Workday Inc (WDAY) 2017 Q4 法說會逐字稿

Welcome to Workday's fourth-quarter FY17 earnings call.

(Operator Instructions)

With that I'll hand over to James Redfern.

Welcome to Workday's fourth-quarter FY17 earnings conference call.

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

Following Aneel and Robynne's 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.

We have also posted on our investor relations website additional information related to our adoption of ASC606, which Robynne will review during her prepared remarks.

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 including non-GAAP operating profit and operating margins.

These 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.

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

These non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance, should be considered in addition to, and not as a substitute for or in isolation from, GAAP results.

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.

In addition on today's call will discuss our forward outlook for non-GAAP operating margin.

A reconciliation of our forward outlook for non-GAAP operating margin with our forward-looking operating GAAP margin 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.

The webcast replay of this call will be available for the next 45 days on our Company website under the investor relations link.

Also, the customers' page of our website includes a list of selected customers and is updated monthly.

Our first-quarter quiet period begins at the close of business on April 15, 2017.

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.

Thank you, James.

Hello everyone, and thank you for joining us in our fourth-quarter FY17 earnings call.

I am pleased to report that after a slow November that was highlighted on our Q3 earnings call, the business bounced back nicely in December and January and we ended up having a very strong quarter, by far the best quarter in the history of the Company.

The fourth quarter was highlighted by strength across the board in terms of product and geographies.

We saw continued success in the HCM spaced, where we closed 13 Fortune 500 accounts in the fourth quarter alone.

Some notable wins include BP, Deutsche Bank, Dow Chemical and Walmart.

We ended the year with 1,528 ACM customers, and we now have 136 of the Fortune 500 using Workday Human Capital management, with over 70% of them being in production.

We also had a strong quarter for our financial management applications, highlighted by 38 new sales for our planning application and the addition of more than 40 core financials customers, including wins at [Telus], FactSet Research and John Muir Health.

We ended the year with the following customer accounts: 324 for core financials, 111 for planning, and 452 for expenses.

Of note, we now have five Fortune 500 customers who have chosen Workday Planning only two quarters into it's general availability.

Lastly, we also reached our goal of driving acceleration in net new ACV growth for both the fourth quarter and the full year.

As we look back on the fourth quarter, I believe several factors led to our strong performance: our industry-leading products and technology, the great efforts of our sales team and the high levels of customer satisfaction across our customer base.

Nearly all of the net Workday customers conducted heavy referencing of the different alternatives, and the fact that 70% of our customers are live on Workday and 97% are happy with us clearly set us apart from our legacy competitors, both of whom are struggling with just getting customers into production.

Heading into FY18, we are focused on capitalizing on our momentum and surpassing $2 billion in revenues this year.

Now to prepare for this next wave of growth we have decided to make some changes to our sales leadership and go-to-market model.

On our leadership front, our Co-President Phil Wilmington and I are pleased to announce the promotion of Chano Fernandez to the expanded role of Executive Vice President Global Field Operations.

Over the past three years Chano has done a phenomenal job building our European and Asia Pacific teams and delivering great results.

Chano brings a broad global perspective and a strong passion for team building and culture.

In his new role he will extend his proven consistent approach to sales and sales operations across the globe.

You all be seeing and hearing from Chano at future investor events.

As we have growing larger as a Company, it has become evident that we need to constantly adjust our organization to stay nimble and focused on our key objectives.

To that end, we have now cleanly divided our North American business into two groups: large enterprise and medium enterprise.

While we've had separation at the account executive level between large and medium enterprise for some time, we're now taking it all the way to the senior sales leadership at a national level and brining the same approach to the services organization as well.

Switching gears to the product side, we are pleased to announce two new SKUs for the FY18 sales year: Workday Financial Performance Management, which is available today, and Workday Prism Analytics, which is on track to be delivered in the fall of this year.

Workday Financial Performance Management provides financial consolidation, financial reporting and management reporting, and includes a connector that facilitates integration of accounting entries from third-party accounting and general ledger systems.

This offering also includes Workday planning and will allow customers who may not be ready to replace their core general ledger to take advantage of Workday's powerful and robust consolidation analytics reporting and planning functionality.

Our second new SKU, Workday Prism Analytics, is an analytics platform that provides Workday customers the ability to blend and analyze Workday data and non-Workday data from multiple sources.

Workday Prism Analytics includes a data repository for storage of data, governance controls, data preparation tools for transformation and blending of mixed data sources, and tools to explore and analyze the data.

Last October at Workday Rising we announced that this new offering would be delivered this fall with Workday 29, and I'm pleased to share that we are right on schedule.

As a reminder, Workday Prism Analytics has been enabled by the team and technology from our acquisition of Platfora last summer.

Wrapping up our commentary on FY18, we have all the ingredients for an excellent year.

Our business and pipeline are healthy, we have a great team of dedicated workmates, we continue to innovate at the pace of the consumer internet, and our customers are happy.

As long as we continue to execute on all these dimensions, FY18 should be another great year of progress for Workday.

Before handing it over to our CFO Robynne Sisco, I wanted to take a minute to thank her and our accounting for accomplishing a significant milestone.

She will share more details with you shortly, but Workday has just become one of the earliest adopters of the new 606 revenue recognition standard.

It's a strong testament to their hard work and the capabilities of the Workday financial management applications that we were able to move so quickly to this new standard that will affect thousands of companies in the upcoming years.

Over to you, Robynne.

Thanks Aneel, and good afternoon everyone.

As Aneel just mentioned, while we ended FY17 on the historical revenue accounting standard, ASC605, I'm excited to share that effective February 1, 2017 we have early adopted the new revenue standard ASC606.

I'll discuss our Q4 and FY17 results on this call according to the historical revenue recognition standard ASC605, but will provide forward-looking guidance according to the new revenue recognition standard.

For comparability, restated financial statements under the new standard for the full year FY16 and the full-year and quarters of FY17 have been provided on our investor relations website.

I will also talk more a little later about our early adoption of the new standard, the impact of this change and the significance to Workday, our customers and our products.

Our fourth quarter capped another strong year for Workday.

Our subscription revenue grew 39% to $365 million for the fourth quarter, and also 39% to $1.287 billion for the year.

Total revenue was $437 million, reflecting growth of 35% from Q4 of last year, and $1.569 billion, or 35% growth for the full year.

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

Our momentum and the predictability of our businesses is positively reflected in our backlog and unearned revenue.

At the close of FY17 our non-cancelable backlog, which represents contractual amounts not yet billed and is not on our balance sheet, was $2.54 billion, representing annual growth of 63%.

Unearned revenue at the end of FY17 was $1.23 billion with annual growth of 37%.

Combined, the non-cancelable backlog and unearned revenue represents approximately $3.8 billion in future subscription revenue, or almost 3 times our FY17 subscription revenue.

The financial visibility provided by this future subscription revenue gives us high confidence in the sustained strength of our business.

Our non-GAAP operating profit for the fourth quarter was $8 million or 1.8% of total revenue.

For the year, our non-GAAP operating profit was $29 million, or 1.9% of total revenue.

Our strong results also translated into strong cash flow.

Operating cash flow for FY17 was $349 million, representing 35% growth from last year.

Our free cash flow was also strong, increasing to $228 million in FY17, reflecting growth of 82% year over year and representing over 14% of total revenue.

The strong cash flows were positively by unusually strong customer collections in Q4 and slower than expected capital spend.

Operationally we continue to execute well against our vision and appreciate the continued support we have received from our loyal customers.

The annual dollar value of contracts from renewing customers continues to exceed the original contract value, supporting our thesis that satisfied customers become long-term customers.

We successfully added and integrated approximately 1,400 net new employees to Workday this year, bringing our total workforce at year end to over 6,600.

Now I want to talk about the new revenue standard, ASC606.

As I mentioned earlier, effective February 1 Workday has early adopted this new standard and we are proud to be the first software company to do so.

While a significant amount of work went into this project in terms of contract review, documentation and thoughtful interpretation of the standard, our Workday Financial Management product was the key driver enabling us to early adopt.

Workday Financial Management includes revenue recognition functionality that allows all Workday Financial Management customers to evaluate, model and then apply these new standards both retrospectively and on a go-forward basis.

This functionality is embedded in the core system of record and delivered to customers through Workday's regular update process.

Had we been using a legacy financial system it would not have been possible for us to be an early adopter, and our adoption would have cost is considerably more money.

It is in times like this, times of significant change, that the huge advantage of having a true SaaS cloud financials product is most apparent.

We elected to adopt ASC606 under the full retrospective method.

As required by this method, we have fully restated FY16 and FY17 under the new standard using financial data all the way back to 2010.

We were able to adopt under this method because we have detailed accessible historical data in our Workday financial system.

Under this method all future reporting will be under the new standard only.

We believe many companies will have difficulty accessing their data as far back as necessary and in enough detail to adopt the full retrospective method and will therefore adopt what is known as the modified retrospective method instead.

Workday Financial Management functionality also supports the dual reporting under both the old and new standards, which is required under this alternative method of adoption.

To ensure full transparency, we have provided restated income statements and balance sheets for the full year of FY16 and for each quarter and the full year of FY17 on both a GAAP and non-GAAP basis.

These restated numbers can be found on our IR website along with a brief summary presentation on the new standard and its impact to Workday.

As a reminder, this new standard is an accounting change only.

It has had no impact on our operating or free cash flow, and does not change the underlying strength of our business or the opportunities ahead of us.

The following three areas are the primary drivers of changes in our numbers under the new standard.

First, the timing of subscription revenue has been impacted for contracts where invoiced amounts have been lower than the annual contract value.

Under the old rules the revenue recognized was limited to amounts invoiced.

Under ASC606 that limitation no longer exists, and such contracts are now recognized ratably regardless of the associated contractual invoicing schedule.

For Workday, less than 5% of our contracts were affected by this change.

As a result of this change, our restated subscription revenue now incorporates some of the headwinds from flexible contracts that we had previously discussed in our results, although that benefit is partially offset by other impacts of the new standard.

From a cash flow perspective, however, the full headwind remains as the contractual invoiced timing and therefore the collection of cash has not been impacted.

Note that this new standard requires companies to recognize revenue ahead of invoicing in the circumstances described, therefore adding an unbilled component to accounts receivable.

Second, subscription and professional services revenues above both been impacted where disproportional discounts lead to reallocations of revenue between subscription and professional services under ASC606.

Previously such reallocations could only go one direction, from professional services revenue to subscription revenue.

Under the new standard, allocations can go either direction depending on the facts and circumstances of each particular situation.

Only a handful of contracts were impacted in this manner, but those contracts have resulted in changes to both professional services and subscription revenue in all restated periods.

To give you a feel for the total impact to revenue of the new standard, our total revenue growth for FY17 is 36% under the new revenue standard versus 35% as reported.

Our Q4 FY17 total revenue growth is also 36% under the new standard versus 35% as reported.

The third and most significant impact from ASC606 is in the treatment of contract acquisition costs.

We are now required to capitalize a larger portion of sales compensation and to amortize those amounts over a longer period of time.

The incremental compensation costs capitalized are for indirect incremental payments on customer contracts, where previously we only capitalized direct incremental payments.

In short, while we used to only capitalize the sales account rep commissions, we now additionally capitalize payments to all sales leaders whose compensation was affected by that particular sales contract.

Also, while we previously amortized the capitalized commissions over the term of the specific contract to which this commissions related, which was generally three years, we will now amortize all capitalized compensation over a five-year period, which represents our estimated period of benefit of those payments.

This change alone positively impacted our GAAP and non-GAAP operating margin by approximately 1.8% in FY16 and 1.2% in FY17.

Also as a result of this change, the deferred costs on our balance sheet have increased.

The total impact of the new revenue standards on our non-GAAP operating margins is an improvement over our previously reported margins of 1.2% in FY16 and 1.4% in FY17.

The improvement to our GAAP operating margins is 1.2% in FY16 and 1.6% in FY17.

Now let me turn to guidance.

All of our future financial reporting and guidance, including our guidance on this call, will be under the new accounting standard only, and all growth rates are calculated using the restated historical numbers provided.

As we begin FY18 our pipeline and momentum are both strong.

We estimate that subscription revenue for FY18 will be $1.68 billion to $1.70 billion, or growth of 30% to 32%.

We expect professional services revenue to be approximately $325 million in FY18, or growth of 15%.

We therefore estimate that total revenues for FY18 will be $2.005 billion to $2.025 billion, or a growth of 27% to 29%.

This puts us on track to be the second peer-placed SaaS company to reach the $2 billion revenue milestone.

Our subscription revenue forecast for the first quarter is approximately $392 million to $393 million, or 40% growth, and is expected to grow sequentially in Q2 and each remaining quarter in FY18 by approximately 5%.

We expect Q1 total revenue to be $467 million to $468 million, or year-over-year growth of 34% to 35%.

At this point I would historically have also provided detailed billings guidance.

However, largely as a result of the changes resulting from our adoption of ASC606 which divorces timing of invoicing from revenue recognition, we have concluded that now is the right time to transition from annual billings guidance to annual operating cash flow guidance.

Annual operating cash flow is a metric we focus on internally, and one which we believe is a better indicator of performance as we scale our business and improve our profitability.

Given the increasing seasonality of our business, both between and within quarters, as well as variations in the timing of contractual customer invoicing, we believe the best way to look at cash flow is on an annual basis.

For FY18 we anticipate operating cash flow of approximately $420 million, or growth of 20%.

We expect to have non-GAAP operating margin of 8% to 9% in Q1 and between 5% and 6% for both Q4 and the full year as we scale our business and incrementally improve our profitability.

When considering trends in our profitability, it is important to note incremental margin improvement versus our restated FY17 non-GAAP operating margin of 3.3%, and not versus the 1.9% margins I discussed earlier today under the old standard.

We anticipate professional services margins will be lower in FY18 as compared to FY17 as we invest in programs to ensure ongoing customer success.

The GAAP operating margin is expected to be lower than the non-GAAP operating margin by approximately 25 to 26 percentage points in Q1 and 26 to 27 percentage points in both Q4 and for the full year.

During FY18 we expect to grow our employee base by approximately 1,500 net new people.

We expect FY18 CapEx, excluding our owned real estate projects, to be approximately $160 million.

We continue to invest in our new development center and other real estate projects at our Pleasanton headquarters.

In FY18 we expect capital expense for these projects to be approximately $175 million, including CapEx from FY17 that was delayed due to the unusually wet weather in the Bay Area this winter.

The entire project is still expected to be ready for occupancy in FY19, and we continue to fund construction from cash on our balance sheet.

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

(Operator Instructions)

Mark Murphy, JPMorgan.

Yes.

Thank you, and congratulations on a nice finish to the year.

Aneel in the Q3 earnings call you had commented that the first month of Q4 had started out slowly with some deal slippage and you did not include that language this time.

Is it fair to conclude that linearity in Q1 has started out a little more robustly or more normally?

Also, are the underlying issues around Brexit, or whether it is Brexit or trade and tariffs, et cetera, is that looking like a blip in retrospect, or is it still out there to some extent?

In terms of linearity it's still early in the quarter, but I think that it is back to business as usual.

November was just an odd month.

Actually, second half of October and November were just an odd time period.

I'm not sure if Brexit and other things have completely gone away, but they don't seem to be impacting our business right now.

Great.

And as a follow-up, Aneel, I was thinking back to the Q4 earnings call a year ago.

At that time you had talked about the potential for accelerating net new ACV bookings growth, and I think you had also commented that the pipeline for financials was up 150% year over-year.

And so now, I think seeing -- we have seen your subscription revenue growth did accelerate here in Q4.

Do you see parallels in terms of the setup for FY18, and in particular I'm wondering if the availability of Planning is boosting the pipeline coming into this year?

There's no question that Planning is having a very positive impact, and in my prepared remarks a talked about a new SKU, Financial Performance Management, which basically takes Planning, General Ledger and a connector.

Therefore, you can get all the benefits of Workday, Workday's Planning and consolidation, financial reporting management reporting, and view a legacy general ledger as a database.

That taking with attraction and Planning really bodes well as just another new revenue stream on our financial products.

To that point, we now have five Fortune 500 companies using Planning, That's as fast the ramp as of ever seen in a new module.

In terms of setup, I feel really good going into this year.

I like the organizational changes we've made in terms of clear lines between medium enterprise and large enterprise.

We have different competitors in those two buckets.

And then Phil and I making the with Chano, I think we now have a very straightforward global way of going to market, which is really important as we continue to penetrate the global marketplace.

Thank you.

Karl Keirstead, Deutsche Bank.

Thank you.

Aneel, if DB signing a big deal gets me near the front of the queue, I will see if we can do this every quarter.

(Laughter).

Sure.

How come you're not (inaudible).

Okay.

Thanks for including me.

I've got a question, maybe it's for Robynne.

Robynne, on the decision not to give a billings guide and flip to operating cash flow, I guess I had two questions.

One is, in the past you've mentioned that growth in operating cash flow can approximate billings growth, and I'm wondering should we loosely assume, therefore, that that 20% operating cash flow guidance for FY18 is roughly what the model is generating on the billing side?

Secondly, given that we're not going to have that billings metric and you're only giving us an annual operating cash flow, if that's the proxy for the healthier business, is there anything that you can give us in terms of the quarterly operating cash flow to help monitor the performance of Workday?

Thanks so much.

Yes, Carl.

As you are aware, there are timing differences between billings and operating cash flow.

Cash flow lags billings by 30 days or more and can sometimes actually roll into the following quarter.

We also have -- we're continuing to invest in our business, which impacts our cash outflows.

The timing of large payments to suppliers is also a factor.

The operating cash flow number is just a little more complex than billings as you got things going both directions.

So you've got more ins and outs.

On your second, we really look at operating cash flow on an annual basis.

There is a lot of seasonality with cash flow into now it's between the quarters, and so we don't really believe that guiding to it on a quarterly basis really gets you much insight into the business.

There will be some new disclosures that you'll get under the new accounting standards as well, and we'll talk more about that next quarter when we start disclosing those metrics.

They will be things around unearned revenue as well as total future revenue under contract.

Got it.

Okay, thank you.

Walter Prichard, Citi.

Hi, thanks.

A quick one for Aneel.

Just on financials, it seems like a couple of years ago I wouldn't have thought you would bring out a product that might try to bridge customers from existing financial products, and it feels like maybe that business has evolved a little bit more slowly than you expected.

I'm wondering, have you at all changed your view of the size of the financials opportunity, the timing of the financials opportunity, and as a result your pace of investment in that product area?

No.

We're still very optimistic and FY17 was a great year.

We are now at 320 core financial customers.

At this point in HR, it was a foregone conclusion that the market was moving in that direction, and that's how we feel.

I think for some of the larger companies though, they view core accounting the way some of our large customers view payroll.

It's something that works, doesn't have a huge interface.

Maybe let's push that down the road, but what they want is all the functionality from the reporting, the analytics, the planning, and Planning really opened up this thread.

If you are to think about it, to take the analogy of one of our competitors.

They talk about their financial wins, but it's really about Hyperion.

And what we're seeing is that market around financial performance management, it's just a very hot market right now.

And if a customer has Workday HR, Payroll, Workday Financial Performance Management, we're going to get the core accounting now or later.

It's just a matter of time.

So if anything, I think the market opportunity has grown.

Two years ago we weren't even thinking about being in the performance management space and today Planning and Financial Performance Management is a really new growth sector for us that has surpassed our expectations.

Robynne, could you just help clarify, there's been a couple large deals that you've announced and acknowledged, and I think a lot of investors are trying to understand what's in those, or what from those deals is in the billings and cash flow we saw, say, this quarter and the January quarter and then what will see in April?

And just general how those large deals are rolling in terms of billings and cash flow progression.

Yes, Walter.

We can't talk about specific terms on specific customer contracts.

Needless to say, these deals didn't happen overnight.

They were in our in our pipeline.

So we've built large deals as well as all of our other deals into the guidance that we've provided.

Okay.

Great.

Thank you.

Keith Weiss, Morgan Stanley.

Excellent.

Thank you, guys, for taking the question.

I think both of these are actually for Robynne.

One, I was hoping you could help me understand a little bit better of why the new accounting standard means you can't give billings growth?

I didn't make that connection very well.

And two, on the operating cash flow guidance, maybe to double-down on Karl's question, is there anything in particular that is happening in the upcoming fiscal year that would significantly take away or add to that operating cash flow number that we should be thinking about in terms of other working capital accounts?

Yes, Keith.

To answer your first one, it's not specific to the new standard but what happens, one of the impacts of the new standard is that the revenue recognition of a contract is completely divorced from the invoicing schedule.

So due to this, as well as our increase in compounding seasonality we've been experiencing, the increase in contract complexity and variability we've been experiencing, we believe this metric is increasingly less relevant for gauging our business progress.

We thought this was the perfect time to move away from it and toward something that we focus more on internally, which is the operating cash flow.

In terms of your second question on operating cash flow, there's really a lot of ins and outs.

Keep in mind that operating cash flow does not include capital spend either on our data centers or for our owned real estate, but there are a lot of fluctuations in the timing of when cash comes in the door from customers and goes out for supplier payments and even payroll.

Those are all factored in.

Got it.

Maybe one follow-up for Aneel.

If operating cash flow is a new metric, if you will, for looking at growth.

I think you've talk to us in the past about the ability to sustain top-line growth of 30% for some time.

Is there a similar sort of long-term target of what we should be thinking about for operating cash flow growth?

I think the question is for Robynne, too.

I would say that I feel especially coming off of Q4, I do feel comfortable with a 30% top-line growth, but as it relates to operating cash flow I'll push that back to Robynne.

Yes, I think over the long term we would expect the operating cash flow would get closer to our revenue growth number, but as we are investing more in our business and we continue to expand internationally into higher, very strategically and aggressively, it's going to be lower for some time.

Okay, excellent.

That's very helpful.

Alex Zukin, Piper Jaffray.

Thank you.

The first one is for Aneel.

Aneel, can you talk about what the new division of roles is going to be between Phil and Chano, where they overlap?

And is there any way to qualify what you believe to be the changes from a sales management and distribution perspective versus this time last year?

Sure.

So very simply put, Phil has been our Co-President now for two years and he was also acting as the Worldwide Head of Sales and had other responsibilities including services, strategic customers, product marketing.

There was a lot of things on Phil's plate.

It was natural at some point to pick somebody to run worldwide sales, and frankly we had been talking about the change with Chano for the last couple of years.

Going into this year as we look to past $2 billion and we have a goal of being a much larger Company, it was the right time to do it.

We didn't even think about looking outside.

We knew we had the right person internally.

It's time for us to have a standard way of going to market across the globe, and Chano's way is a great way.

I'm very, very excited about him in that role and him working with Phil.

I think the added benefit is you know probably have three of us who are very focused on large multinational opportunities and get involved in them.

Got it, that's helpful.

And then maybe -- sorry.

I was going to ask Phil to add anything he would like to.

I think that's very true.

I think the discipline that Chano brings and consistency globally is very important for all of our global customers and our go-to-market strategy.

As it relates to the second part of your question in comparison to changes that we made last year at this time, anything that we've announced today in terms of changes, or last week when we announced these changes of our sales kickoff meeting, are very consistent with the foundation that we built over the last couple of years.

The total clarity in our organization for mid-enterprise was set up a few years ago and now has taken -- we've taken the next logical step.

The same is true with Chano.

I think it's a very consistent approach.

Got it, that's helpful.

Maybe one follow-up for Robynne.

Can you talk about any changes in contract duration or terms or pricing, or what in your mind is leading to that -- we see backlog growth rate reaccelerating.

Is that -- what's driving that?

Yes, there are many factors that impact the backlog growth, particularly the timing and size of renewals.

That renewals number is becoming increasingly larger as we grow.

Also the duration of new contracts can have an impact on that as well.

also one thing to note is that we will not be providing backlog going forward as the requirements under the new rules give different disclosure records.

So we will have some new disclosures for you instead of backlog starting in Q1.

Got it.

Thank you, guys.

Justin Furby, William Blair & Company.

Thanks, guys.

Just two questions.

First Aneel, I'm just curious about the [regular way] business.

You clearly have a lot of mega-enterprise activity.

I'd love to hear about the regular way enterprise in mid-market and what you're seeing there and your expectations going forward.

Then you said you're comfortable with 30% growth in response to Keith's question.

I guess how long?

Is that three-year, five-year, what were you referring to when you said that?

And then I've got one quick follow-up for Robynne.

Thanks.

So, it was a strong quarter across the board.

Our win rates were some of the highest, and where we had stronger win rates, frankly, were in the -- versus historical numbers was in the medium enterprise segment against the likes of Ultimate and NetSuite.

Really, it was strong across the board.

The win rates against S&P and Oracle were as high as they've been in recent memory, but we had also picked some share points in the medium enterprise segments as well.

So I think that bodes well for our organizational strategy going into this year.

In the 30% growth rate, there are so many things that factor into that.

I would say that as we look at a planning horizon, we look out two years.

Beyond two years, I would be guessing, and I'd rather not guess.

But comfortably in two years, ask me in a year and it might still be two years and just keep pushing out., Right now, as we plan and look at pipelines I feel the comfortable with that timeframe.

Basically no real deceleration in FY19?

Is that just given financials and your view that that will continue to inflect, or what drives confidence in that?

Well, we went into last year hoping to reaccelerate the business, and it did.

So that provides an confidence going into this year that we now have -- the more products we have, the more coverage we have, and frankly the lack of our competitors' abilities to get customers live, it really bodes well for us to continue to see high growth rates in the business.

I think that last piece, I've been harping on it for two years now, but it is beginning to catch up with our main legacy competitors.

They just cannot produce referencable customers at any scale, which is why we added 13 Fortune 500 customers to the Workday platform.

That's same platform is the one we use for HR, it's the same one we use for financials.

I think this point of customer success is going to come back to haunt those two companies, or lack of customer success in their case.

Got it.

Thank you.

Then Robynne, just quickly, last quarter you offered mid-20%s subscriptions billing guidance for 2018.

It seems like the mood is clearly better now than it was in early December.

Is it fair to say that you feel similar to better about that growth number if we were going through these accounting changes?

Thanks.

Yes, we're just not going to give guidance on billings, Justin, now or going forward.

Obviously we had a great Q4, we're feeling good about this coming year, and so let me just leave it at that.

I'd say definitively right now than we did during the earnings call for Q3 about -- less about our business, but more about where the market is.

Got it.

Thank you very much.

Phil Winslow, Wells Fargo.

Hi.

Thanks guys for taking my questions, and congrats on a great end of the year.

Aneel, just wanted to double-click on Planning again.

You made some interesting comments about just how you intend to position this offering in a unified manner, but then also into other, call it companies' install bases.

When you think about the feedback that you've been getting since the launch of Planning, and then also sure, your go-to-market intentions, wondered if you just double-click on that plan?

What proof points do think we should look to hear for Planning?

We're two quarters into and we have 111 Planning customers.

We're two quarters into Learning, and I think the number is right about the same, I think it's 105 and 106.

If you just look at from that perspective where we have a very significant HR install base, you would expected that Learning would've taken off like it did, and Learning is ahead of Plan.

But Planning is well ahead of where we thought it would be, and it's clearly hitting a pain point around the budgeting/planning/forecasting area.

As we bring out this FPM product, and there's a very well-defined FPM marketplace, it's clearly striking a chord, not with just medium-size companies but with Fortune 500 companies.

I mentioned that five companies, or five Fortune 500 companies have signed up for Planning.

Those include Walmart, Nationwide, Striker and Netflix.

Those are big names, and for us it's a great way to get -- we have HCM, we have Planning, we're really well positioned to run the tables within that enterprise when they do move their transactional platform as well.

I would also say in the second half of the year, also due to customer demand, this Workday Prism Analytics, which allows you to explore both Workday data and other third-party data and get to things around customer profitability, get to things that really involve multiple data sets, that's also another boost for both the financials play and the HR market.

Well, my follow-up was actually going to be on Prism.

You actually answer that question.

Thanks for that, and then congrats again.

Heather Bellini, Goldman Sachs.

Hi, great.

Thank you.

I just had a couple of -- well, two quick ones and then one additional one.

Aneel, just to start off I was wondering if any of the rhetoric around ACA impacted deal signings in the quarter?

We heard that from some of the other companies in payroll recently so I was just wondering if you saw anything there.

And then I had a question just related to -- I know you guys haven't disclosed in a while, but billings from renewals, if that was something that you guys were going to share?

And then my last question was for Robynne, just the revenue guide for fiscal 1Q and the full year.

Is there any way, maybe you said this and I missed it, but what the impact was related to the transition to 606?

Just so we can compare apples to apples versus what was said on last quarter's call.

On ACA, as far as I can tell and I asked Phil, no impact at all.

Frankly, that never crossed my radar.

In terms of terms renewals, all I would just say is it was over 100%.

Okay.

We're not going to provide any guidance under the old standard, Heather, but it's reasonable to assume that the impact for FY18 is not that different from the impact to FY17 on the new standard, which is something that you have.

Yes, great.

Thank you.

Kash Rangan, Merrill Lynch.

Aneel, sometime back you said that financial as a net of net new ACV could reach about 50% of the Company's net new ACV in a few years from now.

I'm wondering if you just give us an update on how you think about financials as a percentage of net new ACV, and/or should we be thinking about other aspects of the Company, Planning product, analytics products, et cetera that should really be considered as a larger context, not just be nearly focused on financials?

That's it for me.

Thank you.

So first of all, our definition of financials, I put into three chunks.

There's core financials, which is basically core accounting, general ledger, AP/AR, asset management.

The second bucket is Financial Performance Management, which includes Planning.

And the third is spend, which is procurement and expenses.

All three of those categories are part of the financials product line, and it is why we are bullish that is going to continue to be a bigger and bigger part of our business.

I don't know when it hits 50% of net new ACV, but we expected it to start moving significantly down that path this year.

Without getting into a lot of detail, we have a lot of confidence both in the people, the pipeline and the incentives to make that happen.

Got it.

And if I could slip in one on the PP&E side, certainly for the size of the Company, it's a big number.

How should we think we be thinking about the payoff in terms of how big these markets can be, how much this CapEx can differ in terms of incremental subscription revenues or big new opportunities?

That's it for me.

Thanks.

Hey, Kash.

It's Robynne.

Our CapEx spend is primarily around our customer data centers, and so that's been -- continues to grow as we increase our customer base.

There's also some spend in there on facilities for our expansions internationally.

Richard Davis, Canaccord.

Hey, thanks.

Aneel, you have touched on it, but do you feel that the the mid-market HR effort is buttoned down sufficiently to the point where if I was a salesman on that product, this is just kind of the year of execution?

In other words, that the ducks are in a row, you have the TCO down to the right spot, et cetera?

In other words, you're at the sweet spot and either I hit my quota or I don't.

Thanks.

Ever sale is hard work.

But I would say what is different from last year, last year at a sales rep level we were split between large enterprise and medium enterprise.

When you got to the national level, a given region, say like the Eastern region, had coverage for both large enterprise and medium enterprise.

This year we've taken it to the point where there is a senior executive who reports to -- the two senior executives report directly to Chano, who are responsible individually for large enterprise and medium enterprise at a sales level, at a regional level, at a sales support level, and importantly at a services level.

And that services level is key because you go into to a project and one day you're bidding on a Fortune 50 company and the next day you're bidding services on a 1,000-person high-growth company, and they require very different types of bids.

Now have a services model that is very in line with the sales model.

I think that's probably the biggest boost going into this year.

Got it.

Thank you so much.

Time for two more questions.

Kirk Materne, Evercore ISI.

Thanks very much, and congrats on the quarter.

Aneel, when we spoke at the end of last year I think one of the things you brought up, given -- or around FY17 was the idea that some of the enterprise adoption in financials little bit slower than you guys had obviously hoped for at the very high end of the market.

It sounds like you have some products out right now that you think are going to help speed that up, or at least get people to take a look at the product, especially around APM.

I was just curious, with the split between enterprise and medium-size sales orgs, is there any real change in terms of what quota bearing reps are going to be carrying in either of those organizations?

Maybe I'm trying to get a sense on, is there will be a higher emphasis on specialists that can come in in the medium-size -- I'm trying to get a sense if there's any sort of change on what people are going to be carrying in their bag.

Thanks.

In terms of the reps across the globe, they'll carry all products in their bag.

For large enterprise in North America, we have assigned a handful of reps who are going to focus on the highest priority accounts and have direct quota responsibility.

These are reps that really know our financial products well and in some ways are financial experts.

They will have primary account responsibility for a select group of accounts that really fit our profile, and that number is less than 100 but it's a very important group of accounts.

Okay.

Just maybe one follow-up for Robynne.

Robynne, with 606, and I might be mistaken on this, I think we're getting more details in terms of your filings around contracted business.

And I assume even though we're getting more disclosures on that front, the guidance is still going to be predicated on an operating cash flow.

Is that a fair assumption?

That's correct.

Okay, great.

Thanks guys.

Raimo Lenschow, Barclays.

Hey, thanks for that.

Can I just follow on on Kirk's question?

Robynne, if you get contracted business but not billed, in a wave you can tackle almost what your bookings was.

Is there some error in my thinking?

You're obviously the first to talk about that.

Will you give us this kind of metrics looking backwards as well now, or does that really start in Q1?

It starts in Q1 although you will get the Q4 balance at that time.

Really what the disclosure is, it's future subscription revenue and so it will vary, kind of like backlog did, based on the duration of the contracts, the timing of renewals and other such things.

So it will be somewhat similar to backlog, but backlog represented future billings and this disclosure will represent future revenue.

Slight difference there.

Okay.

One quick one for Aneel, if I may.

Aneel, if you look at your Planning, If you have the customer [colonizations], how deep is your Planning goal in terms of running the whole customer business versus more business units?

What do think in terms of how quickly you can get these guys to convince to go to the full Workday, including the core (inaudible)?

Is that kind of, do you see the new normal will be a more modern Planning platform and people just lease the old legacy stuff to do their accounting, or do you think that will eventually change?

No, I think people -- I think 606 is a great example.

People are going to have to change their core accounting platforms, and in medium enterprise and now several large enterprise companies, they're changing out their accounting platforms.

Frankly, this Planning opportunity is a sound opportunity.

We were able to move quickly into the market and basically get another revenue stream.

I don't see people deferring their core accounting issues because 606 is the first of many changes coming down the path.

If you're running Oracle or S&P financials, you're going to have a hell of a time getting to 606.

With Workday, great effort by Robynne and her team, but the platform enabled that.

I think there's a lot of people that are going to take notice how quickly we moved to a very important revenue recognition standard, which has to start with the underlying accounting system.

On the FPM opportunity, is not departmental, is enterprise-wide.

Most companies are using it for financial planning and analysis.

Some are using it for -- basically for human capital planning.

With this new SKU that basically couples Planning with consolidations, management reporting and analytics, it's very attractive and can be run by many Fortune 500 companies along with their HR system.

I think it sets you up to replace core counting down the road.

Again, I'll use the analogy, core accounting looks very similar to us as we've now looked at all the data, to payroll.

There are many cases in the first several years of HR where we won the HR deal but they didn't want to touch payroll, and now our payroll attach rate is over 60%.

People came back after they went live on core Workday and said, yes, let's move to that, let's unify that platform.

And I think the same thing will happen with core accounting if they don't choose core accounting upfront.

Perfect.

Very clear.

Thank you, and well done.

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

You may now disconnect, and have a great day.