Workday Inc (WDAY) 2017 Q1 法說會逐字稿

Welcome to the Workday first-quarter earnings conference call.

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of the conference.

With that, I will hand it over to James Redfern.

Welcome to Workday's first quarter FY17 earnings conference call.

On the call we have Aneel Bhusri, our CEO; Robynne Sisco, our CFO; Mark Peek and Phil Wilmington, our Co-Presidents.

Following Aneel and Robynne's prepared remarks, we will take questions.

Our press release was issued after market closed, 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 Annual Report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ material from those set forth in such statements.

In addition, during today's call we will discuss non-GAAP financial measures, including non-GAAP operating losses, operating margins, free cash flows, earnings per share, and interest expense.

These non-GAAP measures exclude the effect of our GAAP results of share-based compensation, employer payroll tax-related items on employee stock transactions, amortization of acquisition-related intangible assets, and debt discounts and issuance costs associated with our convertible notes.

We will also discuss free cash flows, which are defined as cash flows from operations less certain capital expenditures other than owned real estate investments.

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.

In addition, on today's call we will discuss forward outlook for non-GAAP operating margins.

A reconciliation of our forward outlook for non-GAAP operating margins with our forward-looking GAAP operating margins is not available without unreasonable efforts, as the quantification of stock-based compensation expense requires additional inputs, such as number of shares granted and market price, that are not ascertainable.

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 second quarter quiet period begins at the close of business July 15, 2016.

Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our FY16.

With that, let me hand it over to Aneel.

Hello, everyone, and thank you for joining us today.

I'm pleased to report that we are off to a strong start in FY17 with our Q1 results, following an excellent FY16 and an especially strong Q4.

Business was strong across product lines and geographies, and in the first quarter we welcomed almost 100 new HCM customers and more than 20 financial management customers.

New customers included ConAgra foods, Best Western International, LL Bean, Cerner Corporation, Finnair, Financial Times, and Premier Healthcare Services.

We are particularly pleased with the progress we have made in Europe, and are beginning to see similar levels of success in the APJ region.

During this past quarter, I personally spent a week in Australia and New Zealand, and came away very excited, and with the belief that we can be a leading player in that region.

As we all know, sales is only part of the equation for success in today's world of cloud solutions.

The real differentiator in our market place is our ability to get customers into production, so they can get value from our modern cloud business applications.

To that end, I am pleased to report that we once again saw several large organizations go live with Workday in Q1, including companies such as 3M, Hitachi, DS Smith, Memorial Herman Health System, and Warner Music Group.

As we head into the rest of FY17, we believe we are well positioned for continued growth and customer success.

Our pipeline is healthy, especially for the second half of the year.

We saw little to no change in the competitive dynamics and win rates as it relates to our main competitors.

Going forward, we plan to put more emphasis on selling and servicing medium-sized companies on the heels of the development of lower-cost deployment technologies that we have built for this segment of the market place.

From a product line perspective, we continue to innovate rapidly, and are on track to deliver Workday Planning, Workday Learning, and Workday Student later this year, which we believe will accelerate our momentum based on very positive initial customer feedback and interest.

The HCM market continues to grow nicely, and we are the clear leader in terms of product capabilities and customer satisfaction.

We continue to see healthy demand for HCM across the board, and as I mentioned earlier, are seeing growing momentum in some of the international markets where we have entered in the past few years.

We continue to see growing demand for our financial management applications.

In a recent report, Gartner predicted that by 2018, at least 25% of new core financial application deployments in large enterprises will be with SaaS solutions.

Given the lack of focus on true cloud financials by our main competitors, we believe Workday is well positioned to enjoy success with financial applications, much like we have with HCM.

I am pleased to report we saw financials adoption begin to spread to other parts of the globe, as we added new customers in the UK, Netherlands, France, and Finland.

In this past quarter, we also continued to build and strengthen our Senior Management Team as we aim to grow our business from $1 billion in revenues in FY16 to $3 billion in the upcoming years.

To that end, we were very pleased to welcome Diana McKenzie as our new and first CIO, and equally excited to promote Robin Cisco into the role of CFO, after several years as our Chief Accounting Officer.

Workday is now 5,500 employees strong across the globe, and I am grateful for all their hard work across all parts of our business.

Lastly, I wanted to address the topic of profitability.

As many of you know, profitability has been a core value of the Company since Dave and I started Workday back in 2005.

For the past several years, we have been primarily focused on growth, but have always kept our eye on our path to profitability.

To that end, the Senior Management Team spent a few days off site earlier in the quarter planning our path towards profitability over the next few years, both from an operating margin and cash-flow generation perspective.

We came out of that session with a clear strategy that has since been shared with the whole Company.

I hope to share progress with you on that front on an ongoing basis.

With that, I will turn it over to Robynne.

Thanks, Aneel.

Good afternoon, everyone, and I thank you for joining us.

I look forward to working with all of you over the coming quarters and years, and I'm excited to be joining Aneel, Mark, and Phil on this call.

I joined Workday prior to our IPO, and it is a great privilege to step up to the leadership role as CFO, and to continue preparing Workday for many years of strong and profitable growth we see ahead.

With that, let me turn to our results from the first quarter of FY17.

We started the year with a strong first quarter, generating record quarterly revenues, strong billings growth, as well as strong trailing 12-month operating cash flow and free cash flows.

We continued to grow at an exceptional rate, and thank our new and existing customers for their continued support.

Our total revenue for the first quarter of FY17 was $345 million, an increase of 38% from a year ago.

Within that, our subscription revenue grew 39% to $280 million.

We continue to demonstrate strong momentum across all our subscription revenue growth drivers: new customers, renewals, and sales of additional products to existing customers.

Our professional services revenue grew 31% to $65 million.

As we mentioned on our last earnings call, given our success in simplifying implementations, combined with the growth and maturity of our partner ecosystem, we are increasingly shifting our go-to-market approach within professional services towards our partners.

While Q1 was a strong quarter in services, going forward we will not be ramping our professional services organization at the same growth rates you've historically seen.

Our total derived billings, which is the sum of revenue and the sequential change in total unearned revenue, were $372 million for the first quarter, or growth of 37% over last year.

Total subscription billings, which is the sum of subscription revenue and the sequential change in total unearned revenue, grew 38% to $306 million.

Let's spend a few minutes on operating expenses and our results of operations.

Unless otherwise noted, all references to our expenses, operating results, and free cash flow are on a non-GAAP basis, and are reconciled to our GAAP results within the tables posted on our IR website.

Our non-GAAP operating profit for the first quarter was $11 million, or an operating margin of 3.2%.

As Aneel discussed, the Senior Leadership Team is focused on profitability as one of our core tenets.

Q1 operating expenses benefited from strong operating leverage and better-than-anticipated gross margins for professional services.

While we are pleased with our margin performance in Q1, which indicates the increasing profitability of our model, we have not changed our focus on prioritizing growth over margins, given the large opportunity still ahead of us.

Our trailing 12-month operating cash flow for the quarter was $328 million, growth of 90% over the comparable period a year ago.

Our free cash flow was also strong, increasing to $188 million in the trailing 12 months, greater than 10% of our trailing 12-month total revenue, and up more than 200% from the same period a year ago.

Note that in calculating free cash flow, we have excluded $19 million related to our owned real estate investments, as we consider such investments non-recurring in nature.

The strength of our cash flow in the quarter means that we now have $2.1 billion of cash and marketable securities on our balance sheet, which continues to provide tangible evidence to our customers of the strength of our business, and provides more than ample cash for our capital expansion and strategic M&A.

In addition, unearned revenue on our balance sheet at the end of Q1 was $926 million, which is 42% growth year over year.

Current unearned revenue, which will be recognized over the next 12 months, was $798 million, or annual growth of 39%.

The financial visibility provided by the future subscription revenue, which reflects the long-term nature of our contracts, continues to give us high confidence in the sustained strength of our business.

Operationally, we continued to execute well against our vision.

We successfully added over 300 employees to Workday this quarter, bringing our total employee count at quarter end to over 5,550.

Let me now turn to guidance.

For Q2 FY17, we expect derived billings, which is the sum of revenue and the sequential change in unearned revenue, to be approximately $420 million, or 34% growth.

Our subscription revenue forecast for the second quarter is $303 million to $304 million, or 35% to 36% growth.

We expect Q2 total revenue to be $371 million to $373 million, or growth of 31% to 32%, with professional services growing only 15% to 17% year over year in Q2, as a result of our pushing more services to our ecosystem.

For FY17, we currently expect the range for our derived billings to increase to $1.87 billion to $1.885 billion, or 31% to 32% growth.

We continue to estimate that our subscription revenue for FY17 will be $1.275 billion to $1.285 billion, or growth of 37% to 38%.

As we pointed out last quarter, the timing of revenue recognition can be impacted by the amount of cash we bill and other contractual factors, and we anticipate this will impact subscription revenue growth this year by up to 5 percentage points.

As mentioned earlier, with the shift in our go-to-market strategy with respect to services, we expect professional services revenue to be approximately $270 million in FY17, or growth of 16%.

Given these components, we expect total revenue for FY17 will be $1.545 billion to $1.555 billion, or growth of 33% to 34%.

We continue to prioritize growth versus margins, while maintaining our long-term goal of 20%-plus non-GAAP operating margins.

While the positive margin we achieved in Q1 reflects the financial strength of our model, we do not anticipate maintaining that level of profitability next quarter or for the full year.

We continue to expect non-GAAP operating margins will be approximately break-even for FY17, with a Q2 operating loss between 1% and 3%.

The change in our operating margins between Q1 and Q2 is driven largely by our expectations around hiring in Q2, and increases in cash compensation from our annual merit cycle that came into effect on May 1.

The GAAP operating margin for the second quarter and the full year is expected to be approximately 25 to 27 percentage points lower than the non-GAAP margin, due primarily to the impact of share-based compensation expense.

Broad equity ownership among our employees remains one of our core principles, and we continually monitor our compensation arrangements with a view to maximize our long-term free cash flow per share.

When calculating our free cash flow, we are excluding owned real estate investment projects, as we consider these to be non-recurring in nature.

Excluding these projects, our CapEx in the first quarter was $34 million, and $140 million on a trailing 12-month basis.

We expect CapEx for FY17, excluding owned real estate investments, to be approximately $185 million.

Cash flow is inherently difficult to forecast on a quarterly basis due to changes in working capital, but we continue to expect operating and free cash flow growth, excluding owned real estate investments, to approximate growth in billings for FY17.

We continue to expect capital expenses related to our owned real estate investment projects to be approximately $125 million.

Finally, we believe passionately in what we're trying to achieve as a Company, and we're still in the early stages of executing on a very big opportunity.

We appreciate your interest in Workday, and value your support of our long-term ambitions.

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

(Operator Instructions)

Your first question comes from the line of Keith Weiss with Morgan Stanley.

Excellent.

Thank you for taking the question, guys, and very nice quarter.

I just was hoping we could clarify on the commentary on speaking about the margin profile on a go-forward basis.

With the result of those discussions that you aren't going to change your view on margins and still look at growth over margins, or was there some change in the margin profile?

Were you just trying to point out that Q1 was anomalous versus the unchanged long term priority?

I think Q1 is probably anomalous.

The business plan for the year is pretty much set in stone at the start of the year, and we're not really going to deviate from that.

My comments in the opening remarks were much more about a focus for FY18 and beyond, and the importance we're making throughout the Company of getting to significant levels of profitability in the near future.

The fact that it happened this quarter, I think, was really just a coincidence.

Got it.

Were there any difficulties in hiring or bringing or finding the people that you needed that essentially pushed some of those expenses out of Q1 into Q2?

We were behind in some pockets, but in general I think we're pretty much caught up.

I suspect we'll continue to hire well.

I actually think the hiring environment is pretty attractive right now.

The draw for many of the start-ups in Silicon Valley is not what it was just a year or two years ago.

Keith, as we see the full-quarter impact of Q1 hires and we continue to hire aggressively in Q2, that plus the focal that goes into place May 1 of the merit cycle for our employees will really drive the lower margins in Q2.

Got it.

Excellent, thank you guys.

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

Good afternoon.

Aneel, you made a comment about the pipeline being healthy in the second half.

I would assume that is tied to the on-track release of Planning and Learning.

I'm just curious if you're starting to see some of the deals now impacted and larger commitments, larger deal sides, as a result of those two solutions coming, and what you're seeing in terms of the dynamic in the field with those on track for the second half?

We've had a healthy pipeline for student systems for quite some time.

I think in the recent few months we've seen Learning and Planning really jump up in terms of activity in the pipeline and interest from our customer base.

I'm turn it over to Phil and provide more color on what we're seeing with the new products.

Yes, there's a lot of interest in Planning.

Planning takes on really two points of impact for us -- one on the financial side, which certainly enhances our ability to have larger transactions and financials; the other is in the workforce analytics area.

It enhances our ability across the platform to look at larger transactions, and I think you will see that impacting the second half of the year.

Learning, now outside the student area and in the corporate setting and environment as that product rolls out in the second half of the year, will make -- give us the opportunity for larger transactions in human capital management.

On both platform fronts of our business, the addition of analytics certainly provides us with opportunity for larger transactions.

Just a quick follow-up on financials.

The Street's been pretty focused on your ability to go up market, understandably, into the Fortune 500.

There were a lot of logos you announced; but I guess in terms of the big ones that you saw in Q1 financials, could you just call out a couple highlights, if there were?

If there weren't, maybe give us a sense of what that's looking like there?

I would say in general Q1 was not a big-deal quarter for either of the product categories.

We had a huge Q4 of big deals and Q2, and the rest of the quarters have them.

Phil can talk about the one for financials.

I will say that there are many big financials deals in the pipeline for this year.

I don't know which ones will close and when they'll close, but the number of big ones popping up in the pipeline has gone up quite considerable in the last -- I think in the last 90 days.

Yes, the pipeline continues to grow.

We had some large financial wins in Q4.

We'll see some in the second half of the year.

We are pleased with the number of transactions we had in the financial area.

The Q1 and the impact of seasonality with the close going on in many large financial -- well in all companies, but in large financial organizations -- impacted us a little bit.

Also, our transition to bring in all of our sales organizations online probably impacted us a little bit, as we prepared the entire team to sell the products on a go-forward basis.

We're very excited about the number of large transactions, as well as the overall transaction volume in the pipeline, so I'm certain you'll see those as we go into the second quarter, and then the second half of the year.

Thank you.

Your next question comes from the line of Mark Murphy with JPMorgan.

Thank you very much.

I will add my congratulations.

Just following up on the last question, Aneel, I did want to ask you in general how is the broader field sales force responding to the stronger incentives that you put in place this fiscal year to have them sell Workday Financials more broadly?

I'm wondering just in general, is that generating the type of behavior that you intended, and in fact producing a greater pipeline for later in the year?

Also, are you seeing signs that they can master the Financials selling motion without taking their eye off the ball in terms of core HCM for this year?

Sure.

The changes went into effect early in Q1.

We've definitely seen the positive impacts, I will say, and I think Phil will echo it, that it took a little longer to snap the new organizational model into place and get the approval processes in place.

So that probably did have a little bit of an impact in Q1.

But now we're seeing the benefits of that shift.

Again, we really -- from a product perspective, we really rely on our pre-sales people on the financial side to drive the functional story and how we compete.

On the sales side, the relationships that the reps have at the CIO level and the CHRO level are really valuable as we sell Financials in many cases back into that installed base.

Frankly, the key player in that equation is the CIO.

If we've got that CIO on our side after a successful HR deployment, in many cases that individual actually opens up the door for the finance side, and the sales cycle looks very similar to the HR sales cycle.

Thank you.

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

Hi, guys.

Congrats on the quarter.

Thanks for taking my questions.

I guess for either Aneel or Phil, I was wondering if you could comment on the competitive dynamics you're seeing specific to Financials.

Once a Company makes a decision they're going to either make some change, whether it be upgrading the next version of on-premise or moving to a new system, how do win rates look for you specific in Financials versus HCM?

What have they been -- what's been the trend there?

Aneel, how many live customers do you think you need before you have a critical mass within the Financials category?

Then I've got a couple follow-ups, thanks.

I'd start with the second part of that question first.

I think we have enough customers live on Financials now, and that's why the pipeline is doing so well on the Financials side.

We validated that with recent Financial wins.

It's not like it was a year or two years ago.

I feel very confident.

In terms of large organizations being live, JB Hunt going live with the scale of transactions that they have, it was very helpful for other large organizations, who frankly are looking at us from a scale and performance perspective and looking at peers that have their similar scale requirements.

JB Hunt is a very valuable reference for us now.

In terms of the other part, I'll turn it over to Phil.

I think I would maybe combine a little bit of this answer with the tail end of the question that was asked previous.

I think our sales force is certainly excited about what it's selling, because the cloud has been substantiated on the platform side for not only HCM, but financials and now for analytics, like our Planning solution.

This is a sales force that's now been prepared to be the only one in the industry that talks about that on the same technology stack.

Our products are integrated.

As Aneel said, the involvement of the CIO, along with the CFO and the CHRO, are all involved in that decision process.

We're coming in with one integrated product to address that need, unified.

It's actually one true product platform, rather than some of the competition where they actually integrate lots of different technologies together.

Good point.

I think it's a tremendous competitive advantage that we're seeing growth in the pipeline, and also, our ability for our sales organization to get to the right levels of these organizations with this unified solution.

From a competitive perspective, when we look at the landscape, SAP still does not have a cloud offering for financials.

Their strategy is S/4HANA.

HANA's a database.

HANA does not equal cloud.

As far as I can tell, they don't have a multi-tenant true cloud offering that's even under way for financials, so that's a big win for us.

From the Oracle perspective, I think they claim Hyperion hosted as cloud.

We just see a lot of runway and a lot of opportunity, and the truth comes out in the sales cycles.

That's helpful.

Then I wanted to hit on international, too.

It seems that's an area where quarter over quarter a lot of your partners are even incrementally more constructive on.

Can you give a sense for pipeline growth there?

How would you quantify that opportunity as it relates to financials, in terms of impacting billings growth this year?

Then I've got one last housekeeping item for Robynne, thanks.

Sure.

As it relates to international pipeline growth over the last two quarters, we've seen more material growth in international markets than we did even in the North American pipeline on a percentage basis.

I think some of those markets were a little slower to embrace the cloud, and I think that is now going away.

I think there's more -- the cloud is more readily accepted for HCM and for financials.

That's one of the reasons that we're seeing pipeline growth.

In addition to that, it's the growth and the strength of our reference ability across our customer base.

While many customers of ours currently may have started in North America, they've increased their deployments to include their international operations.

With that comes a recognition of the stability of our platform, the reference ability of our platform, and because of that we're seeing pipeline growth in each of the theaters.

I would just add that the scale of the international opportunity right now is bigger than the scale of the financials opportunity for this year, but they're somewhat intermingled.

One of the things driving the international opportunity is the introduction of Financials.

For the first time, we saw multiple sales outside of North America.

We saw multiple sales of Financials in Europe across five different countries.

We hadn't seen that before, so one feeds the other.

Got it, that's helpful, thanks.

Robynne, real quickly.

First, congrats on the new role.

I was wondering if you could provide a little color on seasonality specific to the second half of the year, both from a billings and a subscription revenue basis?

Thank you.

Yes, thanks Justin.

From a subscription revenue basis, when we look at the second half we're seeing for Q3 subscription revenue in the range of $329 million to $331 million-ish.

We see professional services as being flat from Q2 to Q3.

From a billings perspective, we expect to follow largely the seasonality that you've seen last year.

Got it.

Thank you very much.

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

Great.

Thank you for the question, and apologize if this was touched on a little bit already.

I just wanted to ask a little bit with the change in how you're structuring the sales force earlier in the year, how you've seen that play out, and the efficiency of that in terms of driving leads and conversions now that people are selling everything?

Also, given your comment earlier about making it easier for smaller businesses to deploy, so spending time with those customers, how are the sales people splitting their time between the elephant hunting and the bread and butter of the small and mid-size of the market?

Thank you.

I'll take the second question first and then Phil can take the first question.

On the second one, we have the sales force stratified, so we have a segment of the sales force that only focuses on the mid-market.

What we found there is that while our product has been an excellent fit, the deployment time and costs don't necessarily fit with the mid-market, the mid-market budgets.

Starting over a year ago, we started investing heavily in deployment tools and technologies, led by Annrai O'Toole out of Dublin, who is one of the founders of Cape Clear, and has been with us now for, I think, coming up on seven years.

We've built into this a set of tools that dramatically reduced the cost of configuring Workday.

We think as we bring these tools to market we can be very competitive with the lower-end offerings in that market place but still hold up our pricing.

It's a -- I'd say it's a net new opportunity for us.

It's not an area we focused on.

As we understood more about that market they were more price-sensitive on the implementation side.

We found a way to automate much of it to really make it an attractive market for us.

Do you want to talk about the combining HR finance sales force?

Sure.

Yes, thanks Heather, for the question.

I think probably one of the biggest areas is the overall relationship with the large accounts.

When we had people selling HCM, they'd go in, they'd do the HCM transaction, and then they'd move on to others.

I think you've heard us talk in many of the calls about the long-term value of the customer, and it doesn't end with just an HCM transaction or a financial transaction.

It really builds off of a knowledge of the account, the penetration into the account, and knowing that account and the needs of that account as it relates to the cloud platform.

Our people now are able to focus on that entire relationship, invest in it, and make sure that there's a smooth transition from the evaluation of one particular product suite to our other product suites, and then the successful implementation.

We're making that investment, and I believe it protects the long-term value of those customers.

A customer doesn't want to be looked at as an individual transaction.

They want that relationship with their cloud provider over time.

I think we're much better structured to suit that on a go-forward basis.

Great, thank you.

Your next question comes from the line of Richard Davis with Canaccord.

Hi, thanks.

You guys are unique in a lot of ways; but what's interesting to me is that while most firms started more or less with small customers and moved up, you guys landed at the top of the funnel in terms of customer size early on.

My point here is that while everyone needs up time, big companies really need service level agreements and things like that.

My question is to what degree has your ability to scale and stay up and running been a competitive differentiator?

I can imagine to some degree that would be nice reference if I'm a small Company to go -- hey, look, we handle all the biggest guys on the planet, so if you could help me out if I was a sales person, would that be a wedge that I would be using?

Thanks.

Yes, it's a big differentiator.

When we ask about -- when we talk about the customers and prospects really doing the references vis-a-vis our competitors, this is one of the areas that we really ask them to dig into.

I think SAP had nine outages in the month of January.

I think it's well-documented and written up.

In terms of SLAs, Oracle's down-time, when they move from version to version they ask for two days.

We migrate all of our customers in two hours.

Some of the fine print of SLAs and production that you get from having done it for over a decade the way we have and in the true multi-tenant way are beginning to surface as frankly our competitors are having to deliver against their promises over the last couple years.

At least to me -- and it's not just me.

It's written up I think pretty broadly they're really struggling to prove it out.

The cloud stuff is hard.

I'd tell everybody, it's not like you just take old applications and throw them up in the cloud and they work.

It doesn't work that way.

Ask Amazon, ask Salesforce, ask us.

It's really got to engineer it for production and for scale.

Great, now that's helpful.

Thanks so much.

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

Yes, hi.

I wouldn't mind going back to your comments around the path to profitability.

You seem to be hinting that there might be an improvement in FY18.

I'm just wondering if you could comment on what the catalyst was to get to you and the rest of the Executive Team to re-think that out-year margin profile.

Then as a quick follow-up, was there any change in invoicing duration in the quarter to call out?

Thank you.

I wouldn't necessarily say it was re-thinking our focus on profitability.

I think it was just putting our mind on it.

Candidly, since we started the Company and through the IPO, we've been very focused on growth.

When we saw what was occurring with our HCM product line and the level of profitability we've been achieving, we looked at it and said -- hey, there's a clear pathway here.

Frankly, I don't like the gyrations in the stock price when these markets swing wildly.

I think frankly, profitability is a buffer.

I watched how Salesforce's stock traded when the market was melting down, and how our stock traded.

Clearly, there's a premium based on profitability.

While we're very focused on the market opportunity and the growth, from a shareholder perspective and employee perspective, having that level of profitability is important.

The companies that I admire most in the tech world like Amazon and Google and Facebook and Salesforce, it's a rite of passage.

They've all passed it, and it's the next step in our growth and evolution for being a long-term player in this market.

To address your second question, Karl, we really saw no meaningful changes this quarter from previous quarters in invoicing terms or durations.

Got it.

Thank you, both.

Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch.

Hi, congratulations on the quarter.

Plenty to talk about a couple days, but I'll keep it very brief.

Can you comment on attach rate of new modules -- I'm sorry, attach rate of payroll and recruiting modules on top of your new customers you won in this quarter?

That's it for me, thank you.

Those attach rates were very similar to the ones we've seen in the previous couple of quarters.

I think we'll see that continue to stabilize in those product areas, and we touched earlier on a couple of the exciting other product areas that we'll see begin to impact attach rates as we go into the second half of the year with Planning and Learning.

Can we have the next question please, operator?

Your next question comes from the line of John DiFucci with Jefferies.

Thank you for taking my question.

Aneel, what is it that needs to happen for new Financials contracts to get to that 25% SaaS by 2018 that Gartner is predicting here?

Is it customers' comfort with putting something so important that's often customized in the cloud, or is it the simple maturation of the product, both yours and others out there?

I think it's far more the latter than the former.

The CIO is the same for both HR and finance, and frankly that person is more in the driver's seat.

What I see in the sales cycles is frankly people are more focused on the sensitivity of HR data than finance data, so I don't think it's a fear of the cloud.

People frankly are putting legacy systems into the cloud anyways, just to reduce their processing cost.

I think it's much more of the latter, which is our systems -- the new cloud systems -- have to be functional enough to turn off the legacy systems.

It's exactly what happened in the HR market back in 2011, 2012.

We just hit an inflection point where clearly we had enough functionality to turn off a PeopleSoft or an SAP or an Oracle HR system.

Without that, people are going to carry two systems, and that just doesn't make any sense.

I think on finance, we are largely there.

There is still pockets around from global capabilities.

Planning is a huge deliverable.

I think planning is a big catalyst going into the end of this year and into the following fiscal year.

I really think it's that functional footprint.

The reality is there's no innovation happening on-premise any more anyways.

If you want a modern finance system, which people do, in two or three years the cloud offerings are going to be the only choices on the market.

Actually, that's interesting.

If I could, just a quick follow-up, because often times we hear -- especially your comment about the sensitivity of HR perhaps being even greater than financials -- because often times we'll hear people out there, so-called experts, say something that conflicts with that.

Why do you think financials would be less sensitive than HR data?

When you sit down with the Chief Security Officer at a Fortune 500 company, they are so, so sensitive on the loss of any employee data.

Finance data has a time value to it.

It's valuable for only a short amount of time, and in many cases it's not even that useful in the hands of other people.

But people's social security numbers and personal information are things that are near and dear to the hearts of every Chief Security Officer, and there are frankly privacy and security rules again around it.

I think what's happened in that market place is they've come to a conclusion that cloud is actually far more secure and private than anything that was being done on-premise.

I think the same thing's happening with finance.

Great.

Thanks, Aneel.

Operator, we have time for two more questions please?

Certainly.

Your next question comes from the line of Mark Moerdler with Bernstein Research.

Thank you very much, and congrats on the quarter.

Now that you've built the new tools to be able to implement more quickly to the mid-size market and make it more affordable from a services point of view, how should we think about the opportunity and impact of selling to more mid-market on revenue as well as on margin?

Then a quick follow-up.

I don't think it's going to have -- if these tools work the way we expect them to work and we've already got proof points that they do -- I don't think it's going to have any impact on margins.

It definitely opens up a broader segment of the market place.

When you look outside the US, many of the large economies are frankly mid-market economies.

Germany, as an example, is full of mid-market size companies.

This new approach to deployment pays off hugely across the globe, not just in the US mid-market.

I think it opens up a significant chunk of our market, both for HR and financials across the globe.

It's not like we haven't been successful there.

It's just that we tend to be successful with a Silicon Valley high-growth company that expects to be a large company, and they're willing to pay a little extra for Workday.

If it's a mid-market company that's largely going to stay a mid-market company, in some cases the deployments have been too expensive, and this addresses that issue.

The other part that we've seen with the mid-market is they do like the platform purchases, and that frankly reduces the sales and marketing costs if you can sell the platform.

Beautiful.

That brings me right to my follow-up.

How do you think going forward we should think about the mix of full-platform sales, versus selling of just HCM or Financials.

How much do you think that increases, or how much do you think overall it could be within the mix?

Well, I'll just define the question maybe slightly differently, and then turn it over to Phil.

I think large enterprises typically don't buy platforms.

They don't buy the systems together, because the projects are probably on different timelines.

But the idea that they might be a platform customer because they buy in two separate transactions is high.

I think that will be -- I don't know, what's your guess, 50%?

Yes, I think that it would certainly approach that.

I think Aneel, your point there and the question is, it's a profile of how those market segments buy.

They're a far larger number of what's been traditionally referred to as mid-enterprise companies that want to make one platform selection for HCM and Financials.

What they've been forced to do prior is to settle for products that were less sophisticated, because the sophisticated products, the ones with robust functionality, were expensive to implement.

That's no longer going to be the case.

Just because a Company's smaller doesn't mean they have less sophisticated functional needs.

We think the opportunity that we have to bring the right product from a feature and function standpoint with the right technology platform, cost-effectively implemented, provides a great opportunity for growth for us.

Excellent.

Thank you very much.

Your last question comes from the line of Patrick Walravens with JMP Securities.

Oh, great.

Thank you, and congratulations, you guys.

Aneel, what kind of acquisitions should we expect from Workday?

Are there any particular technology areas, for example, that you could go deeper in with the right acquisition?

There are.

I'm not sure how much we want to share on the call.

I would say look at our past acquisitions as a precursor to future acquisitions.

We tend to look for core technologies that improve our platform rather than big revenue streams.

If you look at what we've done recently, GridCraft for collaborative spreadsheets, MediaCore for a video learning platform, Identified for data sciences, Cape Clear for integration.

I think that's a pretty good lens to look through what we do in the future.

All of those are now sewn in and native to our platform.

The GridCraft technology is the basis for what we're doing in Planning.

The MediaCore technology is the basis for what we're doing in Learning.

I would look for acquisitions in that manner.

That answer your question, Pat?

Okay, yes.

I think we'll see it.

As long as I've got it, and I think you addressed this briefly with your comment about profitability and the stock price.

But when we look at some of these survey websites, it looks like the morale maybe took a dip among employees at Workday, I know that's something you're so focused on.

Is there anything you can tell us about what might have caused that, whether it's true in fact, and what plans are to address it?

We've definitely had some growing pains over the last 12 months.

Half the employees have been at the Company for 2 to 2.5 years.

It's a topic we've been on for the last six months.

One by one -- I read the Glassdoor stuff very carefully -- we're trying to get to the root of some of the issues, and I think we've addressed a bunch of them.

In some cases, we need to organize a functional area differently to adjust for scale.

Candidly, we have a bunch of college grads that we need to -- we have done a great job bringing them into the Company.

We've got to do a better job creating long-term career paths for them.

These are all things we've got under way.

I feel very good where we are today.

I would say three or four months ago this was an area of concern.

Working with Ashley Goldsmith, our great CHRO, we've been on it and making big progress.

I think we'll be back to the old ways, or the old view of the Company from new employees.

This is the -- I can't really think this is a bigger challenge for any high-growth company that has a positive culture, more challenging than actually the competition.

It's just keeping sure -- keeping the culture on track.

Great.

Thanks very much.

Thanks, everyone.

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

You may now disconnect, and have a great day.