Workday Inc (WDAY) 2018 Q2 法說會逐字稿

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

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

Welcome to Workday's Second 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 the 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 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 quarterly report on Form 10-Q for information on risks, uncertainties and assumptions 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, which we believe are useful as supplemental measures of Workday's performance.

These non-GAAP measures 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.

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 third quarter quiet period begins at the close of business on October 13, 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.

Hello, everyone, and thank you for joining us.

Today I am pleased to share details of a very strong Q2.

For the fourth consecutive quarter, we have experienced subscription revenue growth of more than 40%.

We continue to attract new customers, and many of our current customers continue to grow their investments with us.

Our customer satisfaction rate remains among the highest in the enterprise cloud, and the success of our customers is a hugely important part of our long-term business strategy.

Our second quarter results reflect continued progress in executing along our journey as a leading provider of enterprise cloud applications for finance and HR.

Let me share some of the highlights from Q2, beginning with our HCM suite of applications.

Momentum for our Human Capital Management suite remains strong as many organizations continue their transition to the cloud.

Our win rate in the large enterprise segment was notably high and was strengthened by our existing customer list, which includes a who's who of the world's largest companies.

Indeed, as of today, more than 30% of the Fortune 500 have selected Workday for core HR.

Of those companies, 17 are in the Fortune 50.

In the second quarter alone, we were selected by Citigroup Management Corporation, Nordstrom, Qualcomm and Humana.

We are also thrilled to announce that Siemens, the manufacturing giant based in Munich, Germany, is replacing their current HR system with Workday Human Capital Management.

While Siemens now represents our largest customer headquartered outside of North America, it is just one of many new internationally based customers that joined Workday in the quarter.

Today we are also welcoming Shell in Europe and Johnson Electric Holdings in our Asia Pacific Japan region as new customers.

I personally had the chance to spend a week in Japan over the summer visiting with our employees, customers and partners and came away bullish about the prospects of our Japanese efforts and the revitalized Japanese economy.

Of course much of our new sales success can be traced back to our unrelenting focus on customer satisfaction.

In Q2 we saw many of our customers go into production, including FedEx and Kohl's.

And as of today, over 70% of our HCM customers are live on Workday.

We believe our global HCM leadership position is also being reinforced by industry analysts.

Gartner published its Magic Quadrant for Cloud HCM Suites for Midmarket and Large Enterprises on August 15 and positioned Workday as a leader.

Also in the past 2 weeks, Forrester released a report on its views of the HRMS industry.

In the Forrester Wave report on SaaS human management systems, Workday Human Capital Management is also ranked a leader.

We are proud of our placement in these reports as our global market opportunity remains significant and we believe we are still in the early innings of cloud HCM adoption.

Turning to our cloud Financial Management and Planning applications, we had another strong quarter of growth and industry recognition.

While the shift to the cloud is still in the early days for finance, we continue to see a growing number of signals that suggest that the finance market is beginning to turn to the cloud, much like CRM and HCM have in the past.

One of those signals was the publishing by Gartner of the first-ever Magic Quadrant for Cloud Core Financial Management Suites for Midsize, Large and Global Enterprises.

In this report that came out on June 19, Workday was positioned by Gartner in the leaders quadrant and was recognized as a leader based on its ability to execute and completeness of vision.

These signals are also leading to momentum in our pipeline, as companies large and small look to transform the way they run their business with Workday Financial Management and Planning applications.

In the second quarter, OhioHealth Corporation, the Children's Hospital of Philadelphia, Giant Tiger Stores and Carlisle selected Workday for core Financial Management.

And we had several customers go live on Financial Management including Denny's, Yale University, Panera and Christiana Care Health.

In addition, Workday Planning continues to be a popular add-on for customers looking to do financial and workforce planning, and more than 170 customers have selected us for this application, including Qualcomm and Bank of America.

Since we last met, we made 2 important product announcements that I would like to highlight.

First, we announced fixed fee, pre-configured application packages for U.S.-based medium enterprises delivered by Workday services and our deployment partners.

Companies in this space need predictable deployment time frames and fast time to value, and that is exactly what we are delivering.

Our packages are based on the success of several hundreds of deployments in the medium enterprise market, and we believe this approach will increase our already attractive offerings, especially where companies prefer a single business partner for finance, payroll and human resources.

We intend to deliver these packages more broadly to companies outside of the U.S. in the near future.

At our Altitude conference this past July, we also announced our intention to enter the platform as a service market by opening the Workday Cloud Platform to our customers, partners, independent software vendors and developers.

This community will soon be able to build unique extensions and applications that can significantly enhance what organizations are able to accomplish with Workday.

We hosted 2 hackathons over the past several months, and the early returns from these events have reinforced our view as to the attractiveness of this new offering to the Workday ecosystem of customers and partners.

As some of you know, I have long been fond of comparing Workday's strategy to the process of sending a rocket to the moon.

Workday HCM was our first booster rocket that launched the company.

International expansion was the second.

Financial Management was the third stage, and the combination of Planning and Workday PRISM Analytics was the fourth and most recent step in our journey.

Opening up the Workday Cloud Platform and entering the PaaS market will be #5.

We believe strongly that our platform-as-a-service initiative is a major step forward for Workday as we continue to innovate and bring increasing value to our customers.

I hope many, if you will be able to join us at Workday Rising, our annual customer conference, which is just around the corner.

We'll be covering all of our offerings in greater detail, including Workday Cloud Platform and Workday PRISM Analytics.

The financial analyst day takes place on October 10 in Chicago, and you're welcome to join to network with our customers and to hear more about our innovative, current and new offerings.

And now over to Robynne.

Thanks, Aneel, and good afternoon, everyone.

As Aneel discussed, we continue to see strong momentum in our business, driven by our differentiated technology and uniquely purposed customer success model, and are very pleased with our second quarter results.

We delivered total revenue of $525 million in Q2, reflecting year-over-year growth of 41%.

Our Q2 subscription revenue was $435 million, up 42%.

Our subscription revenue outperformance was driven by strong net new customer growth and continued high levels of customer satisfaction, which once again resulted in renewing customers increasing the annual value of their contracts.

Our Q2 Professional Services revenue grew 34% to $91 million.

We continue to see robust growth globally, with total revenues outside the U.S. up 59% to $106 million, representing 20% of total revenue.

We are pleased that our continued investment in global expansion on both the product and sales front is yielding significant results.

Non-GAAP gross margins for the second quarter were down slightly to 73%, primarily as a result of a decline in our Professional Services margin.

This normal seasonal decline was due to the cost associated with our annual Altitude Partner conference as well as the impact of our annual employee compensation cycle, which went into effect at the beginning of Q2.

Our non-GAAP operating profit for the second quarter was $49 million and operating margin of 9.3%.

We continue to invest back into our business to drive long-term growth and expect gross and operating margins will continue to fluctuate quarter-to-quarter based on seasonality as well as the timing of our investments.

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

Moving to the balance sheet, total unearned revenue at the end of Q2 grew 26% year-over-year to $1.2 billion.

Current unearned revenue, which will be recognized over the next 12 months, was $1.1 billion, representing strong annual growth of 32%.

Non-current unearned revenue was down 15% year-over-year.

As we mentioned last quarter, we're seeing fewer customers electing to pay more than 1 year of subscription fees upfront, which has resulted in a decreasing long-term unearned balance.

Our subscription revenue backlog was $4.4 billion, up 10% sequentially, with 2/3 expected to be recognized within the next 2 years and the remaining balance to be recognized thereafter.

Although we don't disclose the duration of net new contracts in the period, we didn't see any material change from the first quarter.

Consistent with our other new disclosure from last quarter, in Q2, $398 million of our $435 million of subscription revenue or 91% came from the balance sheet.

This compares to Q2 of last year, where $282 million of our $306 million of subscription revenue or 92% came from the balance sheet.

Our biggest investment continues to be in our people and in attracting top talent to Workday.

During Q2, we successfully added and integrated almost 500 net new employees, bringing our total workforce at the end of the quarter to almost 7,400.

Cash flow from operations was $15 million in Q2, led by stronger-than-expected collections in our seasonally lowest cash flow quarter.

Our trailing 12-month operating cash flow was $376 million, up 17% year-over-year.

Our trailing 12-month free cash flow was $248 million, up 38% year-over-year.

Note that in calculating our 12-month free cash flow, we have excluded $134 million related to our owned real estate projects.

Operationally, we continue to execute exceptionally well and finished a very strong first half of the year.

Based on these great results, we're raising our fiscal 2018 outlook and providing Q3 guidance as follows: For subscription revenue, we're raising our full year estimate to be in the range of $1.75 billion to $1.757 billion or growth of 36%.

We expect our Q3 subscription revenue to be $450 million to $452 million or 33% to 34% growth.

We therefore expect our fourth quarter subscription revenue to be $466 million to $471 million or growth of 27% to 28%.

Please keep in mind that the second half growth rates reflect more difficult comps from last year, particularly in Q4.

We expect Professional Services revenue to be approximately $343 million in fiscal 2018 and $88 million in Q3.

We therefore estimate that total revenue for fiscal 2018 will be $2.093 billion to $2.1 billion or growth of 33%, with Q3 total revenue in the range of $538 million to $540 million or growth of 30% to 31%.

For non-GAAP operating margins, we're expecting approximately 8% for the full year.

We expect non-GAAP operating margins to decline quarter-over-quarter in Q3 to approximately 5% to 6%, primarily due to continued headcount growth and seasonal marketing spend, including Workday Rising in October.

The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 24 to 25 percentage points in each remaining quarter and for the entire fiscal year.

The strength in our top line growth is allowing us to maintain our operating cash flow guidance of $420 million or 20% growth despite the negative cash impact we're seeing from fewer customers paying more than 1 year of subscription fees upfront.

In terms of our fiscal 2018 plans for capital expense for our owned real estate projects, we are lowering our forecast from $175 million to $150 million due to changes in the timing of project expenditures.

For all other CapEx, we are maintaining our previous forecast of $160 million.

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

We had a great first half of the year and we'll continue to focus in our customers' success.

We look forward to seeing many of you at Workday Rising in October as we share more insights on our strategic product initiatives and long-term market opportunity.

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

(Operator Instructions) Our first question comes from the line of Richard Davis with Canaccord Genuity.

Aneel, you called out kind of good customer satisfaction.

But you and I both know that a majority of these digital transformations fail in the eyes of the customer.

What are you guys doing better than other people?

I mean.

You have to be doing something because I'm old enough to remember 80% of Siebel deployments failing.

Well, I think first and foremost, we built these products to be figured and implemented quickly.

And secondly, we have a ton of experience getting customers live.

We have 1,800 customers, 70 are in production.

And we just keep refining our implementation approach.

We're able to layer in the best practices that we learn from all of our customers into the products.

So if you're starting now, you start with a great set of best practices.

And then I think we're really focused on time to value, and we see really big Fortune 500 companies going into production in 12 to 13 months.

And I think if you have that focus, and many of these companies do -- Bank of America, a recent example of a really rapid implementation, they see value quickly.

And also, I think, you avoid the scope creep of many -- of many implementation projects.

And it goes without saying it all comes back to a great product built by our developers and a great services organization that's committed to customer success.

Got it.

And then just a real quick follow-up.

Are you guys -- are you prepared for that European regulation?

What is it, GDPR?

Are you all set for that?

Yes.

Yes.

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

Maybe first for Aneel.

It seems like the last 3 quarters have been packed with Fortune 500 activity.

And I guess I'm wondering what you think the remaining opportunity is out there on the HR side, what the pipeline looks like for the second half and just longer term what the opportunity is there.

And then I've got a follow-up.

Yes, I mentioned both in the press release and in my comments, we're now over 30% of the Fortune 500.

Our best guess is 50% of the Fortune 500 has not made a decision yet, and it's our best guess.

I'm sure the data has got some inaccuracies, but directionally, I think that's about right.

So probably half the market hasn't made a decision.

Tons of market in front of us.

And those kinds of opportunities continue to show up in the pipeline.

And again, success begets success in terms of customer deployments and having happy customers.

And I do think that we're beginning to see a network effect of the large Fortune 500 companies talking to each other and comparing notes on which solutions work and don't work.

And I share that view with -- that Marc Benioff has, that we're relentlessly focused on customer success and that scale is beginning to really pay off.

It always has paid off, but now we're getting to such big numbers that the customers really do talk a lot amongst themselves.

Got it.

And then maybe either for Chano or for you, Aneel.

Just in terms of financials, I guess, can you give us a sense for what the pipeline mix looks like today in terms of ACV HCM versus (inaudible) and maybe what it looked like a year ago?

And I guess can you (inaudible) standpoint?

Yes, Chano can give you that perspective.

Our pipeline really continues to grow well across all products.

And I could say that when you reflect more on the core finance, sales planning and (inaudible) that is growing nicely as a percentage of the total.

And we're pretty happy with regard to the cloud financials, and what I understand, it continues to grow as evidenced by the Gartner's recent Magic Quadrant.

So we are pretty optimistic about the growth -- pipeline growth.

Yes, it's off of a smaller base, but Financials is growing significantly faster than core HR at this point in terms of pipeline, right?

Yes.

And Aneel, are we at the point where it's 10% of new business?

Or what does it look like from just new bookings?

Plus or minus, is that a good range?

It is a good range.

Yes, it's a good range.

I would say that -- and I'll be the first to admit, I've been overly optimistic when the market would turn for financials moving into the cloud.

I think Gartner publishing a Magic Quadrant for cloud financials is a big step.

It's an acknowledgment that the market is moving.

And I think it's just one of several catalysts, including the aging financial systems at most Fortune 500 companies.

That as they get through their CRM projects and HR projects, finance is the next place to go, and we're beginning to see that.

It's taking longer than we would have liked, but now we feel like we've got the right products and we're well positioned and beginning to see those big companies show up in the pipeline along with the medium-sized ones.

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

Just trying to understand the significant growth in your backlog if you do a bookings [calculation] rather than revenue change deferred (inaudible) include the stuff that's off the balance sheet.

That seems to be pulling away.

I calculate about 69% and that seems to be significantly faster than your reported revenue growth rate.

I'm wondering if you could talk to what is driving that.

Is that, I believe, increasing attachment of new modules on existing customers as they come up for renewal, which you certainly alluded to?

But I'm curious if that is the case or if there are some other factors at work that is causing this explosive growth in your bookings off the balance sheet?

So Kash, with regard to the backlog, there are really 3 main drivers that can grow that number, right?

One being renewals that happen within the period.

The second being net new contracts within the period.

And the third being the duration of both of those pieces.

We didn't see a material change in duration, and so the backlog increased from $4.1 billion to $4.4 billion was really a result of very, very strong scheduled renewals, which we executed very well on, as well as a very, very strong quarter with regard to net new ACV, and which includes up-sells into the existing customer base.

And in particular, if I may, these up-sells, can you tell us which products are you seeing the significant increase in up-sell rate as customers talk renewals?

That would be it for me.

Well, we haven't published attach rates, but we're seeing very good traction in planning and learning.

And we continue to see great up-sells with some of the more mature products as well such as payroll and expenses.

So it's really across the board at this point, Kash.

(inaudible) once a year, check in on that during the financial analyst, and we'll provide some detail on attach rates across the different modules.

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

Maybe one for Aneel and one for Robynne.

Aneel, it felt like you went out of your way to highlight the European growth.

Congratulations on that, and obviously, a win at Siemens.

Aneel, that's obviously SAP country, and I'm just wondering if you could comment on whether you think the pace of share gains there will be any different than in the U.S. market, where perhaps Oracle had a bigger presence and that was your main rival.

And then for Robynne, certainly again in this quarter, the gap between reported subscription revenue growth of 42% and your DR growth of 26% remains unusually wide.

And I'm wondering if we're almost through the point where those 2 growth rates can begin to converge.

On the first one, I'll offer a couple of thoughts and turn it over to Chano.

The perspective that we've always had at Workday is that a multinational in the U.S. and a multinational in Germany or the U.K., they face the same needs, they face the same challenges in terms of running a global organization.

And so a lot of what worked in the U.S. has translated very well to Europe.

We've had to build a great sales team, a great services team.

The product was meant to be global from the start.

But when you look at a company like Siemens, they are not necessarily looking at just local German companies.

They're looking at other multinationals that are of similar size and scale and complexity around the globe because they compete on a global basis.

And so as a result, the success we've had in not just winning the Fortune 500 accounts but actually making them successful through the deployment and post-deployment areas has just played as well in Europe as it does everywhere else.

And the same thing is happening in Japan, it's happening across Asia, across New Zealand, Australia.

If you stay focused on customers and customer success, people pay attention and they also want that same customer success.

Anything you want to talk about specifically about Europe?

No.

I think you explained it very well.

I think when there are any subtleties, geographical ones regarding either compliance or particular regulation locally speaking, they are able to compare notes today with many other successful Fortune 500s that are live in Europe.

It doesn't matter if it is the Unilevers or Airbus or just an office of Philips or many others.

And that also helping out to believe that resolutions are improving, and it's also proving into that geography and make them more confident to make the move.

Karl, with regard to your second question, I would encourage you to look at unearned revenue on a current basis instead of total.

Current unearned revenue actually grew 32%.

I think that's a better comparison to sub-revenue than total given some of the dynamics we're seeing in the long term.

I don't believe that those growth rates will ever perfectly marry each other.

The unearned revenue balance will fluctuate based on billing terms under particular contracts.

One of the reasons that we're no longer guiding billings is because of the variability we see on that front.

So I would expect that we'll have times when subscription revenue is ahead of current growth rate, unearned growth rates, which is what we're seeing today.

It could also flip the other way.

So I don't expect a perfect correlation between those 2 rates.

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

I have a question for Robynne and then a follow-up for Aneel, if I could.

Robynne, the results look really strong, but if there's anything that some might question, and it sort of gets to what Karl was talking about, it was really the long term for revenue decline.

And thanks for all the color you gave, but I just want to sort of make sure that I understand all of it here.

You said that the contract duration is not really changing sequentially.

Can you say the same if you're considering year-over-year?

And then am I right to assume that less customers paying multi-year contracts upfront, that's going to benefit future cash flow?

And finally, can you give us any color on how we should think about how this goes forward?

Do you expect to continue to see this sort of behavior, I guess, in payments moving forward in the second half of this year?

Yes, thanks, John.

So from a duration perspective, we haven't seen a material change from the same period of last year as well.

The duration has stayed fairly stable, although it can fluctuate particularly in periods where we either have an excessive number or a lower number of large contracts, which tend to have longer duration.

But we've seen fairly -- that number be fairly consistent over the past year.

With regard to fewer long-term billings today benefiting future cash flow, that's absolutely correct.

They will benefit billings as well as cash flow going forward.

It's one of the reasons that we have deemphasized, trying to get multiple years upfront, is that we're trying to set ourselves up for success going forward.

And so we are not as focused on getting multiple years upfront.

And a great question about the go-forward.

I'm actually glad you asked that because, from where we sit today, not only do we expect that that long-term deferred balance will continue to decline.

We actually see that decline accelerating into the back half of the year.

So when we look at the unearned balance in long term today that will roll into short term by the end of the quarter, we actually believe that we'll see a decline for Q3 that's double what we've seen in either Q1 or Q2 on a dollar value basis.

Okay, great.

That's really helpful.

Very clear.

And Aneel, I'm going to ask you the question I ask you every -- once a year anyway.

But now you've given me more to ask about, and that's on the platform-as-a-service.

And I know it's early.

But I find this really, really interesting.

You talk about, at least so far, about unique extensions to Workday solutions.

I'm just curious what your thoughts are about unique workloads, like how might this roll out?

It does make sense that people would use this to add on to what their -- to Workday solutions that they're consuming.

But do you envision this ever becoming something like -- maybe like force.com, where companies actually can build separate -- completely separate applications on your platform?

Yes, in the short term, we're very focused on our customers and our systems integration partners being able to extend Workday in logical areas around HR and finance.

But longer term, definitely see an independent software vendor opportunity.

I think we'll be very careful with that.

We're not looking to get into a whole host of different areas, but as an example, if we came across a group that wanted to build supply chain and manufacturing systems or another industry-specific system that we had a long-term view on but weren't going to get to on our own road map, we'd welcome that.

So I think I would consider that the second phase of the platform rollout.

The first phase will be to customers, but we're already talking with ISPs that are -- that are looking to build new applications on our platform.

And anything on timing for the first phase, Aneel?

And then I'll let others ask questions.

You'll hear a lot more about the Workday Cloud Platform at Rising.

Your next question comes from the line of Alex Zukin with Piper Jaffrey.

Maybe the first one for Aneel.

As you guys have adopted 606 and become more flexible on cash collections, I'm curious how that's impacted pricing in the field and your ability to hold price.

And then maybe -- and then I have a follow-up.

I'll probably defer that to Chano.

I would just say that independent of price, it just makes the negotiation go smoother that we're not asking for a whole bunch of cash up front.

It's a more logical request to ask for 1 year as opposed to more 1 year, which is where we were before.

But do you want to talk about how it impacts pricing?

No.

I would say that we definitely value our customers' relationships and are willing to become flexible if needed, to align with the customers' success.

I don't think you can draw any major trends so far.

And I would say that overall we're seeing a very stable pricing environment.

Got it.

And then maybe or kind of echoing the questions around financials, what's been the impact to the sales cycles and maybe your pipeline now with your new financial performance management SKU, having planning in the field for a lot longer and maybe some of the new directional sales focus in that area?

It's still, I would say separate out medium enterprise from large enterprise.

Medium enterprise is ticking along very nicely with the financial products.

In many cases, they are bought hand-in-hand with the HR products, and those are 5, 6, 7 month sales cycles, from what I can tell.

Large enterprise is still unpredictable.

I think they are still trying to sort through what they're going to do with their core accounting systems.

But Planning has taken off, and we're now over 170 Planning customers.

And this last quarter landing companies like Qualcomm and Bank of America has really validated that story and that approach of wedging in Planning as a bridge between Financials and HR and a start with Financials.

And I think we're going to continue that playbook.

It's working well and resonating with the marketplace.

We've now got to focus on making sure those first 170 have a really good experience with the product.

But it's been a nice play until the core financials market and large enterprise begin to take off.

With that Magic Quadrant from Gartner, we are seeing a lot more interest in people exploring financials in the cloud.

I think that really was a seminal moment for our industry.

Anything you want to add?

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

I had two quick ones.

I think last quarter, Aneel, it was either you or Mark, who made the comment about ACV in Q1 and how it grew.

You made a comment about how it grew, I think 3x faster than what we've seen in other Q1s.

I'm wondering if you have any comments to share with us on ACV in that vein related to this quarter.

And then the other question I had was just related to I believe you said that there are fewer customers paying even 1 year upfront.

That seems like it's been a trend for a while.

Just wondering how long do you think that continues for and what's the reason why you don't press to get more of your collections 1 year upfront?

So on the first one, we didn't say 3x faster growth, but we did see acceleration in ACV growth.

And I think that we've continued to see that acceleration throughout the year and the 4 quarters of north of 40% subscription growth pretty much validate that.

So we've definitely seen an uptick in demand.

On the cash collections, I'll ask Robynne to answer that.

It's not that less people are paying 1 year.

Less people are paying multiyear.

Do you want to?

That's correct.

I mean, Heather, if you go back a couple of years, we did start talking about our willingness to be a little bit more flexible on upfront payment terms for the larger strategic contracts.

That continues to be the case, although there haven't been any significant shifts in volumes between the last few years and now.

The real change we're seeing is that we used to go after multiple years upfront.

So we would ask customers to pay 2 or 3 years of their contract upfront.

And now we're not really even asking that of customers.

We're asking a year.

So it's really the long-term unearned that's been impacted by that and the cash collections and the billings numbers to your point.

But the less than a year cash up front, really that situation has not changed for several years.

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

So Aneel, you had mentioned that your win rate in large enterprise was notably high this quarter.

As you consider this period where there's really been impressive upside and acceleration and very large new logos, can you just help us to separate out how much of this do you think is being driven by fundamentally higher win rates against those legacy incumbents versus maybe how much of this is a broader acceleration in HR modernization projects, which I guess in theory could be benefiting some of the other providers as well?

I honestly think there's an element of both.

The activity level in the Fortune 500 marketplace has definitely picked up.

And I think that market was later to move than maybe the Fortune 2,000 market was.

Within that Fortune 500 market, we have so many proof points of our ability to scale and take companies into production.

And our competition doesn't have those proof points.

And so as these big companies are coming to market, we're winning more than our fair share, so our win rate is actually higher in that segment because these large companies look around and don't see a lot of success on the other platforms.

They might see it in a medium enterprise company, but they don't see it in a large enterprise other than Workday customers.

And that's that network effect I was talking about earlier, where I was with the CIO of a Fortune 10 company, who we've been trying to get in to see for 5 years.

And finally he called me and said, "Hey, I've had so many of your customers tell me what a great experience they've had with Workday, and you're a good company to do business with and that your products are up and running and working really well.

Why don't you come and see me?"

And that -- you can't buy a lead that gets you in the door like that.

The customer referrals, because of the great work that our product and services people have done, we're getting those kinds of meetings now that a couple of years ago, I think people would've waited to see what SAP and Oracle would deliver.

Now as they're moving, they want to make sure that they at least consider Workday.

And then as a follow-up, Aneel, could you update us on your longer range ambitions in broader ERP, for example, supply chain management, manufacturing, inventory, et cetera?

Does the announcement of opening up the Workday Cloud Platform signal to us that you would allow partners to build some of those larger areas of broader ERP?

Or would you keep those larger areas to develop yourself and the platform would be sort of aimed at relatively smaller chunks of code?

So I think the whole platform opportunity is going to evolve the next 2 years, and our strategy probably will change.

But I would just say, taking a step back from where 5 years ago, where we were predominantly an HR software company in North America.

We've really transitioned to a platform company.

We started out with transactions around HR and accounting.

We now have Planning, we now have Analytics.

You think about how a business works, any of our customers, they plan.

They come up with a yearly plan.

They execute against the plan.

They analyze against that plan.

We now can do an end-to-end basic business planning exercise for them.

Instead of planning twice a year, they can plan as many times as they want because it's all built in a unified way.

That in and of itself opens up so much market opportunity for PRISM Analytics, for Financials, for platform-as-a-service in addition to the HR and accounting applications.

I think that will keep us busy building out those combination of products for the next several years.

If somebody came along and wanted to build supply chain or manufacturing on top of Workday, I'd welcome them.

Maybe in 3 or 4 years, we might decide that we want to do it ourselves.

But right now, I look at what's on our plate to build, and the idea of the right people building on our platform is pretty appealing.

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

This is Sanjit Singh for Keith Weiss.

I have 2 questions.

The first, for Aneel.

You mentioned earlier in your comments that maybe you've been a little bit optimistic on the sort of inflection point in core finance in the enterprise.

You have been able to sustain growth pretty nicely over the last several quarters.

And I want to sort of map that back to what you've announced earlier in terms of 60 contracts, in terms of moving to the mid-market.

If that plays out, how much extra runway, particularly on HCM, could that provide you in terms of sustaining growth in HCM and probably to a degree in financials as well?

Well, there's a lot of HCM markets still out there.

And with many of our largest customers, they've just started with core HR.

So even within a large customer, we have opportunity for up-sell.

I might turn it over to Chano and ask him about how he thinks about these packaged opportunities in medium enterprise.

It's definitely an added market opportunity that we haven't aggressively pursued until this year with the really dedicated medium enterprise strategy.

Yes.

I concur with Aneel that the opportunity in HR is still significant and big ahead of us.

And definitely more mature in the U.S., but it's still a big one here.

Yes, and clearly a huge one internationally speaking.

I think what these fixed packages in medium enterprise allow us is, first of all, making sure that we had a great suitable offer for those customers and at the same time they're taking on more breadth of the product scope that this just covering the functionality that they really need to transform their business.

When it comes to Financials, really as I said before, the pipeline momentum, as a percentage of the total, is accelerating significantly.

So clearly, large enterprise is more in its infancy, but we're seeing quite significant growth already in the medium enterprise space.

Got it.

And then just a follow-up for Robynne.

In terms of the margin, if we look at the first half of this year, we're looking at sort of double-digit operating margins.

And I know last year that you guys had given a snapshot view of HCM crossing double-digit margins.

And so I'm wondering if you could update us on where HCM margins sort of stand today.

Are we sort of in that 15% range or are we in that 20% range?

And is that sort of just -- do you see margins in HCM continuing to scale over time?

Yes, Keith.

So currently our HCM margins are above 20%.

And I think that really speaks well to the long-term operating margin.

Obviously, Financials, we're still heavily investing in the product in Financials and Planning and PRISM Analytics, and those other newer products.

And so those are dragging the overall margins down.

But we don't see any reason why Financials can't mirror a HCM margin opportunity over time.

Your next question comes from the line of Raimo Lenschow with Barclays.

A quick question, Aneel.

We talked about PaaS a lot.

Can you talk a little bit about PaaS in the context of HR?

Because I know some of your competitors got some industries or some customers because of that ability to kind of do self-buffer on regulations.

SAP won a couple of airline deals because they could do stuff or they wanted to do stuff that you didn't want to do into the core.

Oracle win some of the PeopleSoft customers that were heavily customized.

When you have PaaS now, should that not change the dynamic quite a bit for you?

Time will tell, but I think it will.

I'd say there's 2 categories of capabilities.

There are things that are important to a small set of customers that are just 2 or 3 years out in our road map and that we're not getting to.

And as a customer satisfaction issue, they can now go off and build it themselves.

So they're a happy customer, but they want a capability that we don't have yet.

So that actually relieves quite a bit of pressure on our application development team if that plays out the way it does.

And then, yes, absolutely.

The idea that you can build extensions to Workday, and those extensions will be upgradable from version to version, that takes away any issues about people that are honestly effectively customizing systems and running it more like an ASP than a true cloud model.

You kind of get the best of both worlds now with Workday with the Workday Cloud Platform.

I do want to say, though, that we have to be careful not to get too far ahead of ourselves.

We're very confident that the platform will stand up and will work well.

But we're still learning about how people are going to use it.

We're going to have some customer use cases by Rising.

We're going to learn a lot in the way that it gets rolled out over the next 6 months.

And then one follow-up.

As you go deeper in the mid-market, look, like, in the olden days, you had the large vendors and them trying to move down always ended in a disaster because the product was too feature-heavy to be adopted and SaaS should be easier.

But can you just kind of help us to understand how you bridge that gap from you are capable of doing and dealing with a lot of customers and your sales force [works] towards that, towards moving kind of more in the mid-market and what you've seen there in your earlier experience.

Well, if you compare it to legacy software and when the processes were too heavy for medium enterprises, it was kind of hard just to hide it.

In the case of Workday, we're basically just picking a simple configuration through the system, right?

So a medium enterprise still has to hire people, recruit people, retain people, but they want simpler processes.

And so what we've learned through all the medium enterprise deployments is a way to configure the system quickly and rapidly in a much more simplified way that fits their needs.

And that just was not possible with the old technology, where you had to customize it to get it to meet their needs.

In our case, you configure it and the tools are meant to do rapid configuration and focusing on best practice rather than giving them too many options.

We will now take 2 more questions.

Our next question is from the line of Brad Reback with Stifel, Nicolaus.

Robynne or Aneel, can you give us any sense on renewals?

What type of uplift are you seeing on a percent basis?

Yes.

So consistent with previous quarters, we continue to see renewing customers actually renewing contracts for over 100% of the original contracts.

So we're still seeing really good traction with add-ons on the renewal front.

Any more detail?

It's obviously pretty clear that it's north of 100.

But is it 110, 130?

Anything?

Brad, it varies by quarter, as you can imagine.

And I think the overall story is really positive and really strong with regard to selling more into the customer base.

And honestly, that can actually happen on a nonrenewal period as well, right?

So the renewal story and up-selling during the renewal process is only part of the attach and add-on story.

A lot of that actually happens just in the middle of a contract when a customer is ready.

And as Aneel mentioned before, we will talk more about attach rates at the Analyst Day at Rising.

We will take our final question from the line of Kirk Materne with Evercore ISI.

Aneel or -- or I don't know if Chano want to [counter] on this as well.

But earlier, you mentioned that in the mid-market a lot of times people are looking at buying Financials and HCM together.

I was kind of curious where you think things are going to go in the large enterprises.

Meaning, do you think people are still going to want to get HCM done first and then take on Financials?

Or now that this Gartner report's out, are you starting to see people sort of address that differently, meaning maybe take them on both at the same time?

And I guess just a final point on this, would that answer differ when you look internationally where people are just starting to take on HCM?

It's still much earlier, obviously, in that market internationally.

To date, we haven't seen many large companies try to tackle both at the same time.

The place where we have seen it are big government agencies and big universities.

They'll look to do a full-scale ERP type deployment.

But most large corporations, I think if you were to ask them, their top 3 projects that they've done in the last 5 years, they would say Salesforce, Office 365 or Gmail and Workday, if you look at the Fortune 500 and Workday for HR.

And as they get through those projects, they come back.

And I think finance will get the resources and attention.

But that would be a big undertaking.

They might subscribe to the 2 application suites at the same time.

But it would be unlikely if they deployed them at the same time.

I think potentially the -- and you're right.

The only other industry we're seeing it is health care.

In health care.

Health care is also -- yes.

And I would say no difference on international update in terms of financials moving to the cloud.

Particularly when we see international, more in Western Europe, right, to be clear, or European countries, pretty similar to what is going on in the U.S.

Okay.

And if I could just ask a follow-up on your answer.

Aneel, does that mean when you go back in and you talk to these customers that are live now on HCM, are they -- is that the time to then engage them on financials and they're willing to sort of discuss that?

Is that what you're feeling better about sort of seeing these inflections in the market at this point since you have enough of a critical mass on HCM now live?

Yes.

I'd say a lot of it starts with the CIO that we have hopefully converted into a fan through the HR project and that individual, he or she looks at the other projects and says, "Hey, where else can I work with Workday?" And we obviously talk about finance.

I also think it's about having references at scale.

And just this past quarter, we had Denny's, we had Panera, we had Yale go live, and they're all large in their own sectors.

The Aon deployment is, we're halfway through it.

It's going very well.

So now these large customers can look at some proof points of big companies having shifted over and that's actually having a very big impact.

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

You may now disconnect, and have a great day.