Workday Inc (WDAY) 2016 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 FY16 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 the risk factors in 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 in isolation from, GAAP results. Our non-GAAP measures exclude the effect on our GAAP results of share-based compensation, employer payroll tax-related items on employee stock transactions, amortization of acquisition-related intangible assets, and debt discount and issuance costs associated with our convertible notes.

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 monthly.

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 15, 2016.

Unless otherwise stated, all financial comparison in this call will be to our results for that comparable period of our FY15. With that, let me hand it over to Aneel.

Thank you, Mike. I'm excited to share some great news this afternoon, beginning with very positive momentum with our Workday Financial Management applications. In the third quarter, we welcomed insurance and professional services giant Aon as our largest Workday Financial Management customer to date. The addition of Financial Management complements its existing Workday HCM and payroll applications.

I'm also pleased to welcome St. Luke's Health Systems to our Financials community. Aon and St. Luke's join our growing customer list of Financial Management customers that already includes Fortune 500 names such as Unum, Netflix, J.B. Hunt, as well as large universities such as University of Texas at Austin and Yale. And 90 customers are already live with our financial systems to date.

Q3 was also our best quarter in Company history for Financial Management from an ACV perspective. As compared to the prior quarter, Q2, ACV growth for Financial Management applications was up well over 100%. As our customer community for Workday Financial Management grows, so does our suite of applications; our budgeting planning and forecasting application, Workday Planning, remains on track for general availability in calendar year 2016.

In September, we announced general availability of Workday Inventory. In the last quarter, we also announced continued investments in global capabilities for Financial Management, including the addition of new language translations for French and Spanish, as well as new country-specific configurations, including the US, Canada, UK, Ireland, Netherlands, Australia, and New Zealand.

Demand for our industry-leading Human Capital Management application suite also remains very strong. I'm excited to share that Workday was selected by FedEx, which is now our largest HCM customer. I'm also proud to share that General Mills and Denny's both selected Workday in Q3.

In the last quarter, we announced plans to deliver Workday Learning, a new application intended to offer a more personalized meaningful learning experience, organizations to evolve and encourage career development at every stage of the employee life cycle. Workday Learning is being developed out of our Dublin, Ireland office and is expected to be GA in the second half of calendar year 2016. We also announced availability of Workday Student Admissions for our higher education customers.

In September, we hosted Workday Rising, our ninth annual customer conference, thanks to those of you who joined our financial analyst day. Each year at Workday Rising, we announce results of our annual customer satisfaction survey. For the past three years, we have earned a 97% customer satisfaction rating, and this year that number increased to 98%.

We believe this level of customer satisfaction is far unmatched in ERP software and I'd like to thank the extremely talented Workday team as always for their unwavering focused on delivering unparalleled levels of customer service. Congratulations to the entire team on an exceptional quarter.

With that, I'll pass it over to Mark.

Thanks, Aneel, and good afternoon, everyone. Another quarter of record revenues, billings and cash flow metrics was driven by strong momentum in financials and accelerating win rates over legacy incumbents. Increasingly, new Workday accounts are discovering that the approach of do nothing is not a viable strategy in competitive markets for talent and customer engagement.

Operationally, we continue to execute well. Over 70% of our customers are live in production and our customer satisfaction rate improved to 98%. We are also finding increasing demand among mid-sized companies for our fast-to-deploy professional service offerings, which get customers in production faster with core functionality.

We are generating increasingly strong cash flow, have a strong balance sheet, and continue to build backlog. This strength allows us to continue to invest aggressively in both product depth and breadth and also in expanding our market presence. This quarter, we had a small non-GAAP operating profit, but we do not see this as an important milestone, and in fact, we do not expect it to reoccur until the second half of next year at the earliest.

We have significantly more opportunity in front of us than behind us and we will continue to invest in maximizing our opportunity for the foreseeable future. We are pleased with the third-quarter accomplishments and want to thank our employees, our partners, and our customers. I'll now walk you through the financial details.

Total revenues for the third quarter were $305 million, an increase of 42% from a year ago. The vast majority of our revenues today are in US dollars, so there is minimal impact from exchange rates. Subscription revenues for our cloud applications were $243 million, up 48% from last year. The weighted average duration of new contracts signed in our third quarter was about four years, driven by large accounts with longer durations.

Professional services revenues were $63 million, an increase of 23% compared to last year. Job one continues to be the successful deployment of our cloud applications, whether by our ecosystem partners or us. As professional service firms build out their Workday practices, and as we continue to improve fast deployment models, we expect both our growth rate and the percentage of revenue from professional services to decline.

Total unearned revenues were $718 million, up 5% sequentially, and 41% from a year ago. Over 95% of our unearned revenues are from subscription fees. Short-term unearned revenues were $625 million, an increase of 4% sequentially, and 42% from last year. Long-term unearned revenues were $93 million, an increase of 15% from the prior quarter, and 40% from a year ago.

Our renewals experience during the quarter continues to support the thesis of our business model: that we retain our customers and we have opportunity to expand our relationship at the renewal. This quarter, the dollar value of renewing customers again exceeded the original contract value.

Derived billings, which represents total revenues plus the sequential change in unearned revenue, was $340 million for the quarter, or 41% growth from a year ago. Billings are impacted by a number of factors, particularly as renewals become a more significant component of total billings during the quarter. Likewise, when we collect more than 100% of ACV on contract signing, future billings will be less than ACV.

We are also willing to accommodate the unique needs of our customers in structuring billings and payment terms, while retaining the integrity of our business model and consistency across customers. The message here is that simply looking at historic derived billings to estimate the amount of new business booked during a quarter is very imprecise.

We again experienced initial billings of just over 100% of ACV for the quarter, in spite of providing more flexible terms for large organizations and those adopting financials. The strength of our balance sheet, financing programs, and the cash flow characteristics of our business allow us to add some flexibility to our initial terms while holding firm on discounting. Want to take a minute to summarize the impact of changes to billing terms.

First, when given the choice of deferring cash flows to accommodate customer build-outs or discounting, we will defer the cash. These economics make sense in the lifetime value of the customer. The impact on Q3 subscription revenue was minimal. The impact on Q3 billings was just over 2 points of growth.

Looking ahead to the fourth quarter of FY16, the strength of our business model and continued momentum provide very good revenue visibility and we expect a solid quarter. Total revenues for the fourth quarter are expected to be within a range of $317 million to $320 million, or growth of 40% to 41%, as compared to last year. Subscription revenues are anticipated to be within a range of $260 million to $261 million, reflecting year-over-year growth of 43% to 44%. The effect on subscription revenue due to payment terms is expected to be 3 points of growth.

This revenue will be recognized in future periods, so it is simply a matter of timing and not contract economics. Consistent with our historical seasonal pattern, we expect professional services revenue to be down sequentially in the fourth quarter due to lower utilization rates during the holidays.

With respect to derived billings, we expect the total for the current fiscal year to be approximately $1.4 billion to $1.405 billion, or growth of 39% to 40% over FY15. This assumes fourth-quarter initial billings on new contracts to approximate ACV. Putting context to the fourth quarter, billings will be $476 million to $481 million. The impact on Q4 billings of changes to payment terms is expected to be 5 points of growth.

We know that the changes we are making are good for the Business; it's reflected in our results. But we also know that it adds a little more complexity to a business that was easy for you to model. We will continue our historical practice of providing backlog at the end of the year. Last year, committed backlog grew 52% to $965 million. Based on our results to date and our Q4 forecast, we expect backlog to grow by at least 52% for FY16.

When we report our fourth-quarter results, we expect to provide revenue and operating margin guidance for our fiscal year ending January 2017. However, as we develop our operating plans for next year, we are building our investment and hiring models assuming total revenue growth of above 30% for FY17. Factors to consider are consistent with some very positive trends.

First, our ecosystem is growing and building capacity, and our products, particularly in the middle market, are experiencing much faster time to production for our customers. As a result our professional services growth rates will decline to the mid-teens as our partners take on a higher percentage of larger HCM deployments.

We are also willing to leverage our balance sheet and the strong cash flows of our backlog to add flexibility in payment terms to the most complex of customers, particularly in Financials. As I mentioned earlier, revenue recognition can be impacted by the amount of cash we bill and we anticipate this will impact subscription revenue growth next year by up to 5%, but will increase our backlog.

With respect to billings, I currently anticipate the first quarter to be approximately $350 million. Again, we will provide a lot more color after the fourth quarter, not only based on Q4 results, but a deeper look into our pipeline for FY17. For planning purposes, we are assuming that FY17 billing seasonality will be consistent with FY16. Billing terms are factored into these estimates.

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 to our GAAP results within the tables posted on our Investor Relations website.

We had nearly 4,900 employees at the end of our third quarter and expect to end the year with 5,100 to 5,200 people. We will likely hire at similar levels in FY17.

Our third-quarter gross margin was 69.5%, down about 100 basis points from the second quarter. The subscription gross margin decreased sequentially by about 70 basis points to 85%, and includes the costs related to providing our cloud applications, compensation and related expenses for operations staff, and data center networking and depreciation. The sequential decline was due to increasing our capacity in the data centers and the stair-step impact of investing new capital.

The professional services gross margin was down almost 300 basis points from the second quarter, due in part to our annual professional services team events and conducting Rising in Q3 versus Q4 a year ago. We continue to expect the professional services gross margin to be lower in the fourth quarter of 2016 as compared to the prior years, as we invest in programs to ensure ongoing customer success and lower-cost programs for middle market customers.

Our third-quarter operating profit was just over $800,000 or 0.3% of total revenue. The impact of the strong dollar had a $3.2 million, or 100-basis point favorable impact on our operating results for the quarter as compared to last year.

Our non-GAAP EPS was breakeven. Given our net loss from a GAAP perspective, all outstanding stock options, warrants, and common stock equivalents are anti-dilutive and not included in the loss per share calculation in our GAAP financial statements.

For your modeling, our quarterly non-GAAP interest expense from our convertible notes is approximately $1.6 million. From a GAAP perspective, the Q4 interest expense including $6.5 million of non-cash amortizations reflecting the discount and issuance cost of the notes is $8.1 million. The interest payments on the notes are made during our fiscal second and fourth quarters.

Taking into account our adjustments to GAAP operating income that Mike referenced at the start of the call, we currently expect the non-GAAP operating margin for our fourth quarter to be within a range of a negative 2% to a negative 4% of total revenue, and for the year, to be approximately a negative 1%. The GAAP operating margins for the fourth quarter and the full year 2016 are expected to be approximately 23 to 24 percentage points lower than the non-GAAP operating margins.

Now on to our balance sheet and statements of cash flows. Cash and marketable securities at quarter-end were just under $1.9 billion, down $11 million sequentially, and includes $24 million of M&A activity. Operating cash flows were $55 million for the third quarter and $213 million for the trailing 12 months. Free cash flows were $15 million for the third quarter and $79 million for the trailing 12 months.

We continue to expect CapEx of approximately $150 million during 2016. As mentioned before, we acquired a leasehold interest in land in Pleasanton adjacent to our existing office space. We are actively evaluating our alternatives for this site. The potential development costs are not yet factored into our CapEx guidance.

To summarize, we are very please with our solid third 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 expansion to maximize our long-term growth opportunities.

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

(Operator Instructions)

Your first question is from Brent Thill with UBS.

Thanks. Good afternoon. Great to see the nice win in the Financial side.

Maybe Aneel, if you could talk a little bit more about the pace of go lives in the pipeline of some of the larger transactions in Financials, would be helpful?

Sure. The pace of go lives, we're now up over 90 customers, so well more than one-half of the Financial customers are live on the system. We've got companies like Netflix that have been live for several years now. The implementations don't look that different from the HR implementations. They are beginning to ramp up with our partners.

So that's a great sign. As partners begin to do more of the financial implementations, that allows us to scale faster. In terms of the pipeline, I mentioned last quarter that the pipeline had doubled, and as a result we saw a double ACV in Q3. The pipeline in Q4 looks very strong and there are several more Fortune 500 companies in that pipeline.

Okay. For Mark, just on the build-out of some of these larger transactions that are stretching their billing out versus taking it up front. Can you just talk through that dynamic, what you're seeing? Is that a continuation of what happened in the last quarter?

Yes, Brent. It's more of what we talked about from a guidance perspective, is that we had expected that we would offer more flexibility, particularly on the early period of a contract. The impact of that is that it not only defers the billing, but it defers the revenue recognition, so we made some color on the call with respect to the impact on rev rec. For example, in the fourth quarter, the impact on our subscription guidance is 3 points from what we have executed on in the second and third quarter and what we expect in the fourth quarter.

Okay. Just to be clear, there's some investor questions around. Is that happening because of a unique customer issue or is there something competitively that's calling for that, that, that's coming into play?

It's more some of these very, very large customers that we're signing. The projects are unique, and in any new push with a product line in the way we're pushing Financials, we are going to be more flexible there than where we have been with HR, which is much more mainstream at this point.

And then also as we looked at our go-to-market and our contract execution, we take feedback from our customers. One of the points of emphasis that's come back in contract negotiations has been requiring the first year-plus upfront on the billings and so we're just looking also to streamline execution.

Great, thank you.

Your next question is from the line of Keith Weiss with Morgan Stanley.

Excellent. Thank you for taking the question. I was just hoping to ask -- maybe dig in a little bit into the competitive environment and just get some color on your statements about improving win rates against some of the incumbents. Anything in particular that's driving that in terms of sales process or is it just product functionality that you're getting better against the competition?

I would just echo what Mark had said. Q3 was very strong against all of the main competitors we have. It was just a strong quarter across the board. In terms of competitive dynamics, we've gotten back to focusing on the technology differentiation. We've really pushed customers to do their homework and prospects to do their homework on referenceability.

Neither of our main legacy customers really have much in the way of large referenceable customers. As the customers do their homework, we tend to win the deal. So I'm not sure if we lost sight of it a few quarters ago, but we've gotten down to some of the basics.

Phil Wilmington has made some positive changes and they seem to be paying off very well.

Excellent. Then just a clarification, just to bolster my understanding on the impacts from billing less a percentage of ACV. Is there some -- at some point, does that catch up to itself? Basically you're pushing out a billings period, but at some point, you're going to be billing those. So at some point is there a catch-up period of where what's today a headwind at some point becomes a tailwind because you stabilize the amount of ACV that you're billing and what was pushed out starts to catch up? If so, when would that occur?

It absolutely does. It doesn't change the total contract value. It just changes the period in which we recognize. The way the accounting works is that we recognize the lesser of the amount of cash we collect in a year, or the ACV. So in contracts, for example, in which we collect everything upfront, and we still have a few of those, we recognize that straight-line over the contract period.

In contracts in which we're collecting less cash upfront -- let's say we collect 50% of ACV in year one -- we're limited recognizing 50% of ACV in year one. So once we've passed that period and get to the second billing, we then straight-line it after that second or third billing period, whenever it [may get gans].

Does catch up.

So it does catch up and it's reflected in the backlog statistics that we're seeing.

Got it. So should that benefit subscription revenues in FY17, or is there still going to be a declining percentage of ACV billed so the tide gets pushed further out?

We think that it will normalize in 2018. Of course, depending on growth rates, but it won't be in 2017, and in fact, we think that it will have up to 5 points of growth impact on FY17 on subscription.

So it becomes a benefit in FY18, then?

And beyond, yes.

Excellent. Okay. Thank you very much.

Your next question is from Mark Murphy with JPMorgan.

Yes. Thank you. Congratulations on the strong billings results.

Aneel, I believe in the past you have mentioned one of the potential drivers of your opportunity set being the cycle of the legacy deployments at PeopleSoft and SAP, that either become fully depreciated or just outdated or perhaps are being sunsetted from a support perspective. So I'm just curious what you're observing there in terms of the vintaging of those replacement opportunities?

Yes, it continues to be the largest driver of our opportunity set. I'd say the exciting piece is that that same driver we saw in HR is now beginning to manifest itself in finance. Since these finance systems have not moved to the cloud the last five years, they are just five years older than when the HR systems began to move. So what we are finding is finance systems that are outdated on really old versions of the legacy platforms, and really looking for a different way to run their business. So the idea of a financial system with built in analytics, with much better user experience, and now being able to cover the legacy footprint in terms of functionality, has really led to the pipeline continuing to grow in a very positive way.

Thank you. As a quick follow-up for Mark, I just wanted to clarify, in terms of the percentage of ACV build, did that actually come in a bit better than you had expected? For some reason, I had thought there was a chance that, that could dip a bit below 100% in Q3 and you said it came in right at 100%?

Yes, in the aggregate, we had a few customers that elected to pay everything upfront. We also had a customer that took advantage of a financing program that we have in place and so we got that billing upfront as well. So in the aggregate, the billings came in a little better than we had anticipated for the quarter, so the impact of billings is really more reflected in the revenue recognition of subscription revenue than it is in billings for this quarter and for the guide that you got for Q4.

Understood. Okay. Thank you very much.

The next question is from Justin Furby with William Blair & Company.

Thanks. Mark, just a clarification. If the billings came in better than you thought from a duration, is the headwind that you're referring to in Q4, is that a function of the Q2 being less upfront, or is it a function of your expectation for the fourth-quarter billings starting to be less upfront, or what drives that several-point headwind to subscription revenue in Q4 if the terms were better than you thought for this quarter? And then I've got one follow-up?

Justin, we aren't able to recognize revenue on the aggregate results. We have to do them on a contract-by-contract basis. So in the aggregate, although we were in excess of 100%, we had a number of contracts that we closed that were less than 100%, so we have to recognize that revenue on a slower basis than ratably over the entire life of the contract. Then we catch up in future years.

Got it. That makes sense.

Our standard term is still to collect at least a year upfront. It's only in a handful of unique situations where that's not the case.

Got it. That makes sense. Then Aneel, on the Financials, when you look out to next year, is there any way to give some framework for what it could represent in terms of new ACV? I know it's still a very small piece of the business, but when you look at new ACV next year, could it be 15%, 20%, 30% of new bookings, or what framework do you think we should think about? And then how long are we from parity, from a new bookings perspective, between Financials and HR?

That's still, in terms of parity, that's still a ways away, more because the HR engine just continues to grow at a very nice clip. But I would say that, without having finished the modeling for FY17, we're expecting quite a bit from Finance, and a big part of it is not just that the product is ready. Next year, our enterprise reps will be carrying both HR and Financial.

So the coverage and the number of people selling Financials grows pretty dramatically and that's a real big boost. That comes from the confidence that the Financial products really are ready for primetime and the results in Q3 prove that out. We will give more color as we get closer to FY17, but we're counting on financials to grow substantially, faster than the rest of the Company.

Got it. Thank you.

Your next question is from Raimo Lenschow with Barclays.

Thanks for taking my question. Congratulations on a great quarter.

Two questions, if I may. First of all, if you think about these big financial deals -- you just announced one and it was really good news -- how do you think about the implementation times for that?

The plan for Aon is they are going to do it in phases and the first phase will be in early 2017 and follow on from there. So a big chunk will be in a 14- to 15-month time frame, and that's typical for a large HR project as well, so it's about the same.

Okay, perfect. Yes. Makes sense. Then the other thing is what's the feedback from the -- you talked about less growth in professional services because the FIs are getting ready and jumping on. What's been your feedback on the Financial part? Is that too early for them to build already capacity, or how are you thinking about the opportunity there?

No. Right now, we do about one-half of the projects in Financials, or that at least was the case a quarter ago. That number will trend down. The big SIs are ramping up pretty rapidly, as are the boutiques around Financials, so we have definitely begun to shift some of the work to them.

You can talk to them, but they are pretty excited about our Financials product line. Aon is actually not just a new customer for Financials, they are also a partner, and they are going to be investing -- they are going to use this project as a way to train up some skills and invest in the Financials implementation capabilities, as well.

Okay, interesting. Perfect. Thank you. Well done.

Your next question is from Walter Pritchard with Citi.

Hi, thanks. Aneel, I'm wondering if you could talk about, on the competitive side -- you had some really nice wins in the quarter -- do you feel like you've reached a peak in terms of the competitive noise out there in the market? I'm just curious, competitively, what tactics or moves you saw during Q3?

There were no new moves. They are running out of new ideas. I didn't see any moves. It's really important to recognize that when we win a Company like FedEx, it's a phenomenal Company and a phenomenal brand, that's the equivalent of 20 or 30 other-sized companies. We're winning all of the large accounts. At the end of the day, the models are all based on -- all the pricing models are based on employee counts.

So we just continue to win both in the mid-market with our mid-market strategy, but the large accounts we just dominate, and the reason is, is because we have proof points of getting these large companies into production. One after another. We have another big Fortune 100 company that just went live, which we will announce in a couple weeks. At the end of the day, it's not -- really important, it's not just about selling these new accounts. It's about customers getting value and getting into production and we have that down and our competitors just don't.

Great. Then, Mark, just for you on -- there's so many adjustments here. People's heads are spinning in terms of trying to figure out, hone in on what you're actually -- what the growth rates really look like. When we when we step back and look at it, it seems like the backlog and the bookings are pretty good -- gives us a good understanding of what you're growing.

Have you thought about giving that number? Your peer Salesforce gives us that number every quarter. It helps us understand what's really being signed and it cuts through the noise. Any thoughts on giving that on a more frequent basis, the off balance sheet piece?

Yes, we have thought about it, and this quarter, I forecasted, I believe we will be ahead of last year from -- or at least at parity to last year from a growth rate perspective on backlog. I'm hesitant to give backlog quarter-to-quarter. We're in a business that is a long-cycle sales business and when we sell to a customer, they adopt across their enterprise as opposed to just in small pieces of the business, and so I'm just hesitant to give backlog every quarter because it can be a much lumpier result.

Okay, understood.

Your next question is from Heather Bellini with Goldman Sachs.

Great, thank you very much. I just had two quick questions. One would be, it does seem like the financials in the quarter, obviously with a large customer, is very nice to see and people have been waiting for that. I was just wondering if you could give us a sense, based on your comment about the salespeople carrying both quotas in your upcoming fiscal year.

Is there a goal that you could give us of the non-education or non-profits, a target goal that you're galvanizing the sales force around in terms of customer signings for Financials in that category for next year, that maybe you could share with us? Then the other one would just be related to -- you mentioned that they are going to be carrying both quotas for next year. How do you think about the sales cycles so we can think about how the pace of the ramp, now that they are carrying both quotas, might start to flow through?

Well they are not carrying both quotas, they are carrying both products, so that's--

Right that's what I meant. Both products, sorry.

That's a little different. The key with our sales model is built on world-class pre-sales expertise. We have amazing people in the pre-sales organization. Our salespeople basically look to see where there's an opportunity. It doesn't have to be a platform deal where it's HR and Financials together. If there's an HR deal upfront, they'll take down the HR deal; if Finance is upfront, they will take down the finance deal.

It just gives us a lot of flexibility to have one point of contact with the large account and serve their needs in whatever project that's most timely. We've seen that phenomenon play out in spades in the medium enterprise business where we have done quite well with the platform deals and we expect quite a few platform deals next year. I don't think we're at a stage yet to give any predictions into numbers of customers or ACV like we had talked about earlier. I just would say it's Significant with a capital S.

Thank you.

Your next question is from Brian Schwartz with Oppenheimer & Company.

Yes, hi. Thank you for taking my question here this afternoon. Aneel, just had a question on the Financials product capabilities. We did some work at Rising last month. We spoke to a couple of your largest and very satisfied HCM customers.

Based on their opinion, they didn't think the Financials product was ready yet to handle the complexity of, say, a mega bank, or a very large global supply chain, which in a lot of ways is very consistent with the messaging from the Company. The question I wanted to ask you is, when does the product road map tell you the functionality in the Financials product will be ready for the entire Fortune 500? Thank you.

As you know, if you've been following Workday, we're very focused on the service industries and we're specifically not going after supply chain companies and manufactures because they have requirements around inventory and ERP for finance that we aren't planning on building. As it relates to the markets we go after, in technology, and healthcare, and financial services, higher ed, we can scale to the largest company's needs and on the planet.

If you look at Financial Services, Aon is a Fortune 500 company, Unum is a Fortune 500 company in financial services, J.B. Hunt is a Fortune 500 company in transportation, UT Austin and Yale are as big as they come in terms of universities. Then lastly, CHE Trinity, a big healthcare, 80,000 person healthcare organization, running Financials. So, for the industries we're targeting, which are pretty much everything except manufacturing and supply chain-oriented companies, which is only about 20% of the market that we're ignoring at this point, we're a pretty good fit across the board.

Thank you.

Operator, we're going to take one more question, please. Thanks.

Your final question comes from the line of Ross MacMillan with RBC.

Thanks so much, and apologies for the background noise. I just had a question for Mark Peek. When you provided the first view on the impact to subscription billings, or billings overall, and subscription revenues from the flexibility on payment terms, we were talking about 4 points in the second half of FY16 and 4 points in the first half of FY17 and therefore 2 points overall in each year.

If I heard you correctly we're talking about 5 points, or up to 5 points next year. I'm just curious, do you think you've now, with that number, set a line in the sand so that it would be unlikely that it would be a bigger headwind than that 5-percentage point impact? Thanks.

Yes, at our analyst day at Rising, we talked about a 2- and 4-point impact on -- 4 points on the second half of this current fiscal year. We didn't talk about 2017. 5 points, it's up to 5 points, and it's really the trade-off of larger complex entities in which we're making the payment terms a bit more flexible with a little longer time to production. As I said before, it's also a trade-off on discounting, and so we're not going to both discount and provide easier, more flexible payment terms. So we're looking at the business as a whole in the long-term economics.

That's great. Thank you.

Okay, thank you very much.

We thank you for your participation in today's earnings call. You may now disconnect. Have a great day.