Workday - Earnings Call - Q4 2021

Transcript

Speaker 0

Welcome to Workday's Fourth Quarter and Fiscal Year twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of the call. And with that, I will now hand it over to Mr. Justin Furby, Vice President of Investor Relations.

Please go ahead.

Speaker 1

Welcome to Workday's fourth quarter fiscal twenty twenty one earnings conference call. On the call, have Aneel Bushri and Shana Fernandez, our co CEOs Robin Sisco, our President and CFO and Pete Schlamp, our Executive Vice President of Product Development. Following 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. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward looking statements regarding our financial results, applications, customer demand, operations and other matters.

These statements are subject to risks, uncertainties and assumptions including those related to the impacts of the ongoing COVID-nineteen pandemic on our business and global economic condition. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission including our most recent quarterly report on Form 10 Q for additional 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 ninety days on our company website under the Investor Relations link. Also, the Customers page of our website includes a list of selected customers and is updated monthly. Our first quarter quiet period begins on 04/16/2021. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal twenty twenty. With that, I will turn it over to Chano to share go to market highlights in the quarter.

He will then turn it over to Anil, who will provide updates on the strategy and innovation front. And then Robin will close with our financials and guidance. We will then open the line up for your questions. Over to you, Chano.

Speaker 2

Thank you, Justin. I hope all of you joining us today are in good health and that your families are doing well. It has been a challenging few months of the pandemic but there is significant cause for optimism. We had a very strong close to the year as companies increasingly realize that HR and finance are the true backbone of their digital transformation. This realization is leading to significant pipeline improvement and as we enter FY 2022 we are well positioned to drive accelerated new bookings growth.

Our solid results were driven by another quarter of strong execution of high conversion rates. We once again drove strength in North America and our DACH region with vertical standouts in education and government healthcare and the professional services market. Both the large and medium enterprise teams outperformed driven by continued momentum in our installed base efforts as well as improving performance in our net new business. The strength in our HCM solutions was a critical contributor to our Q4 performance with notable customer additions in the quarter including Nike, ABB, Anthem, Cognizant Worldwide, Fox Enterprises, Ferrovial Corporacion, First Rand Bank, Laboratory Corporation of America and Pick n Pay retailers. We also saw significant uptake across our newer solutions that support the office of the CHRO including people analytics, health and journeys and talent marketplace.

By leveraging these applications organizations are addressing and fundamentally rethinking important questions like how to end institutional bias, how to reshape the workforce to meet today's demands and how to spot engagement risks and execution blind spots. The Fins Plus solutions also had a strong quarter and continues to represent an increasing percentage of our new business mix. We have several strategic core wins in Q4 including a Fortune 500 win of Franklin Templeton which included Accounting Center, Minnesota State Colleges and Universities, Century Insurance, the University of Maryland, College Park, St. Jude Children's Research Hospital, Vanderbilt University Medical Center. We are excited by the accelerating pipeline of teams opportunities including emerging use cases with enterprise financing product based industries like retail and manufacturing where recent wins include one of the nation's largest pizza chain, Zumiez, an exporting goods retailer with over 1,000 stores.

And we once again saw solid demand for our suite of products that support the Office of the CFO and Chief Procurement Officer including Workday Adaptive Planning, Prism Analytics as well as Workday Strategic Sourcing and our broader spend management solutions. Our installed base team also had another solid performance with more than 40% growth in new ACV bookings in Q4 against a very difficult comparison and more than 50% growth for full year FY 'twenty one. This team's execution was critical in driving growth over the past year and we remain very optimistic that with an ever expanding product portfolio we can continue to increase customer wallet share in the years ahead. Our customer success and services organization also executed incredibly well taking more than two fifty for HCM and Fins customers' lives in the quarter. Ensuring customer success has always been a core value for us at Workday and I'm incredibly proud of how our services team and our partners have responded in this environment helping to take life and virtually I might add a record number of workers on the Workday platform FY21.

Personally, one of the Q4 highlights was around our pipeline efforts. As we have described over the last two earnings calls, our pipeline generation has been improving since the onset of the pandemic and I am pleased to say that trend continue meaningfully accelerated in Q4 with record pipeline generation across all three regions. We still see some pipeline impact from COVID impacted industries but those headwinds appear to be lessening. The pipeline strength we have seen along with the stabilization in new business demand drives our expectations that new business growth will accelerate in FY 2022. On the personnel side, I wanted to congratulate my good friend, Doug Robinson on his recent promotion to EVP of Global Sales.

That has been incredibly impactful over his ten years plus and birthday most recently serving as Head of North America Sales with an impressive track record where he not only played an instrumental role in helping us win some of the world's biggest brands, but he also established high levels of operational and sales excellence across our North America region that have been critical to workplace growth. In his new role, Doug will lead our global sales efforts reporting directly to me helping us to accelerate our FINS momentum by continuing to expand our international footprint. Congratulations, Doug and I look forward to our continued partnership. Finally, before handing it over to Anil and on behalf of the entire Workday leadership team, I would like to express thanks to all of our workmates across the globe. Your response to this challenging environment has been nothing short of amazing and your resiliency has set us up for a strong year ahead.

With that, I will turn it over to our Co Founder and Co CEO, Anil Pulsory. Over to you, Anil.

Speaker 3

Thanks, Shano, and thanks everyone for joining today's call. Last August, we shared the exciting news of Shano's promotion to Co CEO. And six months in, I couldn't be happier with the positive impact of this change. China has been at the center of our go to market and customer facing activities, while allowing me more time to focus on our product strategy and innovation. This increased focus could not have come at a more important time.

Our innovation cadence has accelerated and we're excited to continue to bring out market leading innovation to support our customers. Shano touched upon our successes in expanding our presence within our customer base. A big part of the success was driven by the introduction of new products. Indeed in the last three years, we have delivered 50% more in terms of monetizable solutions as compared to the prior three years. As the trends around digital transformation and acceleration continue unabated and with increasing gap of what traditional legacy ERP can deliver and what our customers need, Workday finds itself in the unique position to not only help companies close this gap through a new class of enterprise management cloud, but also to truly serve as the backbone of their digital transformation.

We are enabling digital transformation journeys for more than 8,000 customers, including over 3,500 core HR and finance customers and we're excited to go further with them on this journey and to embark on a new journey with our next wave of customers. This concept of accelerated business change has been a core design principle since we founded the company. Workday enables organizations to turn transactional silos into a complete unified picture, hardwired processes into responsive automation, and periodic into real time and continuous planning execution and analysis. And our solutions aren't simply providing accelerating existing processes, we're helping thousands of companies fundamentally rethink the way they run their business. Many of these customers have relied on Workday to help them transform their organizations, including hundreds of customers that went live in Q4, such as Caterpillar, Comcast Cable, Cisco Systems, P.

F. Chang's and Spectrum Health. The world of finance is also being significantly impacted by the trends surrounding digital transformation. Listening to our customers and how they were dealing with all this change, we decided to design and build Accounting Center, one of our most exciting products in recent memory and one that is now generally available. Built on an analytics engine, Workday Accounting Center ingests, riches, and transforms operational transactions into accounting.

Customers can gain insight into rich accounting detail with complete data lineage for drill back for source transactions, empowering them to report faster and reduce time to close. With this new offering as part of a broader suite of our enterprise finance solution that includes Prism Analytics, planning and consolidations, we're now able to address a broader part of the finance market including product based industries such as retail and manufacturing. These industries must maintain their existing ERP and industry specific on premise systems, but want to use Workday to bring corporate finance functions into the cloud. It's one of the several emerging and exciting opportunities that grows our addressable market within the financial management solutions marketplace. On the ATM front, I'm proud to say that we are supporting customers and their efforts to prepare for a post pandemic world.

In Q4, we announced a vaccine management solution that provides leaders with insights to create a healthier workforce and a safer workplace. We've also seen strong interest in other timely solutions such as Vibindex and Vibcentral, which we announced last year and we already have more than 500 customers live. These customers are now equipped to better view and analyze the diversity and representation of their workforce in one centralized place. One area in HCM that has accelerated during the pandemic is employee engagement. With so many companies dealing with remote workers, getting a sense of how employees were feeling about the organization, their manager and their work became paramount.

While Workday had been focused on employee engagement for several years and had introduced capabilities such as pulse surveys, we realized we had to offer more capabilities to our customers. That insight led us to Pecan, one of the acknowledged market leaders in this fast growing space and a company built around a machine learning first approach. By bringing our product offerings together, PCOM allow Workday to greatly enhance our capabilities across several key areas, including understanding the voice of the employee, providing more robust capability in agile performance management and becoming an engine to further our Vibe solutions as the most comprehensive on the market. I'm looking forward to welcoming the more than two fifty Pecan employees who will soon become workmates, including Co Founder and CEO, Phil Chambers, who will continue as CEO of Pecan and will report directly to Tom Bogan. We're all excited about our future together.

As we look forward to Workday's next chapter, I'm excited by the opportunity that is in front of us. I'm very grateful to our employees for their dedication to innovation and customer success during these very challenging times. With that, I'll turn it over to our President and CFO, Robin Sisco. Over to you, Robin.

Speaker 4

Thanks, Anil, and good afternoon, everyone. As Chano and Anil mentioned, we executed incredibly well in the fourth quarter, demonstrating the strategic and mission critical nature of our solutions and the resiliency in our business during these unprecedented times. Subscription revenue was 1,010,000,000 in Q4, our first ever quarter over the $1,000,000,000 mark, representing growth of 20%. For the full year, subscription revenue was 3,790,000,000.00 growth of 22%. Professional services revenue was $125,000,000 for Q4 and $530,000,000 for the full year.

Fourth quarter revenue outside The U. S. Was $283,000,000 representing 25% of total revenue. Subscription revenue backlog was $10,090,000,000 growth of 22% and our first ever quarter above $10,000,000,000 in backlog. The outperformance was driven by better than expected new bookings against a very difficult comparison in addition to strong renewals, with gross and net retention rates over 95100%, respectively.

Backlog also benefited from a notable lengthening of average contract duration for both new customers and renewals. Subscription revenue backlog that will be recognized within the next twenty four months was $6,530,000,000 growth of 19%. Our non GAAP operating income for the fourth quarter was $211,000,000 resulting in a non GAAP operating margin of 19%. For the year, non GAAP operating income was a record $867,000,000 or 20% of total revenue, up more than six fifty basis points from FY 'twenty. This expansion was driven by a continued scale and efficiencies, a reduced pace of hiring and other COVID related moderation of expenses, including reduced spend for travel and events.

Operating cash flow for Q4 was $554,000,000 growth of 86%, bringing our full year operating cash flow to $1,270,000,000 47% growth. Record cash flow results were driven by strong cash collections as well as a substantial operating margin expansion. Our total workforce at the end of the year stood at more than 12,500 employees, and we have begun to ramp up hiring for FY 2022. Overall, we are very pleased with the strong company wide execution in our seasonally most important quarter. Turning now to guidance.

Although the environment remains uncertain, we are encouraged by our momentum in recent quarters and have seen an improvement in both close rates and pipeline growth. We're cautiously optimistic that the environment will continue to improve as we move through FY 2022, driving a faster pace of digital transformation initiatives across HR and finance. We are focused on driving accelerated bookings growth this year, which we expect will ultimately result in a faster pace of future subscription revenue growth. When thinking about our subscription revenue growth for FY 'twenty two, however, keep in mind that while we executed well this past year, we still experienced headwinds to new bookings. As I mentioned last quarter, these headwinds have implications for this year's subscription revenue growth given the lag effect caused by subscription revenue accounting rules inherent in SaaS businesses.

With that context, we expect FY 'twenty two subscription revenues to be in the range of $4,380,000,000 to $4,400,000,000 representing 16% year over year growth. This guidance includes the pending Pecan acquisition, which we anticipate closing later this quarter and is expected to contribute less than one percentage point to our subscription revenue growth in FY 'twenty two. For the '2, we expect subscription revenue to be between 1,018,000,000 and $1,020,000,000 representing 16% year over year growth at the high end. Keep in mind that because of the leap year in FY 'twenty one, we have one less day of revenue recognition in Q1 than we did in the year ago period, representing a nearly $12,000,000 impact to the Q1 subscription revenue and affecting both our sequential and year over year growth rates. We expect subscription revenue to sequentially increase from the previous quarter by just under 6% in Q2 and approximately 4% in Q3 and 4.5% in Q4.

From a backlog perspective, last year we saw a lengthening of overall contract duration, providing more predictability in our future revenue while also adding to total backlog growth during FY 'twenty one. While we have historically guided to total backlog, given that variations in contract length are difficult to forecast and can impact total backlog growth by several percentage points in either direction, we now feel it's appropriate to guide to twenty four month backlog, which will help isolate fluctuations in contract duration. When considering twenty four month backlog, keep in mind that the two primary drivers of growth are net new bookings and the timing of renewals. For FY 'twenty two, we believe net new bookings will have a positive impact on backlog growth given our expectation of new business reacceleration. When we look at the historical impact of renewals on backlog growth, we have consistently seen growth each year in the amount of ACV up for renewal, making renewals a positive contributor to backlog growth.

In FY 'twenty two, however, the ACV up for renewal is relatively flat compared to FY 'twenty one. This dynamic is purely a function of the mix of historical contract lengths, but will serve as a headwind on both the twenty four month and total backlog growth for this fiscal year. From what we see today, this headwind will not persist beyond FY 'twenty two, and we expect the renewal base will grow again in FY 'twenty three. With all this as context, we expect the twenty four month backlog to grow approximately 18% in 2022. We're expecting professional services revenue to be approximately $139,000,000 in Q1 and $590,000,000 for the full year.

This represents a return to growth in professional services revenue, driven by our expectation of improved new business trends. We will continue our tight alignment with our growing partner ecosystem to help ensure customers have successful implementations that support the highest levels of customer satisfaction and business value. From a margin standpoint, this past year, we demonstrated the long term scalability inherent in our model. Investing for growth remains priority number one, however, and in FY 'twenty two, we expect to increase our pace of hiring across the company, but with a focus on sales, marketing and product, specifically targeted at accelerating pipeline growth and advancing our strategic product roadmap. Included in these investments are increased marketing and brand campaigns as well as significant planned growth in quota carrying rep capacity.

With this context and an estimated 100 basis point dilution from Pecan, we expect our FY 'twenty two non GAAP operating margin to be 17%. We estimate non GAAP operating margins of approximately 19% in Q1 and expect a normal seasonal sequential decline in Q2 as we invest in our people through our annual compensation process. The GAAP margins for the first quarter and the full year are expected to be approximately twenty six and twenty four percentage points lower, respectively, than the non GAAP margins. Further, we expect our stock based compensation expense as a percent of revenue will decline by approximately 1.5% this year, starting a multiyear trend of improvements in this metric. The FY 'twenty two non GAAP tax rate remains at 19%.

We expect operating cash flow in FY 'twenty two to be approximately $1,200,000,000 down slightly from record levels in FY 'twenty one, driven by the ramp in growth investments. We expect to invest approximately $170,000,000 in '2 for owned real estate investments as we finalize the purchase of five buildings at our Pleasanton campus that we currently lease. This purchase is important to our headquarters strategy and affords us control of our core campus buildings. We expect to spend roughly $270,000,000 in FY 'twenty two to support all other capital needs. This includes investments in lease facilities, corporate IT infrastructure and customer data centers to support our continued business expansion.

These data center investments, along with other investments we're making in our technology and platform, including our entrance into the federal market and our expanded use of the public cloud, are expected to reduce our non GAAP subscription gross margins to slightly under 85% in FY 'twenty two. And finally, I'll close by thanking our amazing employees, customers and partners for their continued support and hard work, which which allowed us to deliver great results during an unprecedented year. We are more confident than ever in the long term opportunity ahead and look forward to keeping you apprised of our progress throughout the year. With that, I'll turn it over to the operator to begin Q and A.

Speaker 0

Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before Our first question comes from the line of Kash Reagon with Goldman Sachs. You may proceed with your question.

Speaker 5

Hi, thank you very much team. I'm trying to reconcile the strength in the quarter. Congratulations. That's a fantastic quarter. You've seen accelerating backlog growth for the past four quarters and you're talking about accelerating pipeline growth going forward.

Yet I completely understand that new business bookings were somewhat challenged, but I'm also trying to reconcile all the positives against the outlook for fiscal twenty twenty two subscription revenue growth. So maybe if you could just shed a little bit finer light on how we should expect the shape of fiscal twenty twenty two to unfold. And obviously the point is well taken that getting out of fiscal twenty twenty two into 2023, we could see even better trends. So can you just paint the shape of the recovery and where do we bottom out in terms of subscription revenue growth rate? When are we likely to see the acceleration based on all the good things we're hearing from you guys?

Thank you so much once again and congrats.

Speaker 3

Thanks, Cash, for the question. I'll take the first pass which is the metric that we run the business on at Workday is growth in bookings. And we're really excited about what we see over the next twelve months. Subscription growth bookings is a derivative of that number. And as you know, subscription accounting is based on multiple years backing into that.

So I wouldn't look too much at sufficient gross bookings as I would try to figure out what we're actually doing in this next year, which is a reacceleration on the bookings front. And then maybe I'll ask Shano and Robin to add a few comments to that.

Speaker 4

Yes. So as you know, our subscription revenue this year is really a direct result of the headwinds to that new business that we experienced last year, and we've been previewing this the last couple of quarters. So that's an important point. I'd also point out that we've been saying for a while now that our goal has been to flatten the declining growth curve and then ultimately reaccelerate. And as you can tell by the fact that our Q1 sub revenue guide growth is the same as our full year, this is the year we expect to flatten that curve, which is a really positive thing.

And to Anil's point, if we can reaccelerate the bookings growth, which we absolutely believe we can, then that will ultimately lead potentially to subscription revenue acceleration. But there's a lag there, so it's going to take some time.

Speaker 3

Wonderful. Thank you so much.

Speaker 0

Our next question comes from the line of Mark Murphy with JPMorgan. You may proceed with your question.

Speaker 6

Thank you. Yes, great to hear all the positive news. I'm wondering if you can provide any insight into the internals of the financials business the last two or three quarters. Is it safe to assume that that bookings mix of the core general ledger softened up a bit just because of macro uncertainty and maybe that pivoted more toward planning and scout and those other areas. Just trying to understand the magnitude of any shift there.

And then moving forward, what do you think is the main catalyst that a finance team is focused on to say now we're looking at the right conditions to modernize the general ledger and maybe bite off a bigger chunk that would give you a tailwind?

Speaker 3

That's a great question, Mark. Let me just cite some Gartner data that we got a few months ago. And I think instructive for how the market's working today. So they let us know that core accounting or core finance inquiries were down 14%. Core planning inquiries were up, I think, close to 30%.

And as the pandemic eases, what they also said was that while many of the core accounting projects were going to be delayed, the ones that were in 2023 and 2024 and 2025 were getting sucked forward because people realized that they needed to start on that digital transformation journey for financials. And so while it's been a tough time for financials during the pandemic, I actually think from here on now it's going to get accelerated. But I really want to let Shano comment on this.

Speaker 2

Thank you, Neil and thank you, Mark. Fins is certainly a key part of the reacceleration story Mark and we are seeing more of these opportunities coming to market. And not only did we see improvements in our Fins business in Q4, several strategic wins that we mentioned, but we also had solid Fins pipeline growth as well. But it is broader than core Fins as you highlighted. It is a broader solution set that we're selling into the office of the CFO, which also includes spend management analytics and our planning solutions as Dani was highlighting.

So we're really meeting our customers where they are in the journey. And there are emerging opportunities through our entire enterprise finance solution, which leverages Prism and accounting center where we're now better positioned to go after product based industries like retail and manufacturing and that opportunity we didn't have before. So we're widening our addressable market.

Speaker 6

Excellent. Thank you very much. If

Speaker 3

I could just add one more thing that we had a business plan going into the year pre COVID. And without going into the details, I can't go into the details of how close we were. But we were in shouting distance of our original plan around our overall business. And if you had told me that in April, I would not have believed that. And so it's a great testament to our team, but also the fact that digital transformation is accelerating.

And the folks that were not on cloud platforms realized they needed to be. And so it's one of the drivers of our optimism going forward.

Speaker 6

Thank you.

Speaker 0

Our next question comes from the line of Keith Weiss with Morgan Stanley. You may proceed with your question.

Speaker 7

Excellent. Thank you, guys. And it's good to hear the momentum is going back into the business. China, I guess this would probably be a question for you. This quarter you guys saw good durability in that upsell growth, that new ACV up over 40% on a year on year basis.

And if I'm not mistaken, this is the first quarter that you're anniversarying a really tough comp. I think you guys told us it was like up 50% in the quarter ago. So how does that like can you talk to us about sort of whether that type of strength is possible or it could be durable into the year ahead? Can you continue to see that type of growth coming from the upsell motion? And any sense you could give us in terms of what percentage of the overall kind of new businesses that represent today?

Speaker 2

Yes. Thank you, Keith. As we highlighted, we had another fantastic quarter with 40% plus growth in add on sales and that makes kind of 50% for the whole year. But it was really driven across a lot of different products including core themes, financials, workforce planning, business analytics, learning and what the strategic sourcing. But some of the newer products were as well contributing like accounting center and people analytics, extent and health also contributed especially in the last quarter as those products were earlier in the year I mean in the beginning of the year.

So we've seen nice strength in pipeline build from our store based teams and there is a lot of momentum on this effort as we enter into FY 2022. And definitely there is a thesis of certain area where we are strengthening our investments as well that Robin is commenting in terms of our investments on quota carriers. So in terms of the mix, it is definitely becoming a much more significant contributor of our new business in FY 2021, the business that is coming from the upsell and the cross sell. And we expect that over the medium term our growth will become increasingly more balanced between the new and installed base sales. But we have a lot of net new opportunities we believe that will accelerate this year and we're seeing signs of that in the pipeline as well Steve.

Speaker 7

Got it. That's great to hear. And then maybe one for Rob and just on the margin side of the equation. Definitely understand that there's some inorganic pressures that you have on the operating margins going into the year ahead. And then there's also just a reacceleration in spend against a subscription revenue line that amortizes off the balance sheet versus kind of marks what's going on in real time.

And then there's also some sort of T and E spending and the like that didn't take place in FY 2021 that takes place in FY 2022. Can you help us on those last two, can you help us kind of foot like how much comes from the first versus the second? Or more pointedly, what's the overhang that you guys experienced from sort of T and E coming back?

Speaker 4

Well, you know, and E, we don't expect it to really come back until near the end of the year, Keith. And even then, we're not quite sure exactly, you know, we don't believe it's going to come back 100%. So we expect that pace to continue to be slower. So we really are focusing more when you look at the increases in our spending around headcount, right? We were relatively flat in hiring last year.

We did some strategic hiring. We're relatively flat. We're going be hiring now across all areas of the company with, as I mentioned, specific focus on investments in sales as well as in product to take advantage of the great opportunity that we see in front of us. We're going to spend more non headcount wise in marketing, right, which we think now is the time. We've seen great momentum in the pipeline generation.

We think we can help that out by turning up the dial on marketing spend. And then investments in, you know, infrastructure, technology, data centers, really just across the board. We see just amazing growth opportunity ahead of us and now is the time for

Speaker 2

us to invest towards that.

Speaker 7

Right. So this is just like this is a subscription model, right? The subscription line reflects what happened last year in terms of billings and deferred revenue buildup, but you need to invest this year for a better demand environment. And that mismatch, that's what's pressuring your margins in the year ahead?

Speaker 4

That's exactly right, right. Your investment always has to take place before you're going to see the impact in your subscription revenue line. And if you look if you take out the impact of Pecan of 100 basis points, we're largely back on the trajectory we were before last year hit. Right? And so we're just getting back to business and back to normal and we feel really good that now is the time to make those investments.

Speaker 7

Got it. Got it. Makes sense. Thank you so much.

Speaker 0

Our next question comes from the line of Kirk Materne with Evercore ISI. You may proceed with your question.

Speaker 8

Yes, thanks very much. Congrats on the results and that's great to hear about the pipeline builds going into this year.

Speaker 4

Along this line, Shano, I was wondering if

Speaker 8

you could just talk a little bit about the international market opportunity, what you've seen in that theater or in those theaters? Maybe also where you think core Fins is internationally? Obviously, The U. S. Saw HCM take off first and then Fins has been sort of trailing it.

I'm kind of curious whether or not core Fins can maybe land at more of a at the same time, maybe not the same accounts, but the same time or proportionally in some of these international markets that are

Speaker 5

a little bit smaller? Thanks.

Speaker 2

Thank you, Kurt. And as you know and as you said we are much earlier days in penetrating international markets relative to where we are in The U. S. But we see a big opportunity in the rest of the world And we are very optimistic around this opportunity and what it means for us. I think we also saw a bit more impact from COVID in the rest of the world market that we have seen here in The U.

S. And I think it's really when we get to the other side of COVID, we should see accelerated momentum that is fully reflected on the numbers. And why I believe so is because the good news is that the pipeline is certainly improving in the rest of the world markets and I expect that there would be a key contributor to the acceleration this year too. In terms of financials, I would say that I don't think the gap is as big in terms of lagging behind as we saw in HCN, Curt. And we're seeing good wins in international in similar verticals, mainly in financial services and professional services and hospitality.

And now with enterprise finance, we are expecting as well and with accounting center that we can see into broader industries and some product industries. But initially, we're more focused on the services industries and clearly in some of the most mature countries like The U. K, I would say, France and Germany, we're seeing and we have already a nice customer base of core Fins customers that are becoming basically happy and referenceable. Thank you.

Speaker 0

Our next question comes from the line of Brad Sills with Bank of America Securities. You may proceed with your question.

Speaker 1

Great. Hey guys and thanks so much for taking my question. I wanted to ask about the vertical pipeline. Obviously, you're seeing some real success in some of these key verticals for Fins. And as you know, financials is not a one size fits all and you've done a tremendous job of adding more vertical functionality.

And I think seeing some of the traction in some of these verticals that you're citing with some of these wins here. I guess my question is if you look across the verticals where you've made investment for Finns, where do you feel best? Is there one that is ramping perhaps faster than others where perhaps the vertical functionality is ahead of the others that we should expect more in the future? Any commentary on just the vertical pipeline across the different key verticals for Finns? Thank you so much.

Speaker 3

That's for you, Charles.

Speaker 2

Thank you, Anil. Brad, I think there are three I would highlight. One would be clearly financial services. The other one would be healthcare and those are very significant deals for us. And the other one would be state and local and government not federal.

And on those three where we made investments we're seeing very good traction in terms of the maturity of the solution but in terms of customer wins and our conversion ratios.

Speaker 1

That's great. Thanks so much.

Speaker 0

Our next question comes from the line of Brent Bracelin with Piper Sandler. You may proceed with your question.

Speaker 9

Thank you, and good afternoon. For me, obviously, the success you're having upselling add ons in the installed base is very encouraging here, which leads to my question on Pecan. I know it's still very early, but as you think about this employee experience market, it is moving fast. Microsoft made a big splash last month. SAP did a partial spin on Qualtrics.

You're seeing new VC funding into Culture Amp, Lattice, NextThink. What's been the early feedback so far in Pecon? How is it different? And how quickly could you scale the attach rate in the installed base? Thanks.

Speaker 3

I'll take the first two parts and let China address the third. This is a hot space. There's no question about it. We actually had good offerings in the space. And then COVID hit and the demand for more insight into how employees were feeling during this period of time just exploded.

And Pecan, if you look at all the Magic Quadrants and analyst reports, they're the leader. They're the best. And we looked at what we were doing and said, we could get there, but not in a time that mattered because the market is happening now and these guys were the market leaders. So we couldn't be more thrilled to have them as part of Workday. And it's become a super high priority item for every CEO, CHRO to understand employee sentiment.

You know, in terms of the other thing I'd add is they were a very cool machine learning first application. They counted on that machine learning to drive them to better insights. And that's the way that we want to go as well. So we're super excited about that synergy on that front. And in terms of upsell opportunity, I'll turn it over to Chano.

Speaker 2

Yes. Brent, clearly it has not closed yet, right? So I just wanted to mention that. But we are really excited when the deal closes and we are cautiously optimistic that it's going to be a fantastic one. We have some great learnings out of Adaptive and Scout that certainly are going very well.

But as Anil is saying, this is such a hot space. We had a great solution. The majority of their presence is in Europe, but they already have some nice flagships logo in The U. S. And clearly with our distribution channel in The U.

S. And again cautiously optimistic that this is going to be fantastic what we can do together.

Speaker 9

Great. Well, sounds good and we'll be watching this one closely. Thanks.

Speaker 2

And I would just like to add that again even though it has not closed the initial customer feedback is very good.

Speaker 0

Our next question comes from the line of Mark Moebler with Bernstein Research. You may proceed with your question.

Speaker 10

Thank you very much and congratulations on the quarter. Robin, I think you mentioned this a bit but could you give a little additional color? Last quarter, you discussed the expectation of contract duration decreasing for billings both on the new contract side and on the renewal side. Can you give us a little more color on how big an impact did this really have? And how do you see that in terms of the pipeline in terms of what you think those contracts are going to be?

Are they going to be shorter? Are they going to be a return to what we've seen in the past? Thank you.

Speaker 4

Yes, Mark. You know, when we were forecasting total backlog, it's really hard for us to forecast the duration. And, you know, you saw that this past quarter in Q4. And the best way to really measure that impact is if you look at the twenty four month backlog growth, it was 19% in Q4. The total backlog growth was 22%, right?

So that differential in growth rate is due to increase in duration, which we had not been able to foresee when we first entered into the quarter and had our earnings call. So that's frankly one of the big reasons we decided to move towards guiding twenty four month backlog is because that really takes a lot of that guesswork around duration coming out. We did see a lengthening on durations in Q4 across both net new contracts as well as renewals, which was a really interesting dynamic. Overall, we let our customers drive the length of contracts that they want, but we see longer contracts as a positive for us as, you know, you don't have renewal risk as often, right? So if customers are entering the longer contract and then renewing under longer contracts, then that takes away some of the risk to your revenue for nonrenewals.

So we like that dynamic. We just are going to let our customers continue to drive that, so it's difficult to predict. And I don't know, Jon, if you want to add anything to what you're seeing?

Speaker 2

I would just say that we as we said, we have a standard guardrails in place for contracts, but we really don't incentivize our sales teams on total contract value. So it's really driven more by customers than any other thing, right? So I think that the fact that customers are signing longer and longer contracts, which sometimes can be five to seven years longer, I think is rare in the enterprise software and really speaks to the strategic nature of Workday and the trust that customers place on us.

Speaker 10

Makes sense. Thank you very much.

Speaker 0

Our next question comes from the line of Brian Schwartz with Oppenheimer. You may proceed with your question.

Speaker 7

Yes, hi. Thanks for taking my question this afternoon and real nice job on the quarter. John, I have one question for you. It's just around the increase in the sales and hiring comments this fiscal year. I just wonder if there's any particular product area or geography where you see that there's a big opportunity where it's more a function of just not having enough of a sales bandwidth.

Does anything stand out to you as you increase your growth investments in this year's fiscal plan? Thanks.

Speaker 2

Thank you, Brian. I mean we're making investments in a number of areas within sales and marketing helping support our growth efforts because we see the opportunity is clearly there. And it is in the areas like store based team, the rest of the world markets, our ongoing sales force in mid market to push in new countries, some of the vertical markets and then some new areas like the federal government. So it's clearly across the organization. So there will be marketing and presales kind of securities and certain marketing and brand investments as well.

So really this is about driving the pipeline and bookings growth and basically chase the opportunity that we've been creating and we have ahead of us to invest in capitalizing on that one. So it's a bit across the board.

Speaker 7

Thank you.

Speaker 0

Our next question comes from the line of Brad Reback with Stifel. You may proceed with your question.

Speaker 8

Great. Thanks very much. As you guys think about the acceleration or the potential for acceleration fiscal twenty twenty three and beyond, does the underlying sort of foundation of that between the split between HCM and financials look different going forward? Or do you expect it to be similar to where we are today? Thanks.

Speaker 3

Well I would just say the HR world was already pre pandemic full into the mode of cloud first And almost every function in HR was moving to the cloud as quickly as they could. Finance was not at that same place. And so during the pandemic we saw companies that were moving to finance to the cloud continue to move it up. We saw other people saying, hey, let's just wait till we get out of the pandemic and then we want to move forward. The most optimistic thing that I learned over the last twelve months around finances, the ones that were the customers that were using legacy finance systems were challenged to run their business and said, we need to move to a modern finance system.

And if you look at all the Gartner data that means that finance is going to be a pretty hot area over the next two to three years. There anything you want to add, Shano?

Speaker 2

Not much. I think we saw improvement on new HCV in Q4 across both of the areas. But even it's more encouraging the pipeline signs across both HCM and FIMs plus both for net new opportunities as well as the solid traction on installed base. So I guess we see opportunities in both.

Speaker 8

Great. Thank you very much.

Speaker 3

And if I could add just one thing that we actually saw companies that were struggling with their legacy finance systems during the pandemic just actually accelerate their requirements to go to a cloud based solution. And it's very lowly penetrated market right now. So we just have a lot of upside. I know I've been the pied piper of talking about finance for probably a decade at this point, but I really think that finance transformation is upon us.

Speaker 7

Great. Good luck.

Speaker 0

We will now take two more questions. Our next question comes from the line of Brent Thill with Jefferies. You may proceed with your question.

Speaker 1

Thanks. Robin, you mentioned you're going to

Speaker 11

be leaning back into sales hiring this year. I'm just curious if you can just maybe give us the shape of the curve of hiring, specifically in sales this year versus kind of last year. I just want to clarify that I think you said hiring was pretty flat. Can you just give us any color around what you anticipate doing into this fiscal year? Thanks.

Speaker 4

Yes, absolutely. So when you look back over our headcount growth in FY 2021, it was pretty flat. I think incremental hires were maybe a few 100 across the whole year. We'll do significantly more this year across all areas. And those are weighted heavily towards sales and product more so than any other organization.

So we do expect to invest a lot there. And I'll hand it over to Chano to talk about where some of those investments will incur, but it will be a significant acceleration of hiring in FY 'twenty two.

Speaker 2

Yes, think we were mostly flat as you commented against the areas I said before. So it's installed base, it's fresh of the world to support the new enterprise market efforts, some new areas like the federal government. And clearly we are putting plans in place for accelerating there and bringing the people on board as soon as possible. And of course, there will be some growth compared to what we had last year, right? It's not like we're going to go into double or high double digit growth, but I guess some nice single digit growth and then hopefully continue that trend of that acceleration investments in sales as we are leveraging that opportunity ahead and the pipeline that we've been creating.

Speaker 6

Thank you.

Speaker 11

Three years, right? I think you said it was up 50%. Do you have any data that says are average customers using this many modules and maybe how that might compare to your best customers? And I'm wondering if there's any way to kind of put that comparison with spend per employee, right? It would just be helpful to help kind of think about the capacity for the cross sell opportunity.

Speaker 3

D. J, I don't have that exact data. What I do have is data and I'll turn it over to Chano about what percent of our new bookings in Q4 came from new products. Because I think that's a more telling data point on how are these new products doing within our customer base. So Chano, what do you think?

Speaker 2

Yes, that's the main data we track in terms of the growth. So a significant part of the growth that we've been commenting 50% plus last year on installed base is coming from that 50% of the new solutions that we've been delivering over the last three years to the market, right? So those are contributing significantly. When you look at the pipeline, it's kind of pretty similar. The conversion rates are also higher there.

Clearly, we know in every customer the widest space we do have clearly usually we know that medium enterprise customers tend to acquire a number higher SKU six or seven to start with through the launch deployment that we have for medium enterprise. But with the increased efforts in terms of both product innovation and the sales capacity that we'd be adding into the installed base, those penetration ratios in terms of how the new SKUs are progressing and moving towards the best performance peers is tracking very nicely. And I hope we can provide some much more detailed information on this on our upcoming financial Analyst Day. Yes. Okay, great.

That's helpful. Thank you.

Speaker 3

Well and I would add Keith that we have a lot of upside with Pecan. This area of employee engagement is one of the hottest areas in the market right now. We were already in that market with our own pulse surveys, but clearly the market wanted more. And this company during the pandemic grew far more rapidly than Workday did, and I'm excited to bring this great capability to our customers.

Speaker 0

Ladies and gentlemen, we have reached the end of today's question and answer session. This will conclude Workday's fourth quarter fiscal year twenty twenty one earnings call. Thank you again for joining us.