Workday Inc (WDAY) 2018 Q1 法說會逐字稿

Welcome to Workday's First Quarter Fiscal Year 2018 Earnings Call.

(Operator Instructions) With that, I'll hand it over to Mike Magaro, Vice President of Investor Relations.

Welcome to Workday's First Quarter Fiscal 2018 Earnings Conference Call.

On the call, we have Aneel Bhusri, our CEO; Robynne Sisco, our CFO; and Chano Fernandez, our EVP of Global Field Operations.

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.

Statements made on this call include forward-looking statements such as those with the words will, believe, expect, anticipate and similar phrases that denote future expectation or intent regarding our financial results, applications, customer demand, operations and other matters.

These statements are subject to risks, uncertainties and assumptions.

Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K 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, we 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 GAAP operating 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 in 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 second quarter quiet period begins at the close of business on July 14, 2017.

Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2017.

With that, let me hand it over to Aneel.

Thank you, Michael.

I'd first like to also thank everyone for joining our Q1 2018 earnings call.

I'm pleased to report that our first quarter of fiscal year 2018 was one of our strongest quarters to date.

Indeed, net new ACV experienced our highest year-over-year growth rate in almost 3 years.

Our Human Capital Management business remains strong with continued performance across customer size, geography and vertical.

We also had a strong quarter for our Financial Management suite of applications as we added 29 new core Financial Management customers.

Starting out with Workday HCM, we had another strong quarter as we continue to lead the market with an industry-leading true cloud platform, the deepest product capabilities and unparalleled user experience and the highest levels of customer success.

In Q1, we added Target, AECOM, Loews Hotel and Puma among the wave of new HCM customers.

We continue to land marquee Fortune 500 accounts, in part due to our proven ability to support our customers' large volumes of data and transactions, a capability that neither of our legacy competitors has been able to demonstrate in the cloud.

While these new wins are very important to us, we remain equally focused on delivering excellent service to our current customers, and that includes delivering on our commitments to them.

Amongst the many go-lives of Q1, I would like to highlight Qantas Airways, who became a customer in 2016 and went live after a 9-month project, covering all 45,000 employees and contractors in 26 countries.

A special kudos to their great effort and excellent project team.

We also saw a strong momentum for the Workday Financial Management suite of applications.

We believe that a combination of our expanded set of offerings, the CFOs' increasing comfort with the cloud and our high levels of customer satisfaction are beginning to drive broader adoption of our Financial Management applications.

To that end, new Workday Financial Management customers in Q1 included NASDAQ, Adventist HealthCare and Nuffield Health, the largest not-for-profit health care provider in the U.K. I'm also delighted to report that in the first month of Q2, we saw 2 existing HCM customers, 21st Century Fox and CNA Financial Corporation, expand their use of Workday to include our Financial Management applications.

Taken together with our Q1 success, we believe these wins collectively demonstrate both the growing momentum of our Financial Management application amongst large companies and the benefit of having a happy HCM customer base.

In Q1, we also continue to add to our sales leadership team across the globe and are delighted to welcome Gonzalo Benedit as our new President of EMEA and APJ.

Gonzalo brings a strong background in enterprise applications and will report to Chano Fernandez, our Executive Vice President of Global Field Operations.

Shifting to the product development front.

We moved all customers to Workday 28 during Q1.

With this update, which by the way, took less than 5 hours for all of our customers, we expanded our global foundation and industry-specific capabilities in Workday Financial Management and delivered a suite of new features in Workday HCM that equipped customers with even more flexibility to meet their performance management needs.

We also continue to deliver against the road maps for Workday Planning and Workday Learning by adding new features that expand the global breadth and depth of these products.

Indeed, these 2 new offerings continue to perform very well in terms of new sales.

Workday Planning now has over 140 customers as it continues to be one of the best new product launches in our company's history, and Workday Learning has experienced a similar ramp and now enjoys a base of over 165 customers.

As we look forward to the rest of fiscal year '18 and beyond, we will continue our relentless focus on innovation and expect to see continued momentum for our growing family of applications.

On the heels of the success of Workday Planning and Workday Learning, we are seeing increased levels of activity around Workday Financial Performance Management, a new SKU we introduced at the start of the fiscal year, and high levels of interest in Workday PRISM Analytics, our advanced analytics offering that will become available with Workday 29 in the fall.

And stay tuned for some other exciting offerings that we will discuss in the upcoming months.

I would like to end on a note about a topic that is near and dear to me and Dave and the rest of the management team, continuing to build a values-based organization that stands the test of time.

In the past year alone, we have invested heavily in manager and leadership training, including an off-site leadership summit where our 1,200 people managers spent 2 full days learning about our way of managing and leading at Workday.

We also continue to invest in development programs for our individual contributors who drive much of the performance of the company.

And we believe this investment in our people continues to pay off.

In the quarter, we were named one of the 100 Best Companies to Work For by Fortune and Great Place to Work Institute for the third consecutive year, ranking #18 on this year's list.

We ranked #1 in the large company category of the San Francisco Business Times Best Places to Work in the Bay Area list and ranked #1 on the Great Place to Work Institute's list of Ireland's best workplaces for 2017 in the best large company category.

We are very proud that even as we maintain our very fast pace of employee growth around the world, our company culture remained strong.

All in all, this quarter was a great start to our fiscal year.

With that, over to you, Robynne.

Thanks, Aneel, and good afternoon, everyone.

As Aneel mentioned, we continue to execute against our large and growing addressable market.

The momentum from the fourth quarter continued into the first quarter with strong product adoption for both HCM and Financials.

Let's start with our top line results for the first quarter.

We delivered total revenue of $480 million, reflecting year-over-year growth of 38%.

Our subscription revenue was $400 million, up 43%, which represents our third consecutive quarter of accelerated subscription revenue growth.

Subscription revenue outperformance was driven by strong net new ACV growth as well as better-than-normal linearity within the quarter.

Professional services revenue came in at $80 million, representing growth of 19%.

We continue to be excited by the expansion of our global footprint.

Total revenues outside the U.S. grew 58% to $97 million, reaching 20% of the total revenue for the first time.

We are still early in our expansion outside of the U.S., and this will be an area of continued investment for us.

Our non-GAAP operating profit for the quarter was $61 million, resulting in an operating margin of 12.7%.

The strength reflects higher top line growth, improvement in our gross margins and the benefit of overall spend being lower than expected.

We did not see any material impact from FX changes within the quarter.

We achieved a record high for cash flow from operations of $180 million in Q1.

Our trailing 12-month operating cash flow was $368 million, up 12% year-over-year.

Our trailing 12-month free cash flow was $251 million, up 32% year-over-year.

Note that in calculating our 12-month free cash flow, we've excluded $118 million related to our owned real estate investments as we consider such investments nonrecurring in nature.

As always, our cash flow results can vary with the timing of customer invoicing as well as seasonal and varying spending patterns.

Our business model clearly demonstrates strong economics as we scale, and we are confident in our ability to deliver future operating margin and cash flow improvement over time.

It is important to reiterate, however, that given the large growth opportunity still ahead of us, we will continue to prioritize growth over near-term margin improvement.

Moving to the balance sheet.

Total unearned revenue at the end of Q1 grew 31% year-over-year to $1.2 billion.

Current unearned revenue, which will be recognized over the next 12 months, was approximately $1.1 billion or strong annual growth of 37%.

Even with a very strong Q1 on a sequential basis, current unearned was relatively flat, a result of the compounding seasonality we're seeing over time.

Non-current unearned revenue was down 6% year-over-year, driven primarily by fewer customers electing to pay more than 1 year of subscription fees upfront.

As we discussed last quarter and as part of our adoption of the new accounting standard ASC 606, we are pleased to provide 2 new quarterly subscription revenue disclosures.

The first disclosure referred to as our remaining performance obligations under ASC 606, we will simply refer to as our subscription revenue backlog.

This number represents all future revenue from existing customers subscription contracts regardless of contractual billing schedules.

This means that amounts already billed, which are on our balance sheet in the form of unearned revenue, are included in the subscription backlog number as our amounts that will be billed at later dates in accordance with the underlying contracts.

At the end of Q1, our subscription revenue backlog was $4.0 billion, with 2/3 expected to be recognized within the next 2 years and the remaining balance to be recognized thereafter.

Second, we are providing the amount of our subscription revenue within the quarter that was in the unearned revenue balance at the beginning of the quarter.

For Q1, $361 million of our $400 million of subscription revenue or 90% came from the balance sheet.

This compares to Q1 of last year, where $251 million of our $280 million of subscription revenue, also 90%, came from the balance sheet.

We believe the new disclosures are good proof points in the predictability and longevity of our business and that they will be helpful over the long term.

We also believe, however, that there are significant limitations in trying to deduce current period performance using these metrics as they will fluctuate in the short term based on many factors, including seasonality, contract durations, invoicing terms, the timing of renewals and other contractual dynamics.

Subscription revenue growth continues to be one of the best indicators of our performance from a top line perspective.

We continue to see the annual dollar value of contracts from renewing customers exceed the original contract value during Q1, supporting our thesis that satisfied customers become long-term customers, which will drive long-term shareholder value.

We continue to invest in our people and in attracting top talent to Workday.

During Q1, we successfully added and integrated approximately 250 net new employees to Workday, bringing our total workforce at the end of the quarter to almost 6,900.

Operationally, we executed exceptionally well in the first quarter, delivering overperformance on both the top and bottom line.

We're extremely pleased with our results and have gotten off to a great start for fiscal 2018.

I'll now turn to guidance.

As a reminder, all our financial reporting and guidance is under the new ASC 606 accounting standard, and all growth rates are calculated using the restated historical numbers provided last quarter.

Based on our strong Q1 results, we are raising our fiscal 2018 outlook and providing Q2 guidance as follows.

For subscription revenue, we're raising our full year estimate to be in the range of $1.705 billion to $1.720 billion or growth of 32% to 33%.

We expect our Q2 subscription revenue to be $420 million to $423 million or 37% to 38% growth, with sequential improvement in Q3 and Q4 of 3% and 5%, respectively.

This pattern reflects our increasing seasonal trends towards larger Q4s.

We expect professional services revenue to be approximately $333 million in fiscal 2018 and $85 million in Q2.

We, therefore, estimate the total revenue for fiscal 2018 will be $2.038 billion to $2.053 billion or growth of 29% to 30% with Q2 total revenue in the range of $505 million to $508 million or growth of 35% to 36%.

For non-GAAP operating margins, we now estimate Q2 and full year operating margins of 6% to 7%.

The sequential decline in non-GAAP operating margin from Q1 reflects typical seasonality and is primarily a result of our annual employee compensation cycle, which took effect at the beginning of Q2.

In addition, we expect non-GAAP operating margins to decline quarter-over-quarter in Q3 to approximately 4%, primarily due to continued headcount growth in seasonal marketing spend before sequentially improving in Q4.

The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 25 to 27 percentage points in each remaining quarter and for the entire fiscal year.

We still expect strong operating cash flow of $420 million or growth of 20%.

As you know, following our seasonally strong Q4s, Q1 is consistently our strongest cash collections quarter and correspondingly, Q2 is traditionally our weakest.

We are currently expecting cash flow from operations in Q2 to be negative, driven by the combination of seasonally low collections and the seasonally high sequential increase in expenses, driven by our annual employee compensation cycle mentioned earlier.

There is no change to our fiscal 2018 plans for capital expense for our owned real estate projects or other CapEx provided on our last call.

And finally, I'll close by thanking our amazing customers, partners and employees for their continued support and hard work.

We are still in the early stages of executing against our long-term vision as a company, but our progress wouldn't be possible without a shared goal.

We're off to a great start to the year and look forward to updating you on our progress throughout the year.

Operator, let's begin the Q&A process.

(Operator Instructions) Your first question comes from Justin Furby with William Blair.

Maybe, Robynne, just to start, can you give a sense for this new metric on the subscription backlogs for Q1.

What's the year-over-year compare looks like?

Was it a similar sort of growth rate that you saw in terms of Q4 on backlog?

Or any more context around Q1 would be helpful, and then I've got a follow-up for Aneel.

Sure, Justin.

So if you look back to when we were disclosing backlog previously, if you take that backlog number and add in unearned balance, you get a total number that was fairly comparable to the new disclosure under 606.

So last quarter, we disclosed that amount to be 3.8, and then you've got disclosures for every year-end previous to that, so you got some pretty good points of comparability there if you look back in time.

Right.

I was just wondering, Robynne, for Q1 of last year what that might have look like in terms of the year-over-year growth, not sequential.

Yes, we have not disclosed Q1 of last year.

Okay.

And then -- I thought I'd try.

Aneel, I haven't asked this question in at least a few years.

I wanted to take a shot at it again.

Just based on what you see today in terms of financials and traction and pipeline, how long do you think it is before that product line would reach parity with HCM from a new booking standpoint?

And when we get there, whenever it is, what sort of growth story do you think Workday is at that point?

You ask these questions that are hard to predict.

So it's still several years down the road.

We've seen really nice pipeline growth in Financials.

We've talked about the 2 big wins.

Actually, I put NASDAQ through the 3 big wins, NASDAQ, 21st Century Fox and CNA.

So we're beginning to see that market move, and that market is bigger.

At the same point though, the HCM market has a lot of legs in front of it.

And if you look at the re-acceleration in the subscription growth rate, that's still primarily driven by HR, and HR needs to slow down for finance to reach parity at some point, and we're not seeing that.

We don't want to see that.

But I'd say it's clearly down the road, but now the finance business is becoming more predictable and is growing faster, but the HR business is really holding its own right now.

Your next question comes from Kash Rangan from Merrill Lynch.

Congratulations on the strong operating margin performance, besides other things.

A couple of questions for you, Robynne and Aneel.

You said that ACV growth rate was the fastest in almost 3 years.

Can you help us understand what exactly drove ACV growth rate in what could have been otherwise a seasonally slow Q1?

And also, is this a precursor, the deferred revenue growth, and how weak outlet billings should also accelerate just because ACV growth rate was so solid?

And if I could -- actually someone asked a backlog question.

So this is the only question from me.

So in terms of Q1, I'd say it was strong execution, and I'll turn over to Chano in a second to talk about it, but very strong sales execution.

And I do think that we're seeing this phenomenon that especially in the large companies in the market that are out in the market for an HR system, we're just so far ahead of our main competitors in terms of proof points of success.

So if you're a Fortune 500 company, we've got dozens of -- actually over 100 points of success and not just winning the account but the customers actually in production and our competition has very little and we just saw some of those actually trickle into Q1, which historically hasn't seen a lot of Fortune 500 accounts but we did as well.

Maybe, Chano, you want to add something to that?

I think companies continue to move to the cloud.

And clearly, as the leader in HCM Financials, we continue to gain share.

I think the momentum from Q4 continuing in Q1 on both medium enterprise and large enterprise were strong.

And clearly, as Aneel mentioned, we are at the beginning of our global expansion, so we had a very good quarter outside of the U.S., and we continue to be really excited about the opportunity ahead of us.

And Kash, on your billings question, as you know, we stopped guiding that because we don't believe that the billings number really correlates to any meaningful metrics that are good to gauge our current period performance, so it will continue to vary, as it has, against the other metrics that we do manage to, like net new ACV.

I appreciate that, Robynne.

But nonetheless, ACV growth rate should lead to something else accelerating as the rest of the year progresses, I would assume.

It has a lag effect, I would assume.

Well, so, Kash, the thing to understand is that, given now that the revenue recognition rules have changed, we're not as focused on getting a year's worth of cash or more than a year's worth of cash up front, right.

It doesn't impact revenue recognition and, frankly, that gives us more tools in the bag to potentially lower discount rates.

Right.

There's only so many knobs you have and not pushing the customers on cash means you might be able to avoid some additional discounting.

So we're just not focused on collecting cash in the same way that we -- but it's just kind of odd because your name is Kash, but we're not focused as collecting as much cash as we have, historically.

It doesn't matter to revenue recognition anymore.

Your next question comes from Alex Zukin with Piper Jaffray.

This is Scott Wilson on for Alex.

Aneel, maybe one for you and then a follow-up for Robynne.

Aneel, a large competitor of yours over the last month or 2 has announced fairly significant changes to their senior leadership of their ACM competitive alternative.

Just curious if you have any thoughts on these changes, and as a result, is there any change in the competitive deal dynamics?

Our large competitors have changed their leadership in the field on what seems a pretty regular basis, so I think the previous individual was a high-quality person if -- I think the company's SAP so I'm not sure -- I'm not sure what that means other than our win rate against both SAP and Oracle has been consistently high, and I think it will continue to remain consistently high.

Got it.

And then, Robynne, maybe bigger picture question for you.

I think some people have kind of been trying to get at this.

But setting aside kind of invoicing flexibility and selling seasonality, it would seem as though bookings growth is outpacing kind of billings growth and even subscription revenue growth, given it's been the strongest in the past 3 years.

So what is the metric that you'd kind of point us to, to kind of judge your quarterly success, I guess?

Yes.

So Scott, we believe that the best top line metric is really subscription revenue growth.

And while there is a little bit of a lag effect there because we guide, we think that's the best insight to give you in terms of how we're doing.

Your next question comes from Karl Keirstead from Deutsche Bank.

Maybe 2 questions for Robynne.

Robynne, back on the seasonality issue, if you look at total deferred revenues, it was I think down 2%.

Year ago, it was plus 3. So maybe that's an example of the seasonal impacts that you've been highlighting.

So I guess my question is as we look out through the rest of fiscal '18, should we expect in 2Q and 3Q to have that similar dynamics or the less sequential DR growth compared to the year ago and then 4Q perhaps better?

Just directionally, does that make sense?

And then I've got a separate follow up.

Yes.

I think what we're seeing -- well, I know what we're seeing, is our compounding seasonality.

And if you look at one of our large peer companies, you see the exact same dynamics.

It's just because they're a little more mature than we are.

It took us a little while to hit that.

I don't think, for this year, we would expect sequential declines in the next few quarters over the year, but over time, we certainly could more closely follow the pattern of our larger peer on that front.

Okay.

That's helpful.

And then maybe a separate question.

On the services side, it looks like that's where a decent chunk of the revenue outperformance versus your guide came in, in Q1 and your guide, Robynne, for services of $85 million in 2Q suggests that growth will be pretty good.

Is there anything happening on the services side worth calling out?

We're just seeing very strong new contracts on the services side and good execution.

So nothing really in particular.

Just continued growth on that front.

If you look at the year-over-year growth, we still are seeing declines because, as you know, we view professional services as a vehicle more for customer success, getting customers live than for driving revenue growth.

Your next question comes from Kirk Materne with Evercore.

Aneel, we've obviously heard a lot about the bigger deals over the last quarter or 2, but I was kind of curious just on your commentary around the commercial business and some of your efforts in the mid-market and how those are going and maybe just an update on the competitive environment there.

So we had a very strong quarter competitively against both Ultimate and NetSuite.

I think that probably the -- the part that we anticipated was the NetSuite win our -- our win rate is the highest it's been against NetSuite in some time.

At the same point, the number of competes against NetSuite dropped pretty significantly, so I do think that there -- they're in some disarray over there.

And so we're not seeing them as much in the competitive market.

Part of it is we're also moving upmarket, but we do see them, our win rate expanded in Q1.

And if I can just ask a really quick follow-up for Robynne.

Just, Robynne, on cash flow, you guys obviously outperformed this quarter and not only cash flow but on margins, but you're leaving the cash flow guide sort of in place for the full year.

I assume some of that is just seasonality through the year.

You mentioned that you sort of maybe were a little bit too conservative on spending in the first quarter, so I expect you guys might be accelerating a little bit on that front.

Can you just talk about sort of the factors that led to leaving cash flow growth for the full year or guidance for the full year alone?

Yes, Kirk.

I mean, we were very pleased with our cash flow results for Q1, but they were in line with what we had expected for the quarter.

As Aneel mentioned previously, we have less of a focus on getting multiple years of cash upfront from customers, so that is also the factor -- a factor in our annual guide for cash flow.

And the year's early, so we just need to see how it unfolds over time.

Your next question comes from Keith Weiss with Morgan Stanley.

This is Sanjit Singh for Keith Weiss.

Robynne, I know it's in the press release.

You certainly called about the margin, the cash flow performance.

So dovetailing from the previous question, have you guys thought about introducing sort of the framework, some of your SaaS peers that have done something similar where they looked at various scenarios of growth, 20%, 30% and then give investors sort of a framework about how to think about margin expansion and margin levels over time.

Have you guys thought about introducing that now that we're sort of in positive operating margin territory now for Workday?

Yes, it's something we have thought about and that we will do at some point in time.

We're not quite ready yet, but we realize that it's important to give you some more longer-term visibility.

So you'll hear more from us on that front at some point in time.

Great.

And then as a quick follow up, the international side of the business delivered some healthy growth.

I was wondering if you could give us a sense of sort of the penetration, what your view of penetration rates are in the U.S. versus Europe versus maybe rest of world?

Where do you see the opportunity at HCM?

And how long it will take for Financials to follow?

We are still in the early days globally for HCM.

So clearly, the U.S. markets are more mature, but opportunities outside of the U.S. remain robust.

And I think, Aneel commented on the financial traction following the HCM one going forward.

I would add that Nuffield Health in the U.K. is a great data point.

It's a very large health care organization in the U.K., and they subscribe to all of our HR and financial products, so it's not a medium size.

It's a large enterprise that chose us for finance in the U.K., and I think that's a good sign and a good start to selling Financials outside of the U.S.

Your next question comes from Mark Murphy with JPMorgan.

Aneel, in the past, you have mentioned one of the drivers of your opportunity set being the cycle of the legacy deployments that people saw in SAP that are becoming fully depreciated or outdated or, for some reason, being sunsetted.

And I'm just curious what you're observing there in terms of the vintaging of those replacement cycles in HCM and Financials.

And I think what some of us are trying to get at is just the sustainability of this incredible wave of large deal wins that you've had and whether this feels sustainable for a while deal.

So we're now getting into the later versions, not the really old versions but the later versions of the legacy systems coming off maintenance, and so I do believe that's a factor.

And I'm not sure what's happened the past 2 quarters, but activity has definitely picked up.

There's no question about it in Q4 and Q1.

My other hypothesis is that the cloud, at least for HRs, is clearly moving to Main Street, and it's becoming more accepted.

Historically, retail has not been one of the industries that's been an early adopter of new technology.

It's been historically technology and financial services.

The high tech and the fin services worlds have been early adopters.

So now it's just getting to some of these markets like health care and retail.

I think it's telling you that we're moving into another level of adoption of HR in the cloud.

And at the same time, the systems, even the most current legacy systems, are coming off maintenance.

So I think there are a couple of factors that work right now.

Also as a follow-up to that, I wanted to ask, are you seeing cases where you can allow companies to put a Workday Financials kind of a front end on top of a legacy Financials back end with the help of connectors, if you will, kind of creating a reporting layer on top of that existing financial system as a preliminary step to ultimately displacing the general ledger in the future?

Absolutely.

That was actually a big driver of our Financial Performance Management SKU, which we introduced at the start of the sales year, be able to bring in not just the finance reporting but actually planning, analysis and consolidations into an environment likely that's already an HR customer and come back for the [Geo] later and that is a new -- that is a newer initiative, but the products are actually fairly mature with exception of Planning that's getting mature quickly, and we're definitely getting traction with that message and with that offering.

And so I think you'll just see continued pushing of that offering into our customer base and to our prospect base.

Your next question comes from Mark Marcon with R.W. Baird.

On the HCM side, I missed the total number of new logos that you may have brought on board.

And then I was wondering if you could talk a little bit more about the source of growth there splitting it out between new logos versus existing clients bringing on new modules.

So we didn't announce the HCM number.

We'll do it from time to time.

We announced the Financials number just because there seems to be so much interest in that number.

I think -- I think just at a high level, a lot of that growth was driven by new accounts as opposed to selling back into the installed base; that still is a big opportunity in front of us.

There's definitely some of it every quarter, but most of Q1 was landing new accounts.

Great.

And then with regards to the big accounts that you ended up mentioning like Target, did they bring you on for all modules?

Or was it primarily the HCM backbone?

I'm not exactly sure.

I know it's core HR.

I believe it's at least a couple of the other modules.

We will get back to you on that.

We'll get back to you on that one.

I mean, some of these larger ones, they start out with the core HR project, come back for Payroll and Recruiting and Learning later, but we'll get you the exact details of that, maybe in the call back.

Your next question comes from Richard Davis of Canaccord.

I think I recall at the Analyst Day there was some discussion about kind of opening up and building out a platform strategy where you have your kind of partners and ISVs and things like that.

Where are we on that angle?

Well, I alluded in my script that there was other exciting announcements coming down the path this year.

I'll probably just leave it right there.

I would just say that we've been working on that initiative since David Clarke committed to it at that financial analyst meeting in the fall.

So -- and we'd actually been working on it for a while before that, so just stay tuned.

Got it.

And then just a real quick follow-up, I mean you guys have done a good job of building a good reputation for a good culture.

Are you guys on track in terms of hiring for your sales and development staff?

How does that feel these days?

I'll answer development piece, and I'll ask Chano to comment on sales.

We continue to hire very well on the development front.

I would say that Silicon Valley is just more challenging than it has been, both in terms of not just competition but just the cost of living here.

So we've been relying more on places like Boulder, Colorado and Dublin, Ireland to begin building out our development organization.

So we're finding the talent.

It's maybe not all in Silicon Valley the way it was 5 to 7 years ago.

On the sales front, the company's becoming more attractive, as appealing to customer satisfaction and innovation.

And we're on track.

We just continue to be focused on the right mix between culture performance and cultural fit.

Your next question comes from Brad Reback with Stifel.

A little while ago, you guys filed a mixed shelf.

Can you give us some sense of what use of proceeds might be for, given the magnitude of the balance sheet right now?

Yes, Brad.

We actually had a shelf registration that expired just a short time ago, and so this was just replacing that before we file our next 10-Q, which will be tomorrow.

There's no current intended use for that shelf registration at this time.

Our next question comes from Ross MacMillan with RBC Capital Markets.

One for Aneel and one for Robynne.

Aneel, coming into this year, you had alluded to the fact that you're going to be as focused on maybe selling edge financial applications as core financial applications, but it sounds like you got off to a stronger start on the core financial applications.

So I was just curious as to whether that was driven by any additional incentives, whether it was from the Salesforce, or it was driven by just deals closing faster than you expected.

Just curious for any color around why we maybe got positively surprised on the strength of Financial Management core in Q1.

I think it's -- I would attribute it to 2 things.

Chano has brought focus to financial sales, not that we didn't have it before, but I would say more intense focus to financial sales, and we just executed really well.

And I'd also say that the strength of Financials wasn't limited to core Financials.

It included strength in Planning, which we alluded to in the press release -- sorry, in the script.

Expenses, projects, I mean, really across the board and so not just limited to core finance.

It was just a strong quarter across the board.

And I think it's a couple of things.

There's no question, the finance market is moving into the cloud.

We're all trying to figure out the pace at which it's moving into the cloud and what we're seeing as we're beginning to see healthy levels of adoption, and our sales force getting more focused and getting better, frankly, at selling Financials.

Great.

And Robynne, one for you.

Just on the contracted recurring backlog, I heard you give us something on duration, but it was a little confusing to me.

It sounded like you gave us a 2-year recognition and then beyond 2 years.

I felt we were maybe going to get something more like an average duration.

Maybe you could just recap on what you said and how we should think about your disclosure on duration going forward.

Sure, Ross.

So what I said was the 2/3 of that $4 billion number would be recognized as revenue over the next 2 years.

We thought long and hard about what the right disclosure should be to give you guys some color around term.

You have a lot of information around what's going to roll off over the next 12 months, including subscription revenue guidance from us, including the unearned current balance on the balance sheet, so we thought that giving you a little further out would help give you some color on that duration.

The disclosure requirements are pretty flexible on what we can do, so we were trying to find something that was quite useful.

As our peers adopt next year, if there are other conventions that seem to emerge among that front, then we'll certainly take a look and re-evaluate the way we're disclosing it at that time.

Our final question comes from Pat Walravens with JMP Securities.

This is Matt Spencer on for Pat.

If you wouldn't mind, could you please just explain some of the demand drivers you're seeing within Learning?

And also, who, in particular, are you competing against there?

I'd tell you it's the same demand drivers we're seeing across the other products, right.

It's the benefits of moving to the cloud, the better user experience, but then I'd add that our learning product is just different from what else is on the marketplace.

It's a lot more than just the administration and tracking of classes.

It's the ability to create content, track that content and really engage the employee base on how they're learning within the organization, much more like a corporate YouTube.

I think in some places, we're replacing some of the best-of-breed players and in other places, we're coexisting for the time being.

We're not really necessarily focused on replacing.

We're focused on delivering learning to our customer base.

If they choose it to replace an existing system, great.

So I mean I know we've replaced SuccessFactors Learning quite a few times.

I suspect that we're replacing Cornerstone in some places.

In other places, we partner with Cornerstone.

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

You may now disconnect and have a great day.