of Heather Bellini with Goldman Sachs.

I wanted to ask a little bit about the competitive environment and see if you've noticed anything different in particular on the HCM side of things, whether it's from Oracle and SAP.

And then I had a follow up.

Not really.

I guess the only new thing over the last few months is that both of them are offering the ability to tradeoff maintenance on their legacy applications for some of their cloud offerings.

But at the end of the other day, that still puts pressure on their cloud offerings being credible offerings and I still don't see that being the case, at least not right now.

So they continue to be both very aggressive competitors in terms of pricing and that dynamic really has been the case for the better part of the last several years.

Okay great.

And then the follow up would be when you're going in and making that HCM sale, can you give us a sense of how many add-on products you might be attaching now versus maybe six months or a year ago what the attach rate would have looked like?

I'm trying to get a sense for how fast is it to upsell and cross sell?

So on the HCM side we've always -- we've historically had good attach rates on payroll.

I don't know if we've seen anything that's markedly different in the last period of time.

The really big change since 12 months ago is the addition of recruiting.

Most everything else is part of the core HCM product.

We try not to be a Company that nickels and dimes the customer, so we try to make the purchase process straightforward and minimize the number of SKUs.

But recruiting is a fairly large SKU, so that's been the big uptick.

And as we bring out new modules --

And have you given us a sense -- I'm sorry was going to ask if you could give us a sense of what the attach rate might look like for recruiting?

I don't think we have enough data at this point frankly within a couple quarters to give you a good sense of that.

I would say it's amongst the best we've seen across our -- across the history.

Whether it's expenses or procurement or payroll, recruiting is right there at the top.

Thank you very much.

Your next question comes from the line of Karl Keirstead with Deutsche Bank.

Question for Mark.

I was intrigued by your comment around the ACV on the 2Q renewals and I wanted to ask you if you could help us understand how an uptick in the mix of bookings from renewals trickles into the P&L.

It seems to me that it would lead to upon renewal dates deals potentially getting upsized.

Maybe the profitability is a little bit better given the smaller sales attach to a renewal versus an initial booking.

So love to ask you about how a renewal uptick affects the P&L.

Yes, and we're still dealing with a relatively limited set of data, but of course as we continue on over time with our fundamental belief that customers -- that the product is very sticky and that customers will be customers for the long term largely because of the innovation that we put into the products and the care that we give our customers it will become more meaningful.

But today what I really wanted to do is to give you a sense that we've now hit $10 million of ACV on renewals.

So its becoming more meaningful to the total.

But for the most part, it is essentially just serial to the original contract and so it's being added to deferred revenue.

And if it's longer than a year it will be in the backlog number and doesn't have a significant short-term effect on the P&L outside of a normal booking.

From time to time, at the renewal cycle, there will be recounts of employees in a given account, so there may be small components of additional revenue as well as the opportunity to upsell, but at this stage it's really just renewing the initial contract.

Got it.

Okay, thank you.

Your next question comes from the line of Walter Pritchard with Citi.

Mark I'm wondering if you can talk a little bit about the seasonality in your business.

We're seeing it differ a little bit from last year and particularly characterized the impact of large deals on that seasonality, what we're seeing this year.

And generally characterize what -- how the large deal performance was in the quarter.

Was it a big large deal performance or normalized -- normal?

Yes, as Aneel mentioned in his comments, Bank of America is a new customer and our largest customer to date.

And so certainly the overall quarter is impacted by such a great new customer and a great new win.

For the most part as we look ahead into the second half of the year, certainly the visibility on existing billings is clear and fairly straightforward and the pipeline is one in which we take a reasonable approach to it.

I wouldn't call it a conservative approach to it.

But the impact of large transactions is that the timing of closing them is always a bit uncertain as to which quarter that might happen or if it'll happen at all.

And so we don't tend to completely bank on large deals, but they are certainly a big part of our overall mix.

And frankly it's one of the reasons that we are going to move away from giving point data on the number of customers that we have because our customers do range all the way from Bank of America to companies with a 1,000 people or so and so the raw number of actual customers we have becomes less meaningful.

And then for Aneel on the Financial side, could you characterize either in terms of deal size or types of customers or verticals, is there any change in complexity in that base as you move towards the 100 number of signed customers?

I'd characterize where we are today is that we've gotten very good at selling to medium sized companies.

And if you look at our customer list, medium sized meaning 3,000, 4,000, 5,000 to 10,000 employees and where the next push is to go above that size.

But very comfortable now with medium sized companies and I wouldn't have said that 12 months ago.

We were definitely dealing with smaller companies.

But with companies like Netflix going live and Lifetime Fitness with 18,000 employees being live across all of our products, we're just gaining confidence and continuing to move up market.

And increasingly we are seeing as the Financial products get traction, the interest in customers, in particular non-manufacturing customers, to look at getting the whole suite together of HR and Financial products, in particular say in that -- in our mid-market segment.

Customers would tend to choose fewer rather than more vendors and we've seen a nice set of trends in that marketplace.

Great, thank you very much.

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Yes, hi thank you and congratulations on the results here today.

I had a follow-up question on the seasonality in the second half.

Mark, you had previously mentioned that typically about 60% of the year's bookings come in the second half and I'm wondering if anything has changed with that previous linearity assessment?

Well, it somewhat remains to be seen.

As we talked about last quarter we had some large transactions that were pulled in from the second quarter and the third quarter.

And so the linearity can tend to move depending on the very large accounts because of the overall size of their employee bases tend to dwarf the average billings per customer.

So we're not seeing, I would say, meaningful change.

It's still an enterprise sale, the fourth quarter both for our customers and for us tends to be seasonably the strongest, which is why it tends to be weighted more towards a majority in the second half of the year.

Thank you.

And then follow-up question for Aneel on the Financials.

You've highlighted Bank of America here on the call as a new customer this quarter, Netflix as a live, enterprise customer last quarter.

Is the medium size segment, is that still the sweet spot here for Financials for the foreseeable future?

And what do you feel is the right number of referenceable enterprise customers for Financials needed or product capabilities needed before the business moves up market in a greater fashion from a market awareness and branding perspective for Financials?

Thanks.

So first of all Bank of America was an HCM customer, not a Financials customer.

The one we mentioned in the opening remarks was Unum, which is a very large insurance company that is using both our HR and Financial products, so a clarification there.

In terms of references, I feel very comfortable with where we are reference wise.

Our Financial customers are generally happy, they're as referenceable as our HR customers.

There are clearly still gaps that we're closing on an update-by-update basis for the Financial products.

I've talked about it on I think really on every call since we went public.

It's this journey on the path of both scalability and global capabilities that we're on and every update scalability improves and every update we add more global functionality.

Going into FY16 in January we're going to begin to sell our Financial products outside the US, which should give you some confidence as our view on the global capabilities.

And on scale, we feel comfortable scaling to probably the Fortune 500 size customer, maybe not a Fortune 100, so the smallest of the Fortune 500, which is up significantly from where we were a couple years ago.

Thank you and last question for me and then I'll hop back in the queue.

Several of your larger system integrators partners here that we had spoken to over the last couple weeks, they sound very excited right now about the momentum of the number of new cloud computing business transformation initiatives they are seeing in their pipelines.

So I was wondering, Aneel, if you could share your own assessment on where you think central IT buyers are today towards adopting a Next Generation SaaS platform for productivity applications versus say 1 year ago or 1.5 years ago?

Thanks.

I think in the world of HR, and the same would hold true in the world of CRM, the market has flipped.

It's hit a tipping point where if companies are starting with a greenfield, they're going to choose cloud versus on premise.

And for all of the people that are solid with on premise, they're increasingly switching to cloud.

The functionality is there.

The scalability is there.

The functionality is now ahead of where the legacy systems sit.

And added to that the systems integrators have all, over the last couple years, gotten much, much better at not just taking the legacy system out and putting in the cloud system and automating the old processes, but actually using Workday or Salesforce or any of these cloud solutions to transform the business.

Where you can look at HR and say we're going to run it differently and leverage this cloud platform, I think that's where the excitement comes from.

And a lot comes from our focus in HR and talent management.

And our focus in Finance around, really around activity, true activity management and costing where we can really give you the real metrics that run your business different than some of the legacy systems could.

And I don't think that the industry was that focused on that transformation a few years ago.

Thank you.

Your next question comes from the line of Brent Thill with UBS.

Aneel, look forward to that Happy Meal.

Thanks for taking the question.

With regards to the Financial product, I think in the past you've mentioned that technically [Europe] can scale now to the -- into the bottom end of the Fortune 500.

I'm curious if there's any update as it relates to your ability to go into the mid or the upper tier on the scalability or is that something to come from Rising?

Yes, I think this quarterly release is light on some product announcements and product capabilities because we are saving them for Rising, and that's just a few months away.

And as you know we typically make our big product announcements around Rising.

On the scalability side, it's a journey and every update we get better, we got better on 23.

I think by the end of next year, fiscal year, I just don't think the scalability issues will necessarily be ones that come up for us, I think we'll be past those.

It's more about taking each individual process and making sure that we wire in this new processing model to make sure we can scale to the huge volumes.

But it's work that we are doing across the application and its gone well.

The hard part was about 1.5 years ago when we had to design new ways of actually processing transactions for Financials to make sure that they would scale.

Okay and to clarify on Bank of America on HR, is that a wall to wall HR transformative deal or is that -- give us the scope of how far that reached.

Their plan is to roll out Workday for their HR solution globally for their 300,000 employees.

Great, thank you.

Your next question comings from the line of Brendan Barnicle with Pacific Crest.

Aneel, on the call you've talked about several different factors leading to some of the larger deals we've seen in the first half -- scalability, functionality, cloud adoption.

What do you think the biggest one or two factors have been that really lead to that scale and size that we've seen so far this year?

I think it helps a lot that HP is now live.

It set a new benchmark.

Flextronics had been the previous benchmark, but HP set a new benchmark in terms of size company that can go live on Workday.

So that's definitely with Bank of America now and HP, there's not really any corporate entity out there that we see that we couldn't scale to meet their needs.

I also think it's the customer satisfaction, where we're running at north of 95% customer satisfaction.

As much as I love our salespeople, our customers are our best salespeople and they talk with each other.

And at this point, our customers are happy and they're letting other customers know about what you can do with the Workday platform.

Great and then following up last quarter on Financials, you mentioned that about half the customers were public sector, half were commercial.

Any change in that breakdown now after the additional customers this quarter?

I did not mention that specific breakdown.

I don't actually think that's accurate and we can -- at some point we'll give a more accurate break down.

The majority are commercial but we have quite a few public sector customers and I would say there was no real change directionally in percentage in this last quarter.

Great, thanks.

Your next question comes from the line of Brian White with Cantor Fitzgerald.

Your next question comes from the line of Steve Ashley with Robert W. Baird.

I'd like to talk about the international business, you actually called it out in your prepared remarks and the press release.

I know you just hired a new GM in Asia-Pac.

My question is in terms of Management capability or needs, are there anything -- any major positions or anything you need to fill out to help drive that international?

And then secondly, in terms of data centers and what you're currently doing in terms of building out a physical presence overseas and what your future plans might be around that.

Thank you.

So we had a very strong quarter in Europe and in Australia and as the customers give us the go ahead, we'll share some of the names over the upcoming quarters.

In Europe it's becoming a fairly, I wouldn't say mature, but it's a really solid business now.

We have a great leader in Chano Fernandez.

We've made some great hires across Europe.

We have two data centers in Europe.

We have a big development and support presence in Dublin.

So Europe is up and running and is starting to show some of the same signs of adoption that we've seen in the US.

Asia-Pacific is earlier, Australia is the first place where we started to gain some consistent traction.

We've had some good wins in China, We've got a presence in Japan that hopefully will pay dividends in the next six to nine months.

The one place where we really haven't made a move yet is Latin America and that's something that we think about and talk about, but we have not hired yet an executive to cover the Latin American geography.

We feel very good about the other geographies though.

Perfect.

Thank you very much.

Your next question comes from the line of Justin Furby with William Blair.

Aneel, I was wondering if you could look -- if you look at the pipeline for the next couple of quarters or even the next year, if you look at between recruiting, Financials, big data, could you stack rank those?

And then if you look out three to five years, what's your latest view on where you think Financials is as a percentage of new business?

In terms of the pipeline, honestly I couldn't give you a very specific answer.

All three are the growing pipelines.

I'd say the smallest one right now is big data.

A lot of customers are waiting to see what happens when we bring big data into the Workday data center.

There's a lot interest in it, and [candidly] I'd like to see what happens when we bring it into the data center.

We've also got some really important product announcements coming in in November around big data.

With respect to Financials and recruiting, they're both exciting products.

Financials is a suite.

Recruiting is a module, that's an easy attach rate to -- or easy attach to HR.

So they're not really apples-to-apples comparisons.

When you look out three to five years, I would hope that Financials is on a new bookings basis on par with HR, if not bigger.

I'd say probably closer to five years out, given the momentum in HR.

From a revenue basis, given the subscription model, it's going to take a long time for Financials to catch up.

But on a new bookings basis I would hope down the road the Financials market is a much bigger market.

Our history at PeopleSoft was that towards the tail end of the Company, Financials was a bigger business for PeopleSoft than HR, but not by a lot.

Okay great and then one quick follow up on the Financials.

It sounds like you're scaling nicely with the product.

I'm curious if you look at -- what's the biggest pushback from customers today that's not scale.

What are some of the areas of inertia that you're seeing in terms of new deals?

I wouldn't say there's areas of pushback or inertia.

With the CFO, it's a new buyer.

We've gotten the story and the message down in terms of selling to the CHRO.

The good news is that the CIO in many cases is already up to speed on Workday so they're comfortable with the technology.

But it's showing a CFO, who's typically a conservative buyer, a new way of running their financial systems, not just a new technology platform.

And so we're getting better and better at selling to them and marketing to them.

And there are industry capabilities that many of them are waiting for in order to be able to swap out a PeopleSoft recipe Oracle.

This past update we included average daily balance, which was an important feature for Financial Services.

We're rolling out professional services automation.

We've made big investments in education and government functionality, like grants.

So all of those matter in terms of being able to turn off a legacy system.

We have to have enough of a functional footprint to turn those off and those are the kinds of questions that come up.

Okay, great.

Thanks, guys, and congrats.

Your next question comes from the line of Shannon Cross with Cross Research.

I wanted to look into the international business a bit deeper.

Can you talk about how those customers are trending relative to what you saw in the US in terms of verticals or are they following the same trends in terms of adoption that you saw in the US?

And then I had to follow up, thanks.

It's very similar and the reason is that if you look at our success in the US, it's largely driven by large multinationals.

And whether you're a large multinational based in the US or based in the UK or based in France, you largely have the same needs of information, the same needs around talent management, around accounting across the globe.

So the same solution that worked for Flextronics, which by the way most of their population in China happened to work well for Lenovo, the same group that works well for Johnson & Johnson in the US, so same solution works well for Sanofi in France.

And I think that's what we're seeing.

The next wave for us is actually addressing the middle market opportunity in Europe which beginning to rollout going into next year, but the large multinationals across the globe largely act in very similar ways.

Okay, great and then a follow up there.

In terms of the investments you're making and you said you're targeting middle markets in international, but I think during the call the comment significant investments to come and continue to focus on investing in the business was a key comment.

So how do we think about how you think about the hurdle rates for investment, where you put your dollars.

Is this going to be more international versus US, more R&D versus SG&A?

Any color you can give us on the continued investments.

You'll see a set of new product announcements in Rising in November.

That's probably all I can really talk about on the product side.

I don't know if Mark wants to talk about anything on the SG&A side?

Yes, if you -- SG&A -- certainly with G&A we're building our internal platform to be a much larger Company.

And on the sales and marketing we are selling multiple products to different buyers in different geographies and we're going to continue to make investments, particularly internationally, and in selling Financials.

Thank you.

Your final question comes from the line of Derrick Wood with Susquehanna.

Couple questions on the CSC announcement, first sounds like you're selling to the 70,000 employees on the HCM side.

Was that a deal that closed in Q2 or is that still for plan?

And then the second was can you share with us the amount of resources, maybe from a head count perspective, CSC plans to devote to the practice or maybe some time frame as to when they get up and running in terms of ramp to market?

They have signed as a customer, I don't know which quarter it happened in.

In terms of the size of their footprint, I think that's best coming from them.

They're -- they've got pretty aggressive plans about creating a Workday practice but I'd defer to them and let them talk about it so I don't get it wrong.

And CSC was a Q1 deal.

Yes, Q1 deal.

Okay and follow up on the renewal business, Mark.

Any commentary on the duration or -- does the contract duration look much different from a new customer perspective?

Yes, it's somewhat customer by customer and again we don't have a lot of data points.

But we're tending to see the average be a couple of years as opposed to just over three on a new deal.

Great, okay, thank you.

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

You may now disconnect and have a great day.