Workday Inc (WDAY) 2018 Q3 法說會逐字稿

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

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

Welcome to Workday's Third 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 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 we 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 on the Investor Relations page of our website.

The webcast replay of this call will be available for the next 90 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 fourth quarter quiet period begins at the close of business on January 15, 2018.

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, Mike, and good afternoon, everyone.

Thank you for joining our third quarter earnings call.

I'm pleased to report that Workday had another strong quarter.

As we highlighted at our Analyst Day in October, we believe we are still in the early stages of the transition to the cloud for HCM and Financial Management applications.

And as a company, our focus continues to be on driving innovation and customer satisfaction as we continue to broaden our portfolio of offerings.

In Q3, we saw healthy demand across all product areas and geographies.

On the HCM front, we added great new customers, including Lowe's Corporation, M&T Bank Corporation, Lloyds Bank plc, Software AG and Oshkosh Corporation.

Consistent with past quarters, more than 70% of our customers are in production.

A few of the notable go lives included Dell U.S.A., Coca-Cola Company and Cerner Corporation.

We also continue to see strong traction for our Financial Management suite of applications.

In Q3, we added 37 new Financial Management customers, up over 60% from last year.

Some of the new financial customers include Sanford Health, University of Louisiana and MELCO RESORTS SERVICES.

In addition to the strength of our core financials offering, we also added another 34 Planning customers, bringing our total number of Planning customers to over 200.

And as importantly, we continue to deliver on our commitment of getting customers live and successful.

Some of the key go lives for the quarter include Union Group, Accuride Corporation and University of Miami.

Our momentum and customer success was most recently seen at our annual user conference, Workday Rising, which took place last month in Chicago.

We had more than 8,500 attendees, including almost 5,500 customers representing over 1,200 organizations.

Additionally, we had over 650 prospective customers representing 270 organizations, our largest prospective customer participation at Workday Rising in the history of the company.

At the conference, we also revealed our annual customer satisfaction rating, which came in at 98%.

And just 2 weeks ago, we had a similarly positive user conference in Barcelona for our European customers and prospects.

We continue to believe that our relentless focus on customer success is a unique differentiator in our marketplace and is a major reason for the continued growth of our customer base across the globe.

One of the keys to our high customer satisfaction is our continuous innovation cycle, which brings new capabilities to our customers on a frequent basis.

During the quarter, we were pleased to introduce Workday 29, highlighted by the general availability of Workday Prism Analytics and Workday Data-as-a-Service.

Workday Prism Analytics brings together all of the data and business analytics needed to make critical financial people and business decisions and enables customers to incorporate non-Workday data as part of the Workday reports, dashboards and scorecards.

I'm excited to share that Hitachi, Shelter Insurance and United Technologies Corporation are some early adopters of this leading-edge solution.

On the Data-as-a-Service front, we introduced our first offering, Workday Benchmarking, which provides key metrics to our customers to help them better understand their company's relative performance in comparison to peers and achieve optimal performance in their respective markets.

This solution is offered on an opt-in basis and has the potential to leverage the data across 1,900 global organizations and over 26 million workers.

Switching to the people front.

A key part of our success continues to be our company culture, which enables us to have very high employee satisfaction scores and greatly helps us to attract new talent across all levels of the company.

In the past 12 months, we've had particular focus on bringing in senior talent into our worldwide field operations organization that is led by Chano.

I'm pleased to report on our newest addition to the senior management team of the company John Schweitzer.

John joined us a few weeks ago as Senior Vice President of Sales and is responsible for sales and field operations for the North America region.

John brings strong senior executive sales experience and a reputation for building great teams to Workday and has a strong track record of success at both emerging and large enterprise applications companies.

As we look forward to Q4, next year and beyond, we are confident that we are well positioned for continued growth in all of our markets.

As a pure cloud vendor, our technology advantages such as in-memory computing and true multitenancy continue to serve us well, enable us to build differentiated solutions for our customers.

As a result, we have firmly established ourselves in a leadership position for HCM where we continue to have an unparalleled combination of product capabilities, technology scalability and customer referenceability and expect to continue to grow our business and market share in this category in the years to come.

On the Financial Management front, we are increasingly being viewed by analysts as 1 of 2 leaders in the space as the market begins to transition from on-premise to cloud solutions.

The market shift is well underway in the medium enterprise segment of the market and is beginning to emerge in the large enterprise segment as well.

And lastly, in 2017, we have laid the foundation for future growth for many years to come.

While our HCM and Financial Management suites will continue to be the primary drivers of growth in the near term, the introduction of Workday Prism Analytics and Workday Cloud Platform sets the stage for Workday to expand our total addressable market and become a more strategic supplier to our customers with both initiatives representing billion-dollar-plus revenue opportunities.

With that, I will now turn it over to Robynne.

Thanks, Aneel, and good afternoon, everyone.

As Aneel mentioned, our third quarter is an exciting time of the year as we host our U.S. Workday Rising event.

It's always great to meet our amazing, innovative customers and to be able to speak with new prospects looking to transform their business with Workday.

Rising is also when we hosted our Analyst Day, and it was great to see so many of our analysts and investors in attendance.

We appreciate all the support and interest in our company.

Let me start with our results from the third quarter fiscal 2018.

We delivered another strong quarter with total revenue of $555 million, reflecting year-over-year growth of 34%.

Our Q3 subscription revenue was $464 million, up 37%.

Our subscription revenue outperformance was driven by net new customer growth, solid add-on sales and high renewal rates with existing customers and a continuation of the improved in-quarter linearity we've seen this year.

Our Q3 professional services revenue grew 21% to $92 million.

As we highlighted at our recent Analyst Day, we are continuing to invest in global expansion as we believe international markets provide significant future growth opportunities for Workday.

In our third quarter, total revenue outside the U.S. was up 48% to $116 million, representing a record 21% of total revenue.

Non-GAAP gross margins for the third quarter rose to 74.1%, primarily as a result of the continued mix shift towards subscription revenue.

Our non-GAAP operating profit for the third quarter was $50 million, an operating margin of 9%.

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

Our relentless focus on customer success continues to drive our business forward.

High customer satisfaction drives strong renewal rates, customer referenceability and add-on sales, which support both long-term growth and profitability.

We believe we are unique in our customer-centric approach and have a differentiated long-term model as a result.

Total unearned revenue at the end of Q3 grew 21% year-over-year to over $1.2 billion.

Current unearned revenue, which will be recognized over the next 12 months, was over $1.1 billion, representing annual growth of 27%.

Consistent with our communication last quarter, non-current unearned revenue was down 18% year-over-year due to fewer customers paying more than 1 year of subscription fees upfront.

The amount of the decline in the quarter was less than we had anticipated as we saw cash upfront trend up a little Q3.

When looking at trends in unearned revenue, both short and long term, please keep in mind that balances in any given quarter are impacted by increasing seasonality as well as variability in the timing of renewals, net new opportunities and contractual billing terms.

Our subscription revenue backlog, which represents all future revenue from existing customer subscription contracts, both on and off balance sheet, was $4.5 billion, up 3% sequentially and 37% year-over-year.

Approximately 2/3 of the backlog is expected to be recognized within the next 2 years with the remaining balance to be recognized thereafter.

As I've mentioned before, one of the factors impacting this number is the duration of contracts signed in the quarter.

During Q3, we saw a marginal decrease in duration from previous quarters.

Duration is generally a product of deal size and customer preference and may vary quarter-to-quarter.

In Q3, $421 million of our $464 million of subscription revenue or 91% came from the balance sheet.

This is consistent with Q3 of last year, where 91% also came from the balance sheet.

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

During Q3, we successfully added and integrated 500 net new employees, bringing our total workforce at the end of the quarter to almost 7,900.

Cash flow from operations was $144 million in Q3, and our trailing 12-month operating cash flow was $449 million, up 32% year-over-year.

Our trailing 12-month free cash flow was $311 million, up 49% year-over-year.

During the quarter, we also issued $1.1 billion of 25 basis point coupon convertible senior notes due in 2022, resulting in our ending the quarter with over $3.2 billion in cash, cash equivalents and marketable securities.

This positions us well to settle our convertible notes previously issued in 2013, continue to invest in long-term growth and maintain financial flexibility for strategic investments and opportunistic M&A.

Operationally, we continue to execute exceptionally well as we head into the fourth quarter, our seasonally strongest.

The continued strength in our business is allowing us to raise our fiscal 2018 outlook as follows.

For subscription revenue, we're raising our full year estimate to be in the range of $1.78 billion to $1.782 billion or growth of 38%.

We expect our Q4 subscription revenue to be $482 million to $484 million or 31% to 32% growth.

As we've mentioned previously, the year-over-year growth in Q4 reflects tough comparisons as we lap the subscription revenue growth acceleration we experienced in Q4 of last year.

We expect professional services revenue to be approximately $352 million in fiscal 2018 and $89 million in Q4.

We, therefore, estimate that total revenue for fiscal 2018 will be $2.132 billion to $2.134 billion or growth of 35% to 36% with Q4 total revenue in the range of $571 million to $573 million or growth of 30%.

For non-GAAP operating margins, we are expecting approximately 9.5% for the full year and 7% to 8% for Q4.

The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 23 to 24 percentage points in Q4 and for the entire fiscal year.

We are maintaining our operating cash flow guidance of $420 million but anticipate there might be some upside to that number depending on Q4 linearity, timing of collections and invoicing terms on new contracts.

In terms of our fiscal 2008 capital expense for our owned real estate projects, we are forecasting $130 million for the year, down from our previous guidance of $150 million.

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

As we discussed at our Analyst Day in October, we remain committed to measured incremental non-GAAP margin improvement with an intermediate-term target of 20% while establishing a new long-term target of 25%.

While we are early in our fiscal 2019 planning cycle and still have an important Q4 to close, we'd like to provide a preliminary and high-level view of fiscal 2019.

We remain confident in our ability to sustain strong long-term revenue growth given the secular market trends towards cloud adoption and our established leadership position.

The strength we have seen in our top line growth to date in fiscal 2018 has been driven by 3 primary factors: first, acceleration of cloud adoption, especially in the large enterprise market; second, continued high customer satisfaction resulting in strong renewals and upsell opportunities; and third, improved linearity resulting in more revenue recognized on deals signed within the year and the quarter.

As we plan for next year, we expect to maintain similar linearity to FY '18.

With that as context, we are currently planning for FY '19 subscription revenue of approximately $2.25 billion.

We continue to expect pronounced seasonality towards Q4 with our Q1 being the seasonally slowest in terms of net new bookings.

We'd expect subscription revenue in Q1 of FY '19 to grow approximately 5% sequential from Q4.

We continue to prioritize growth and have made and will continue to make significant investments in product this year and beyond that will limit the pace of margin expansion in FY '19.

With that investment context, we are currently planning for FY '19 non-GAAP operating margins of 10%.

In addition, as we communicated at our Analyst Day, we expect operating cash flow margin to return to historical highs.

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

We will continue to focus on our customer success, driving continuous innovation and look towards closing out the year with strong momentum.

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

(Operator Instructions) Our first question comes from Mark Murphy of JPMorgan.

So you commented on the linearity.

I wanted to ask you has the linearity of bookings actually continued to improve versus what you saw in the first half?

And would you expect that to continue into Q4 just considering that you had that anomalous air pocket you encountered, I believe, in the month of November last year?

Yes.

We've actually experienced fairly consistent linearity this year, significantly improved from last year but fairly consistent within the first 3 quarters of this year.

And so we do expect that to continue through Q4 of this year, and that's baked into our guidance.

Okay.

And then as a quick follow-up, Aneel, we've noticed outstanding traction with Financials in the mid-market and the upper mid-market, I think a lot of organizations around 3,000 to 5,000 employees.

It seems like we've also seen more activity at the 10,000 to 20,000 type of level.

So when you look back on it, do you think the typical or median size of the financial customers you're adding today has changed materially versus a year ago?

It's definitely, on average, bigger customer than it was a year ago and much bigger than a couple years ago.

And the ones that we highlighted in our opening remarks were all greater than 10,000 employees to your point.

I'd say the other good trend is I think we'll have some good news for you when we report our next quarter with some wins that are above the 20,000 employee size that are more Fortune 500 type accounts.

They're beginning to emerge in the pipeline and becoming more predictable, and it's more a matter of getting -- from being selected to actually getting the deals closed.

Our next question comes from Richard Davis of Canaccord.

So one question.

Everyone's talking about artificial intelligence and machine learning.

I'm just trying to figure out to what extent do you believe this is evolution from kind of in-line business intelligence such as Prism and things like that.

Or is it kind of discontinuous?

I think if you have a true multi-tenant cloud architecture like Workday, where every customer is on exactly the same version and the data models harmonized across every customer, you can then take advantage of all the machine learning and artificial intelligence that's being built, both open source and what we're doing, and apply those algorithms against the data.

So for us, I think it's a natural evolution into this era of intelligent applications.

I think if you're a legacy company that's different than Workday and you've got on-premise and cloud and single tenant and multitenant, I don't know how you harmonize that data and actually leverage the machine learning and artificial intelligence capabilities across your customer base.

I think that's -- it's much harder for those players.

And our next question comes from Justin Furby of William Blair & Co.

Maybe -- I wanted to follow up on Mark's question.

Aneel, you mentioned some -- it seems like a lot of confidence in some big wins in Q4.

I'm curious what drives that confidence.

Are those deals that have already closed here through November or they're extremely late in the cycle?

And then I guess, taking a step back, can you give us a broader sense of what the growth in that business is?

It sounds like customers grew 60%.

Deal sizes are even higher than that, so maybe bookings growth is more than 60%.

Just give a sense for what's going on with that business and what pipeline looks like.

Lots of different components of a question, sorry.

Sure.

So I'll start with the last one first.

I think if we look across the year, of course, Q4 is our biggest quarter, I'm going to guess that you'll see net new ACV in Financials grow faster than 50%.

I don't know if that's a good guess, Robynne, which is considerably faster than what we're seeing in HCM, which is still at a very healthy rate.

So I think that's a pretty -- probably a pretty valuable data point.

And we're now beginning to get a critical mass of customers and revenue from that base, so that growth rate compounds at -- compounds into bigger and bigger numbers.

Where the optimism comes from, number one, was a great Q3 in terms of closing 37 new financial customers.

Equally positive are all these big companies like Unum and Aon and others going live.

Aon is now 2/3 of the way through their implementation and very happy.

As these companies go live, there are additional proof points for bigger and bigger companies to go with Workday, and we're seeing that basically being manifested into where we are with several large financial transactions where we've been selected, haven't yet closed but pretty confident that at least a few of them will close in this quarter.

And our next question comes from Keith Weiss of Morgan Stanley.

A question for Robynne.

In thinking about the invoicing terms, we've been going through a sort of a multi-year trend of you guys invoicing less and less of the deal upfront.

To what degree is that still impacting the deferred revenue number, particularly the current referred revenue number?

And should we see that reverse as we head into FY '19, that sort of headwind to what we calculated as billings starts to turn the other way?

Yes.

As we said for a while, Keith, we continue to structure deals in the best long-term interest of our customers and of Workday.

And our business, of course, isn't linear, and contractual terms vary.

And that makes both billings and unearned revenue challenging metrics to predict and rely on.

In addition, our success with add-on sales often results in customers early renewing their existing contracts, which often changes the timing of the billing cycle for those contracts as well.

And then uniquely to the unearned revenue side, unearned revenue has actually been negatively impacted this year by our strong linearity because, as we recognize more in-quarter revenue on a contract, we actually exit that contract in the quarter with a lower unearned revenue balance.

So as a result of all these dynamics, we continue to expect inconsistency and variability in billings and unearned, short term and long term, and that's why we don't really believe either are good indicators of our performance in any given quarter, and they become very, very hard to predict, particularly a year out.

So we continue to believe that if we keep focusing on structuring deals that are really long-term focused that those will naturally continue to grow and be successful.

And neither billings or unearned are metrics that we manage to internally.

Got it.

Got it.

And then on the appointment of John Schweitzer to SVP of Sales, is that a new role for him?

Or is he replacing someone?

Can you talk a little bit more about sort of what it was changing in terms of that sales management?

We had an open -- as we transitioned to a large enterprise and medium enterprise national organizations in the U.S., one led by Ed LaPerche, the other led by Doug Robinson, Chano and I felt like we needed to -- someone that ran all of North America operations and just to bring more experience and strength as we continue to scale the business, and that's where we brought in John.

So it was not a position that had existed before.

Got it.

So it's a new level of sales management on top of both the enterprise and then the commercial?

Yes.

(Operator Instructions) Our next question comes from Kash Rangan of Bank of America Merrill Lynch.

Two things I want to get your perspective on.

One is that, Aneel, you've talked about net new ACV in Financials.

But can you talk about how net new ACV growth rate trended for the entire company this quarter, especially because you've been telling us not to look at billings growth or deferred revenue growth rate as a true indicator of the growth here in the business?

And secondly, when you look at Workday today, Robynne, 2 to 3 years back when you have some of these larger companies signing multi-year contracts, you have a lot more to go back and renew and upsell just Planning, Analytics, et cetera.

So how should we think about the growth curve for the next 12 months?

I know, generally, software companies grow slower as they get bigger, but you're in a very unique position in that you've got a lot more new product to sell.

I might have left out a couple new products.

So how should we think about that in the context of your ability to continue to grow at 30-plus percent if that's still a goal?

I'm going to defer to Robynne on the ACV question.

On the long-term growth, I think we're really well poised for long-term growth.

Financials is kicking in.

HR continues to be healthy.

International operations have really kicked in as you heard in the opening remarks.

These 2 new drivers for Workday Prism and Workday Cloud Platform, they're definitely big opportunities for us, but it's too early for us to tell.

I think we'll give you a clearer picture of where we see things both headed into next year after Q4 and then along the way as we begin to get more experience selling, in particular Workday Prism Analytics, which is ready to go now but very new and very different than what we've sold in the past, and it's still early days for the Cloud Platform.

So I continue to see high growth in front of us, and -- but it's hard to be more specific until we get through the end of this year and we get some data points on some of the newer offerings.

Kash, on the net new ACVs, we don't disclose net new ACV growth, but if you'll look back a year, Q3 of last year is when we started experiencing acceleration of subscription revenue growth.

So we've now lapped that quarter, and so we're in a period of difficult comparisons.

We're very pleased with the net new ACV achievement that we had in Q3, and I think that, that really shows up in our revenue beat as well as our increased guidance for Q4.

Our next question comes from Karl Keirstead of Deutsche Bank.

This one's for Robynne.

Robynne, on the Q1 fiscal '19 guide for 5% sequential growth in subscription revs, that's a little slower than the 7% to 9% you've put up in the last couple of Q1s and I think off your 4Q guide, equates to about $508 million, so up about 27%.

So I suppose sort of before we conclude that you're just being conservative in that guidance 2 quarters out, I just wanted to ask you what maybe are the seasonal factors weighing into that guidance that we should keep in mind?

Yes.

Thanks, Karl.

One of the dynamics that we're seeing this coming Q1 that we have not had in the past is that the improved linearity that we've built into and expect for our Q4 business actually increases the revenue recognized on contracts that are signed within Q4.

What that means is that you've got less incremental revenue on those same contracts in Q1 and therefore it impacts the sequential growth trend.

So we don't think it's a negative.

It's just really the shift in linearity that's causing the shift in the sequential change from Q4 to Q1.

Got it.

So the -- it sounds like the strengths you're seeing in 4Q is just pulling stuff forward a little bit and skewing that sequential growth.

That's correct, pulling forward within the quarter, yes.

Our next question comes from Philip Winslow of Wells Fargo.

This is actually Michael Baresich on for Phil.

You've mentioned you've seen increased movement to the cloud in large enterprise European financials.

Are you seeing any differences in the competitive environment there versus the medium enterprise segment?

And what sorts of deals are things like Prism and the Cloud Platform potentially opening up that you may not have seen in the past?

Well, on the second part, it's still too early.

I do think PRISM is probably the one we'll get more feedback on sooner, and that definitely strengthens the story around Financials.

It's not just a transactional platform, but it becomes both a planning platform with Workday Planning and an analytics platform now with Prism Analytics.

And that's what the office of the CFO is looking for today.

So I feel like we're going into the market with a complete solution.

In the higher end of the market in cloud, if you look at the reports, it's pretty much a 2-horse race, the other being Oracle.

Gartner has the 2 of us in the Magic Quadrant.

The other main competitor is not -- doesn't really have a cloud offering yet, so they're not really even considered.

At the -- in the medium enterprise -- or I would say, actually, probably at the low end of the enterprise, we'll see NetSuite.

So it's really just those 2. We don't really come across others, and the market's plenty big for all of us.

And our next question comes from Adam Holt of MoffettNathanson.

I guess, this is for Aneel, and good to talk to you again on the call.

If we look at the bookings number, it looks like it was a little different than we expected.

And durations are moving around with you all.

But if you look at the business that you're doing, do you feel, Aneel, that even with durations maybe moving around a little bit, you're actually getting better business with better long-term potential, either in terms of the duration or the upsell potential?

And if you were us looking at the business, what do you think at this point is the best thing to look at to measure the strength of the momentum from a customer perspective?

I'll answer the first part.

I'll defer to Robynne on the second.

In terms of the kind of business we're doing, China runs a very tight ship.

We're doing very clean, healthy business.

The big difference is that we're not optimizing for cash upfront.

And that -- and it might be surprising, but there are a lot of very big companies that are very concerned about the cash outlays for these projects as opposed to the expense.

And frankly, these are AAA credit rating companies focused on cash.

I don't really care if we get it a year today or a year later or even 2 years later.

Given interest rates, there's not much we're losing for it.

If I can get a longer-term contract at better pricing, I'll do that every day of the week.

I don't know, Chano, if you want to add anything to that in terms of what you see in the marketplace for -- without the focus on cash.

No.

I think it's a continuation of what we've been seeing.

I think definitely we lag the customer (inaudible) [ability] and satisfaction that we've been commenting, and that's really helping us out significantly in the market opportunity out there and no particular changes or trends on any of the other dynamics.

I think we're more focused on getting healthier discount rates and healthier business.

On the long term, that is good for our customers.

And in terms of what's best to -- the best guide for how we're doing, I still think it's subscription revenue growth.

There might be some delay in what you see, but that's what we run the business off of, and that's how we project we're going to invest in next year.

Any other things you want to add, Robynne?

Yes.

I mean, just, Adam, I assume that when you talk about bookings, you're talking about calculated bookings off of our backlog number.

Keep in mind that the subscription backlog number is driven by 3 primary factors.

There's obviously the net new business that we do in the quarter.

There's also the renewals contracts that we ink in the quarter, where the timing of which often varies as in -- and can be impacted by early renewals, which is a pretty common occurrence when customers buy additional product from us.

And then the third being duration, which I noted ticked down slightly this quarter.

We don't actually worry about duration.

We believe that if we continue to do the right thing by the customer, continue to focus on high levels of customer satisfaction, then we'll continue to have very high renewal rates, and in the end, the duration of the original contract is not an important factor for us longer term.

I do believe that the backlog number is a meaningful metric, but I think it's more meaningful when you look at it as how it trends over time.

In any given quarter, given these 3 variables, it can move around.

So it's not necessarily a direct tie to how we've done in a particular quarter, but it is good for measuring us over a longer period of time.

(Operator Instructions) Our next question is from Ross MacMillan of RBC Capital Markets.

Aneel, Oracle is obviously in the cloud financials market.

SAP is moving in that direction with S/4HANA Cloud.

I'm just curious, do you think that 2 incumbents sort of pushing this message is a positive or a neutral or a negative for Workday?

And then, Robynne, on cash flow from operations margins next year, you said you get back up to your sort of historic high levels.

I think that would get you back to I believe it was 22%, but I just wanted to double click on that and make sure that, that's what you meant.

Or is it possible that we could actually move above that historic high watermark on cash flow from operation margin?

I think it's a big positive when all the vendors in a given marketplace are talking about a shift to the cloud.

It creates demand.

This is a huge market.

Financials market is twice the size of the HR market.

As it flips over, there's the -- there's a ton of market opportunity for, I'd say, for more than one, and I think we're very well positioned to get our fair share.

The biggest thing that we're all in this market looking for is the signs that this market's beginning to tip from on-premise to cloud.

Yes, so anything that promotes that is a good thing.

And Ross, on your cash flow question, you are correct that our historical high has been 22%.

As I said at the Analyst Day, we believe next year that we can get back to those levels and then over time go beyond.

But it's still early days for us in looking at next year we've got a huge Q4 in front of us to execute against, which will impact our cash view of next year.

So we'll have better information for you on the next earning call with regard to cash flow next year.

And our next question comes from John DiFucci of Jefferies.

I think my question is for Robynne.

Robynne, the -- all the commentary on the call from both you and Aneel has been positive on the business momentum in the quarter.

And frankly, our field checks indicate at least decent momentum this quarter, good business, but I didn't really hear an answer to Adam's question.

Is there anything that you'd suggest that we consider to gauge the current momentum of the business on a quarterly basis?

Like when we look at this -- because there are numbers out there that are calculated billings, and we understand how some of the things can move around.

But is there anything that we can look at?

I mean, looking at backlog, I mean, that's -- or looking at revenue, those are things that we can look at over the long-term health of the business, and obviously, that's very important.

That's very important for the long-term shareholders.

But to sort of gauge the momentum of this particular quarter, do you think ever think about -- I know we talked about this, but I don't know, maybe you might want to reconsider giving your assessment of new subscription annual contract value.

I know you said it was good this quarter.

But maybe, I don't know, is there anything you would suggest we look at?

(inaudible)

I would just point back to Aneel's earlier comment about subscription revenue growth, and I really do believe that, that's the best metric.

And what you can use this quarter would be the over performance that we had in Q3 on subscription revenue as well as the increase in our guide, which a lot of which is driven off of the net new business that we did in Q3, which will impact full quarter next year.

That's the metric we manage to, and I think it's the best indicator on a quarterly basis to gauge how we did.

But you also said that over 90% of the subscription revenue in this quarter came in off the balance sheet, and you also said you're seeing more linearity, which means you're seeing more revenue being recognized in the quarter.

So that just doesn't seem to me that the -- well, that -- it doesn't necessarily seem to be a great gauge for this quarter.

Again, we've heard things are good for you guys, so that's why I'm just trying to reconcile that with the numbers, that's all.

Yes.

I think if you take that information and marry it with some of the commentary that Aneel had in his prepared remarks around customer growth, around some of new customer logo wins, I think that all of those paint a picture of a highly successful quarter.

And our next question comes from Brad Reback of Stifel.

Just a quick question as it relates to 4Q.

Do you have any really significant renewals up for signing?

Every Q4, we've got a lot of renewals because that's our historically highest quarter, and so as the renewals stack up year-on-year, Q4 becomes our largest renewal quarter in general as well.

As I mentioned before, we can have renewals moved to different quarters if customers early renew, but Q4 is a big renewal quarter for us.

And we have great renewal history, and we expect to continue that solid renewal history in Q4 as well.

And our next question comes from Alex Zukin of Piper Jaffrey.

I apologize for the background noise.

I only have just one for -- one on the subscription backlog number.

Is there any way -- if you adjust for duration and normalize it, is there any way to maybe just talk about the growth rate at the high level?

And then one for Aneel.

Just if you think about the Financials customers that you're talking about Chano for the fourth quarter, were any of them, those customers initially starting office planning or are they net new or -- well, obviously, maybe existing HCM customers?

Yes.

Alex, on the backlog, obviously, the 3 factors that I talked about before, renewals bookings, net new bookings and duration, all play a factor in that number and interplay.

We're not going to be disclosing the -- those 3 components, so I do think that it's a meaningful metric to gauge how we're doing longer term, but it's going to be difficult for you to actually pull that apart into those 3 pieces.

But the reason that I mentioned the downtick in duration was just to give you guys some color around why the increase in the backlog number maybe was not as high as it had been in Q3 last year.

In terms of the large finance opportunities in Q4, the ones that I'm aware of, they're actually full platform opportunities, and -- but Financials is actually the driver in both cases.

Chano, anything else to add in -- but I don't think it's a broad enough set to say that, that's a leading indicator for what they're going to look like over the next 12 months.

Just happens to be the 2 in front of us right now are full platform across HCM and Financials.

No.

You're right on that one.

I mean, I would say the main difference you have, medium enterprise is more becoming ERP adoption as a whole starting point and potentially in large customers when they're really large, they either take (inaudible) or HR, one of the other, because of the complexity of the project, which is just larger, right?

But there are some taking them at the same time as well.

Got it.

And then, Robynne, maybe just one quick follow-up on the duration question, and I apologize if this has been asked.

Can you talk about maybe why that ticks down this quarter?

Was -- is there anything you guys are doing to drive that?

Or is that -- just any more clarity would be helpful.

Yes.

So that's not something that we actively manage or focus on.

We believe the duration of the original contract, if we can continue to achieve strong renewals, isn't an important measure of the business.

Duration of a contract is usually driven by the customer.

It's almost always driven by the customer and what contract term they're comfortable with.

Often, the larger deals have longer-term contracts.

And Q3 historically is a quarter with fewer large deals than other quarters, and that's been true for many, many years.

But it also just comes down to customer preference.

And then as we have success in add-on business, a lot of customers when they add a new product or new products to their contract, they co-term that with the original contract.

The duration of that new business is actually -- can be fairly short, so that's a factor as well.

So lots of things that impact it and not something we focus on or think is important in the long term, although it will impact the backlog number.

(Operator Instructions) Our next question comes from Pat Walravens of JMP Securities.

I'm going to change directions a little bit if that's okay.

Aneel, one for you to start, which was I saw you speak like a month ago, and you talked about this idea of being a multi-generational company, which I thought was new and interesting.

What did you mean by that?

And how do you do it?

And then I'll just put the second out now.

Robynne, I'd love to know any impact you can share with us in terms of impact on Workday if tax reform passes.

Well, so the -- I think that was at the event down in -- at Half Moon Bay.

It's really about 2 things: one, transcending technology trends and being multigeneral across technology trends and not being a vendor that only exists because of one particular trend; and then the second piece is our view on succession at Workday and the longevity of both the opportunity in the company that we can build over time.

And so when Dave and I look back at our previous company and think about what we want to do differently at Workday, one of the things we set out to do was to build a management team that would -- that we could pass on from generation to generation.

And we've done some of that.

If you look at the management team currently running big parts of our business, they were not running it 5 years ago.

Chano or Robynne is 2 examples.

And so setting up a pattern of doing that on a consistent basis sets us up for the long term and for multiple generations of management for this company over time.

And Pat, on your tax reform question, we don't expect tax reform to have an impact on us for quite some time.

We have over $1 billion worth of net operating losses that we can burn going forward.

We continue to generate taxable losses based on our GAAP income statement, so we will have a -- some slight balance sheet adjustments as we revalue our tax assets and tax liabilities, but it won't -- we continue to be in a position where we won't be a cash taxpayer for many years to come.

Our last question comes from Steve Koenig of Wedbush Securities.

So just one question here.

And by the way, congrats on a good quarter.

Maybe a little bit of historical perspective from the recent past that might help us think a little bit about the future here.

As we compare last year to this year, we did see in our checks a fair bit of hesitance in the first 3 quarters of last year, maybe in North America, in the U.S. maybe related somewhat to the election.

It seemed like enterprise buyers started to open up a little bit more in December.

You had commented in November about some weakness there around the time of the election.

And then it seems like in December and January, it was really off to the races for Workday and for other companies as well, and it's been a good year in the enterprise market and certainly for Workday.

No question about that, looks like a much better year.

So you spoke, Robynne, about cloud adoption.

Is that the only factor?

Are there other factors driving Workday this year versus last year?

And then as you think about next year, and you've given us some initial forecast and that's helpful, is there any chance that buyers might catch up with kind of pent-up demand that they weren't doing projects as much last year and they've now caught up?

Or do you see just a reservoir of projects that are going to continue to support the kind of demand environment you've been seeing this year?

So I would say that what a difference a year makes.

This has been a very strong year.

We did definitely have softness in the first 3 quarters of last year, and we've not seen that this year.

We've seen -- I mean, going into Q4 of this year, it's the best position we've been going into Q4 for several years, actually, not just compared to last year.

It's a pretty consistent demand environment.

The pipeline continues to grow at a healthy clip, so it's well positioned.

It positions us well for next year.

I'd say the 2 things that are -- and our sales execution, I think, actually has approved in the last 12 months.

Our win rates are consistently high.

I'd say if there's anything that really is continuing to drive the success that's becoming clearer and clearer over time, it's our customer satisfaction.

When you get to the -- especially when you get to the large companies, in many cases, we're the only proven solution at -- if you have 50,000 or 100,000 employees, there's -- you look at all the proof points of successful customers, they're almost always Workday customers.

And it's creating somewhat of a network effect where customers are talking to other customers, hey, if you're going to go down this path and you want to have a successful project, and no one wants to have an unsuccessful project, Workday is the safe choice.

And I think that's bearing out more this year than it did last year.

And kudos to the product organization and the services organization, our QA organization, our support organization for keeping these customers happy and for having products that truly scale.

But this last quarter, Coca-Cola is just another example of a very large company who's going -- who went into production and very happy.

And happy customers gets you more happy customers.

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

You may now disconnect, and have a great day.