Mike Magaro - VP, Investor Relations Aneel Bhusri - Chief Executive Officer Robynne Sisco - Chief Financial Officer Chano Fernandez - EVP, Global Field Operations.

Richard Davis - Canaccord Genuity Justin Furby - William Blair & Company Kash Rangan - Bank of America Karl Keirstead - Deutsche Bank John DiFucci - Jefferies Alex Zukin - Piper Jaffray Heather Bellini - Goldman Sachs Mark Murphy - JPMorgan Sanjit Singh - Morgan Stanley Raimo Lenschow - Barclays Brad Reback - Stifel Nicolaus Kirk Materne - Evercore ISI.

Welcome to Workday’s Second Quarter Fiscal Year 2018 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 conference. With that, I will hand it over to Mike Magaro, Vice President of Investor Relations..

Welcome to Workday’s second quarter fiscal 2018 earnings conference call. On the call, we have Aneel Bhusri, our CEO; Robynne Sisco, our CFO; and Chano Fernandez, our EVP of Global Field Operations. Following Aneel and Robynne’s prepared remarks, we will take questions.

Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast. Statements made on this call include forward-looking statements, regarding our financial results, applications, customer demand, operations and other matters.

These statements are subject to risks, uncertainties and assumptions.

Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-K for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

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

You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website. The webcast replay of this call will be available for next 45 days on our company website under the Investor Relations link.

Also the customer’s page of our website includes a list of selected customers and is updated monthly. Our third quarter quiet period begins at the close of business on October 13, 2017. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2017.

With that, let me hand it over to Aneel..

Hello, everyone and thank you for joining us. Today, I am pleased to share details of a very strong Q2. For the fourth consecutive quarter, we have experienced subscription revenue growth of more than 40%. We continue to attract new customers and many of our current customers continue to grow their investments with us.

Our customer satisfaction rate remains among the highest in the enterprise cloud and the success of our customers is a hugely important part of our long-term business strategy. Our second quarter results reflect continued progress in executing along our journey as a leading provider of enterprise cloud applications for finance and HR.

Let me share some of the highlights from Q2 beginning with our HCM suite of applications. Momentum for our human capital management suite remains strong as many organizations continue their transition to the cloud.

Our win rate in the large enterprise segment was notably high and was strengthened by our existing customer list, which includes a who is who of the world’s largest companies. Indeed, as of today, more than 30% of the Fortune 500 have selected Workday for core HR. Of those companies, 17 are in the Fortune 50.

In the second quarter alone, we were selected by Citigroup Management Corporation, Nordstrom, Qualcomm and Humana. We are also thrilled to announce that Siemens, the manufacturing giant base in Munich, Germany is replacing their current HR system with Workday human capital management.

While Siemens now represents our largest customer headquartered outside of North America, it’s just one of many new internationally based customers that joined Workday in the quarter. Today, we are also welcoming Shell in Europe and Johnson Electric Holdings in our Asia-Pacific Japan region as new customers.

I personally have the chance to spend a week in Japan over the summer visiting with our employees, customers and partners and came away bullish about the prospects of our Japanese efforts and the revitalized Japanese economy. Of course, much of our new sales success can be traced back to our unrelenting focus on customer satisfaction.

In Q2, we saw many of our customers go into production, including FedEx and Kohl’s. And as of today, over 70% of our HCM customers are live on Workday. We believe our global HCM leadership position is also being reinforced by industry analysts.

Gartner published its Magic Quadrant for Cloud HCM Suites for Midmarket and Large Enterprises on August 15 and positioned Workday as a leader. Also in the past two weeks, Forrester released a report on its views of the HRMS industry.

In the Forrester Wave Report on SaaS human resource management systems Workday human capital management is also ranked leader. We are proud of our placement in these reports as the global market opportunity remains significant and we believe we are still in the early innings of cloud HCM adoption.

Turning to our cloud financial management and planning applications, we had another strong quarter of growth and industry recognition.

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

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

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

These signals are also leading to momentum in our pipeline as companies large and small look to transform the way they run their business with Workday financial management and planning applications.

In the second quarter Ohio Health Corporation, The Children’s Hospital of Philadelphia, Giant Tiger Stores and Carlyle selected Workday for core financial management. And we have several customers go live on financial management including Denny’s, Yale University, Panera and Christiana Care Health.

In addition, Workday planning continues to be a popular add-on for customers looking to do financial and workforce planning and more than 170 customers have selected us for this application including Qualcomm and Bank of America. Since we last met, we made two important product announcements that I would like to highlight.

First, we announced fixed fee preconfigured application packages for U.S. based medium enterprises delivered by Workday services and our deployment partners. Companies in this space need predictable deployment timeframes and fast time to value and that is exactly what we are delivering.

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

We intend to deliver these packages more broadly to companies outside the U.S. in the near future. At our Altitude Conference this past July, we also announced our intention to enter the platform-as-a-service market by opening the Workday cloud platform to our customers, partners, independent software vendors and developers.

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

We hosted two hackathons events over the past several months and the early returns from these events have reinforced our view as to the attractiveness of this new offering to the Workday ecosystem of customers and partners. As some of you know I have long been fond of comparing Workday strategy to the process of sending a rocket to the moon.

Workday HCM was our first booster rocket that launched the company. International expansion was the second. Financial management was the third stage and the combination of planning and Workday Prism Analytics was the fourth and most recent step in our journey. Opening up the Workday cloud platform and entering the PaaS market will be number five.

We believe strongly that our platform-as-a-service initiative is a major step forward for Workday as we continue to innovate and bring increasing value to our customers. I hope many of you will be able to join us at Workday Rising, our annual customer conference which is just around the corner.

We will be covering all of our offerings in greater detail including Workday cloud platform and Workday Prism Analytics.

The Financial Analyst Day takes place on October 10 in Chicago and you are welcome to join to network with our customers and to hear more about our innovative current and new offerings and now over Robynne?.

Thanks, Aneel and good afternoon, everyone. As Aneel discussed, we continued to see strong momentum in our business driven by our differentiated technology and uniquely purposed customer success model and are very pleased with our second quarter results. We delivered total revenue of $525 million in Q2 reflecting year-over-year growth of 41%.

Our Q2 subscription revenue was $435 million, up 42%. Our subscription revenue out-performance was driven by strong net new customer growth and continued high levels of customer satisfaction which once again resulted in renewing customers increasing annual value of their contracts. Our Q2 professional services revenue grew 34% to $91 million.

We continue to see robust growth globally with total revenues outside the U.S. up 59% to $106 million representing 20% of total revenue. We are pleased that our continued investment in global expansion on both the product and sales front is yielding significant results.

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

This normal seasonal decline was due to the cost associated with our annual Altitude Partner conference as well as the impact of our annual employee compensation cycle, which went into effect at the beginning of Q2. Our non-GAAP operating profit for the second quarter was $49 million and operating margin of 9.3%.

We continue to invest back into our business to drive long-term growth and expect gross and operating margins will continue to fluctuate quarter-to-quarter based on seasonality as well as the timing of our investments. We did not see any material impact from FX changes within the quarter.

Moving to the balance sheet, total unearned revenue at the end of Q2 grew 26% year-over-year to $1.2 billion. Current unearned revenue, which will be recognized over the next 12 months, was $1.1 billion representing strong annual growth of 32%. Non-current unearned revenue was down 15% year-over-year.

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

Our subscription revenue backlog was $4.4 billion, up 10% sequentially with two-thirds expected to be recognized within the next 2 years and the remaining balance to be recognized thereafter. Although we don’t disclose the duration of net new contracts in the period, we didn’t see any material change from the first quarter.

Consistent with our other new disclosure from last quarter in Q2, $398 million of our $435 million of subscription revenue or 91% came from the balance sheet. This compares to Q2 of last year where $282 million of our $306 million of subscription revenue or 92% came from the balance sheet.

Our biggest investment continues to be in our people and in attracting top talent to Workday. During Q2, we successfully added and integrated almost 500 net new employees bringing our total workforce at the end of the quarter to almost 7,400.

Cash flow from operations was $15 million in Q2 led by stronger than expected collections in our seasonally lowest cash flow quarter. Our trailing 12-month operating cash flow was $376 million, up 17% year-over-year. Our trailing 12-month free cash flow was $248 million, up 38% year-over-year.

Note that in calculating our 12-month free cash flow, we have excluded $134 million related to our owned real estate projects. Operationally, we continue to execute exceptionally well and finished a very strong first half of the year. Based on these great results, we are raising our fiscal 2018 outlook and providing Q3 guidance as follows.

For subscription revenue, we are raising our full year estimate to be in the range of $1.75 billion to $1.757 billion or growth of 36%. We expect our Q3 subscription revenue to be $450 million to $452 million or 33% to 34% growth. We therefore expect our fourth quarter subscription revenue to be $466 million to $471 million or growth of 27% to 28%.

Please keep in mind that these second half growth rates reflect more difficult comps from last year, particularly in Q4. We expect professional services revenue to be approximately $343 million in fiscal 2018 and $88 million in Q3.

We therefore estimate that total revenue for fiscal 2018 will be $2.093 billion to $2.1 billion or growth of 33% with Q3 total revenue in the range of $538 million to $540 million or growth of 30% to 31%. For non-GAAP operating margins, we are expecting approximately 8% for the full year.

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

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

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

In terms of our fiscal 2018 plans for capital expense for our owned real estate projects we are lowering our forecast from $175 million to $150 million due to changes in the timing of project expenditures. For our other CapEx, we are maintaining our previous forecast of $160 million.

And finally, I will close by thanking our amazing customers, partners and employees for their continued support and hard work. We had a great first half of the year and we will continue to focus on our customer success.

We look forward to seeing many of you at Workday Rising in October as we share more insights on our strategic product initiatives and long-term market opportunity. Operator, let’s begin the Q&A process..

[Operator Instructions] And our first question comes from the line of Richard Davis with Canaccord Genuity..

Hi. Thanks very much. So Aneel you called out kind of good customer satisfaction, but you and I both know that a majority of these digital transformations fail in the eyes of the customer, what are you guys doing better than other people, I mean you have to be doing something because I am old enough remember 80% of Siebel deployments failing? Thanks..

Well, I think first of all we build these products to be figured and implemented quickly. And secondly, we have a ton of experience getting customers live. We have 1,800 customers, 70 are in production and we just keep refining our implementation approach.

We are able to layer in the best practices that we learned from all of our customers into the products. So if you are starting now, you start with a great set of best practices. And then I think we are really focused on time to value and we see really big Fortune 500 companies going into production in 12 months to 13 months.

And I think if you have that focus and many of these companies do, Bank of America recent example of really rapid implementation. They see value quickly and also I think you avoid the scope of any implementation projects.

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

Got it.

And then just a real quick follow-up, are you guys – are you prepared for that European regulation, the GDPR, are you all set for that?.

Yes..

Yes, okay, good. Thank you..

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

Yes. Thanks guys for taking my questions and thank you for the stunning quarter.

Maybe first for Aneel, it seem like the last three quarters have been packed with Fortune 500 activity and I guess I am wondering what you think the remaining opportunity is out there on the HR side, what the pipeline looks like for the second half and just longer term, the opportunity is there and then I have got a follow-up? Thanks..

Yes. I mentioned in my – both in the press release and in my comments, we are now over 30% of the Fortune 500. Our best guess is 50% of the Fortune 500 has not made a decision yet. It’s our best guess, I am sure data has got some inaccuracies, but directionally I think that’s about right.

So probably half the market hasn’t made a decision, tons of market in front of us and those kinds of opportunities continue to show up in the pipeline. And again success begets success in terms of customer deployments and having happy customers.

And I do think that we are beginning to see a network effect of the large Fortune 500 companies talking to each other. And comparing notes on which solutions work and don’t work. And I share that view with that Marc Benioff has that we are relentlessly focused on customer success and that scale is beginning to really pay off.

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

Got it.

And then maybe either for Chano or for you Aneel, in terms of financials, I guess can you give us a sense for what the pipeline mix looks like today in terms of [ATV] [ph] HCM versus [Technical Difficulty] and maybe what it looked like a year ago and I guess can you [Technical Difficulty]?.

Yes, Chano can give you that perspective..

Our pipeline really continues to grow well across all products.

I could say that when you reflect more on the core finance, sales planning and [indiscernible] that is growing nicely as a percentage of the total and we are pretty happy with regard to the cloud financials awareness and continues to grow as evidenced by the Gartner recent Magic Quadrant. So we are pretty optimistic about the pipeline growth..

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

And Aneel, we had a point where it’s 10% or so of new business or what does it look like from just new bookings?.

Plus or minus that’s a good range..

Yes, it is a good range..

I would say that and I will be the first to admit I have been overly optimistic when the market would turn for financials moving into the cloud. I think Gartner publishing a Magic Quadrant for cloud financials is a big step.

It’s an acknowledgment that the market is moving and I think it’s just one of several catalysts including the aging financial systems at most Fortune 500 companies that as they get through their CRM projects and HR projects finances, the next place to go and we are beginning to see that.

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

Got it. Thanks very much..

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

Hi, guys. Congratulations on a wonderful quarter.

Just trying to understand the significant growth in your backlog, if you do a bookings [coverage] [ph] rather than revenue [Indiscernible] because the stuff that’s off the balance sheet that seems to be pulling away I calculate about 69% and that seems to be significantly faster than your reported revenue growth rate.

I am wondering if you could talk to what is driving that, is that a increasing attach rate of new modules on existing customers as they come up for renewals, which you certainly alluded to.

But curious, if that is the case or there some other factors at Workday that’s causing explosive growth in your bookings off the balance sheet? Thank you very much..

So, Kash, with regard to the backlog, there are really three main drivers that can grow that number, right, one being renewals that happened within the period, the second being net new contracts within the period and the third being the duration of both of those pieces.

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

And in particular if I may, these up-sells could you tell us which products are you seeing the significant increase in up-sell rate as customers come up for renewals? That will be it for me. Thank you..

We haven’t published attach rates but we are seeing very good traction in planning and learning and we continue to see great up-sells with some of the more mature products as well such as payroll and expenses. So, it’s really across the board at this point, Kash..

Thank you very much..

[Indiscernible] you check in on that during the financial analyst and we will provide some detail on attach rates across the different modules..

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

Thank you. Maybe one for Aneel and one for Robynne. Aneel, it felt like you went out of your way to highlight the European growth, congratulations on that and obviously, a win at Siemens.

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

And then for Robynne, certainly again in this quarter, the gap between reported subscription revenue growth of 42% and your DR growth of 26% remains unusually wide. And I am wondering if we are almost through the point where those two growth rates can begin to converge? Thank you..

On the first one, I will offer a couple of thoughts and turn over to Chano. The perspective that we have always had at Workday is that a multinational in the U.S. and a multinational in Germany or the UK, they face the same needs, they faced the same challenges in terms of running a global organization. And so a lot of what worked in the U.S.

has translated very well to Europe. We had to build a great sales team, a great services team, the product was meant to be global from the start.

But when you look at a company like Siemens, they are not necessarily looking at just local German companies, they are looking at other multinationals that are of similar size and scale and complexity around the globe, because they compete on a global basis.

And so as a result the success we have had in not just winning the Fortune 500 accounts, but actually making them successful through the deployment and post-deployment areas has just played as well in Europe as it does everywhere else. And the same thing is happening in Japan, it’s happening across Asia, across New Zealand, Australia.

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

Anything do you want to talk about specifically about Europe?.

No, I think you explained it very well.

I think when there are any subtleties, geographical ones and regarding either compliance in particular the relational locally speaking, they are able to compare notes today with many other successful Fortune 500s that are live in Europe, doesn’t matter if it is the Unilever or Airbus [ph] or just an office of Phillips or many others.

And that also helping out to believe that it isn’t losing or it’s proving and it’s also proving into that geography and make them more confident to make the move..

Karl with regard to your second question, I would encourage you to look at unearned revenue on a current basis instead of total – current unearned revenue actually grew 32%. I think that’s a better comparison to sub-revenue than total given some of the dynamics we are seeing in the long-term.

I don’t believe that those growth rates will ever perfectly marry each other. The unearned revenue balance will fluctuate based on billing terms under particular contracts. One of the reasons that we are no longer guiding billings that’s kind of the variability we see on that front.

So I would expect that we will have times when subscription revenue is ahead of current growth rate, unearned growth rates which is what we are seeing today. It could also flip the other way. So I don’t expect a perfect correlation between those two rates..

Okay, thank you..

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

Thank you. I think I have question for Robynne and then a follow-up for Aneel and if I could. Robynne, the results look really strong, but is there anything that sum my question and it’s sort of gets to what Karl was talking about, it was really long-term deferred revenue decline. And thanks for all the color you gave.

But I just wanted to sort of make sure that I understand all of it here, you said that the contract duration is not really changing sequentially, can you say the same if you are considering year-over-year and then am I right to assume that less customers paying multi-year contracts upfront, that’s going to benefit future cash flow.

And finally, can you give us any color on how we should think about how this goes forward, do you do expect continue to see this sort of behavior I guess in payments moving forward in the second half of this year?.

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

The duration has stayed fairly stable although it can fluctuate particularly in periods where we either have an excessive number or lower number of large contracts which tend to have longer duration, but we have seen fairly – that number to be fairly consistent over the past year.

With regard to fewer long-term billings today benefiting future cash flow that’s absolutely correct. They will benefit billings as well as cash flow going forward.

It’s one of the reasons that we have deemphasized trying to get multiple years upfront and that we are trying to set ourselves up for success going forward and so we are not as focused on getting multiple years upfront.

And great question about the go forward, I am actually glad you asked that because from where we sit today not only do we expect that long-term deferred balance will continue to decline, we actually see that decline accelerating into the back half of the year.

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

Okay, great. That’s really helpful. Very clear. And Aneel, I am going to ask you the question I asked you already, I want to hear anyway, but now you have given me more to ask about and that’s on the platform-as-a-service and I know it’s early, but I find this really interesting.

You talk about it at least so for about unique extensions to Workday solutions.

I am just curious what your thoughts are about unique workloads like how might this rollout? It does make sense that people would use this to add on to what their Workday solutions that they are consuming, but do you envision as ever becoming something like – maybe Forrester.com, where companies actually can build separate, completely separate applications on your platform?.

Yes. In the short-term, we are very focused on our customers and our systems integration partners being able to extend Workday in logical areas around HR and finance, but longer term definitely see an independent software vendor opportunity. I think we will be very careful with that.

We know we are not looking to get into a whole host of different areas, but as an example if we came across a group that wanted to build supply chain and manufacturing systems or another industry-specific system that we have a long-term view on, but we are going to on our own roadmap we know we would welcome that.

So, I think I would consider that the second phase of the platform rollout, the first phase will be to customers, but we are already talking with ISVs that are looking to build new applications on our platform..

And anything on timing for the first phase, Aneel and then I will turn it back..

You will hear a lot more about the Workday cloud platform at Rising..

Okay, great. Thanks..

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

Hey, guys. Thanks for taking my question. Congrats on the quarter.

Maybe the first one for Aneel, as you guys have adopted 606 and become more flexible on cash collections, I am curious how that’s impacted pricing in the field and your ability to hold price and then maybe – and then I would follow-up?.

I will probably defer that to Chano. I would just say that independent of price, it just makes the negotiation go smoother that we are not asking for a whole bunch of cash upfront. It’s a more logical request to ask for 1 year as opposed to more than 1 year which is we were before.

Do you want to talk about how it impacts pricing?.

No, I would say that we definitely value our customers’ relationship and are willing to become flexible to align with the customer success. I don’t think you can draw any major trends so far. I would say that overall we are seeing a very stable pricing environment..

Got it.

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

It’s still, I would say, separate out medium enterprise from large enterprise. Medium enterprise is ticking along very nicely with the financial products in many cases that are brought hand-in-hand with the HR products and those are 5, 6, 7 month sales cycles from what I can tell. Large enterprise is still unpredictable.

I think they are still trying to sort through what they are going to do with their core accounting systems, but planning has taken off.

And we are now over a 170 planning customers this last quarter, landing companies like Qualcomm and Bank of America has really validated that story in that approach of wedging in, planning as a bridge between financials and HR and I start with financials. And I think we are going to continue that playbook.

It’s working well and resonating with the marketplace. Now, we have got to focus on making sure those first 170 have a really good experience with the product, but it’s been a nice play until the core financials market in large enterprise begin to take off.

With that Magic Quadrant from Gartner, we are seeing a lot more interest in people exploring financials in the cloud. I think that was really – that really was a seminal moment for our industry.

Anything, you want to add?.

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

Great, thank you for taking the question. I had two quick ones. I think last quarter Aneel it’s either you or Mark, made the comment about ACD in Q1 and how it grew. You made a comment about how it grew I think 3 times faster than what we have seen in other Q1s.

I am wondering if you have any comments to share with us on ACD in that vein related to this quarter.

And then the other question I had was just related to I believe you said that there are fewer customers paying even 1 year upfront, that seems like it’s been a trend for a while, just wondering what do you – how long do you think that continues or what’s the reason why you don’t trust to get more of your collections 1 year upfront?.

So on the first one, we didn’t say 3x faster growth, but we did see acceleration in ACV growth. And I think that we will continue to see that acceleration throughout the year and the four quarters of north of 40% subscription growth, pretty much validate that. So we have definitely seen an up-tick in demand.

On the cash collections, I will ask Robynne to answer that. It’s not that less people are paying 1 year, less people are paying multi-year.

Do you want to…?.

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

Although there haven’t been any significant shifts in volumes between the last few years and now the real change we are seeing is that we used to go after multiple years upfront, so we would ask customers to pay 2 years or 3 years of their contract upfront. And now we are not really even asking that of customers we are asking 1 year.

So it’s is really the long-term unearned that’s been impacted by that and the cash collections and the billings numbers to your point. But the less than 1 year cash upfront really that situation has not changed for several years..

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

Yes. Thank you very much and congratulations on a fantastic quarter.

So Aneel, you had mentioned that your win rate in large enterprise was notably high this quarter, as you consider this period where there has really been impressive upside and acceleration and very large new logos, can you just help us to separate out how much of this do you think is being driven by fundamentally higher win rates against those legacy incumbents versus maybe how much of this is a broader acceleration in HR modernization projects, which I guess in theory could be benefiting some of the other providers as well?.

I honestly think there is an element of both the activity level in the Fortune 500 marketplace has definitely picked up. And I think that market was later to move than maybe the Fortune 2000 market was. Within that Fortune 500 market, we have so many proof points of our ability to scale and take companies into production.

And our competition doesn’t have those proof points. So as these big companies are coming to market, we are winning more than our fair share. So our win rate is actually higher in that segment, because these large companies look around and don’t see a lot of success on the other platforms.

They might see it in a medium enterprise company, but they don’t see in a large enterprise other than Workday customers and that’s that network affect I was talking about earlier where as with the CIO of a Fortune 10 company who we have been trying to get into see for 5 years and finally he called me and said hey, I have had so many of your customers tell me what a great experience they have had with Workday and you are a good company to do business with and your products are up and running and working really well, why don’t you come and see me.

And that you can’t buy a lead that gets you in the door like that the customer referrals because of the great work that our products and services people have done.

We are getting those kinds of meetings now that a couple years ago I think people would have waited to see what SAP and Oracle would deliver and now as they are moving they want to make sure that they at least consider Workday..

And then as a follow-up Aneel, could you update us on your longer range ambitions in broader ERP for example supply chain management, manufacturing, inventory, etcetera, does the announcement of opening up the Workday cloud platform signal to us that you would allow partners to build some of those larger areas of broader ERP or would you keep those larger areas to develop yourself and the platform would be sort of aimed at relatively smaller chunks of code?.

So I think the whole platform opportunity is going to evolve over the next 2 years and our strategy probably will change. But I would just say taking a step back from where we were 5 years ago, where we were predominantly an HR software company in North America we have really transitioned to a platform company.

We start out transactions around HR and accounting. We now have planning. We now have analytics. You think about how a business works, any of our customers, they plan, they come up with a yearly plan. They execute against the plan. They analyzed against that plan.

We now can do an end-to-end basic business planning exercise for them instead of planning twice a year they could plan as many times as they want, because it’s all built in a unified way.

That in and of itself opens up so much market opportunity for PRISM Analytics for Financials, for platform-as-a-service in addition to the HR and accounting applications. I think that will keep us busy building out those combination of products for the next several years.

If somebody came along and wanted to build supply chain or manufacturing on top of work, I welcome them. Maybe in 3 or 4 years, we might decide to want to do it ourselves, but right now I look at what’s on our plate to build and the idea of the right people building on our platform is pretty appealing..

Thank you..

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

Hi, this is Sanjit Singh for Keith Weiss. Thanks for fitting me in. I had two questions. The first for Aneel, you mentioned earlier in the comments that maybe you have been a little bit optimistic on the sort of inflection point in core financially enterprise. You have been able to sustain growth pretty nicely over the last several quarters.

And I want to sort of map that back to what you have announced earlier in terms of fixed fee contracts in terms of moving to the mid-market.

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

Well, there is a lot of HCM market still out there. And with many of our largest customers, they have just started with core HR. So, even within a large customer, we have opportunity for up-sell. I might turn over to Chano and ask him about how he thinks about these packaged opportunities in medium enterprise.

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

Yes. I concur with Aneel that the opportunity in HR is still significant and big ahead of fast, definitely more mature in the U.S. but this is still a big one here yet and clearly a huge internationally speaking.

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

When it comes to financials, really as I said before, the pipeline momentum as a percentage of the total is accelerating significantly. So, clearly, large enterprise is money in its infancy, but we are seeing a quite significant growth already in the medium enterprise space..

Got it. And then just a follow-up for Robynne, in terms of the margin, if we look at the first half of this year, we are looking at sort of double-digit operating margins and I know last year that you guys had given a snapshot view of the HCM crossing double-digit margins.

And so I was wondering if you could update us on where HCM margins sort of stand today, are we sort of in that 15% range, are we in that 20% range and is that sort of just do you see margins in HCM continue to scale over time?.

Yes, Keith. So, currently, our HCM margins are above 20% and I think that really speaks well to the long-term operating margin.

Obviously, it’s financials we are still heavily investing in the product in financials and planning in PRISM Analytics and there is other newer products and so those are dragging the overall margins down, but we don’t see any reason why financials can’t mirror a HCM margin opportunity over time..

Great. Thank you very much..

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

Hey, thanks for taking my question and congrats from me as well. And the quick question, Aneel, we talked about half a lot, can you talk about pause in the context of HR, because I know some of your competitors got some industries or some customers because of that ability to kind of do self-buffer on regulations.

So, SAP won a couple of airline deals, because they could stuff or they wanted to do stuff that you didn’t want to do into the core. Oracle win some of the PeopleSoft customers that were heavily customized.

When you have [indiscernible] should that not changed quite a bit for you?.

Yes, time will tell, but I think it will. Both, I’d say, there is two categories of capabilities. There are things that are important to a small set of customers that are just 2 years or 3 years out in our roadmap and that we are not getting to. And as the customer satisfaction issue they can now go off and build it themselves.

So they are a happy customer, but they want the capability that we don’t have yet. So that actually released quite a bit of pressure on our application development team if that plays out the way it does.

And then yes absolutely, the idea that you can build extensions to Workday and those extensions will be upgradable from version to version that takes away any issues about people that are honestly, effectively customizing systems and running it more like an ASP than a true cloud model you kind of get the best of both roles now with Workday – with Workday cloud platform.

I do want to say though that we have to be careful not to get too far ahead of ourselves, we are very confident that the platform will stand up and will work well, but we are still learning about how people are going to use it.

We are going to have some customer use cases by rising we are going to learn a lot in the way that it gets rolled out over the next six months..

Thank you.

And one follow-up as we go deep into your mid-market like looking the olden days you had the large vendors and them trying to move down always ended in disaster [ph] the product was to feature heavy to be adopted and SaaS it should be easier, but can you just kind of help us to understand how you bridge that gap from you are capable of doing and dealing with a lot of customers and your sales force get to work that and that’s what’s moving kind of more into mid-market and what you have seen in your early experience?.

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

In the case of Workday, we are basically just picking a simple configuration through the system right, so medium enterprise still has to hire people, recruit people, retain people, but they want simple processes.

And so what we have learned through all the medium enterprise deployments is a way to configure the system quickly and rapidly in a much more simplified way that fits their needs. And that just was not possible with the old technology where you had to customize it to get it to meet their needs.

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

Perfect. Really helpful. Congrats..

We will now take two more questions. Our next question is from the line of Brad Reback with Stifel Nicolaus..

Thanks very much.

Robynne or Aneel, can you give us any sense on renewals, what type of uplift you are seeing on a percent basis?.

So consistent with previous quarter that we continued to see renewing customers actually we are doing contracts for over 100% of the original contract, so we are still seeing really good traction with add-ons on the renewal front..

Anymore detail, it’s obviously pretty clear that it’s north of 100%, but is it 110%, 130%, anything?.

Brad it varies by quarters, you can imagine. And I think the overall story is really positive and really strong with regard to selling more into the customer base and honesty that can actually happen on a non-renewal period as well, right.

So the renewal story and up-selling during the renewal process that’s only part of the attach and an add-on story. A lot of that actually happens just in the middle of a contract when a customer is ready. And as Aneel mentioned before we will talk more about attach rates at the Analyst Day at the Rising..

Great. Thanks very much..

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

Thanks very much and thanks for squeezing me in.

Aneel, none of China [ph] that come on this as well, but earlier you mentioned that in the mid-market a lot of times people are looking at buying financial connection together, I was kind of curious where you think things are going to go in the large enterprises meaning do you think people are still going to want to get HCM done first and then take on financials or now that as Gartner reports out and are you starting to see people sort of address that differently meaning maybe take them on both at the same time and I guess just final point on this, would that answer differ when you look internationally where people are just starting to take on HCM at – it’s still much earlier obviously in that market internationally? Thanks..

To-date we haven’t seen many large companies try to tackle both at the same time that the place where we have seen is our big government agencies and big universities.

They will look to do a full scale ERP type deployment, but most large corporations that I think if you were to ask them their top three projects that they have done over the last 5 years, they would say Salesforce, Office 365 or Gmail and Workday if you look at the Fortune 500 and Workday for HR.

And as they get through those projects, they come back and I think finance will get the resources and attention, but that would that be a big undertaking. They might subscribe to the two application suites at the same time, but it would be unlikely if they deploy them at the same time..

I think potentially you are right the only other industry we are seeing it is healthcare..

Healthcare is not so....

And I would say no difference on international update in terms of financials moving to the cloud, particularly when we see international more Western Europe right to be clear or European countries pretty similar to what is going on in the U.S.?.

Okay. If I could just ask a follow-up on your answer, Aneel, does that mean when you go back in and you talked to these customers that are live now on HCM.

Is that the time that then engaged them on financials and they are willing to sort of discuss that? Is that what you are feeling better about sort of seeing these inflections in the market at this point, because you have enough of a critical mass on HCM now live?.

Yes, I’d say a lot of it starts with the CIO that we have hopefully converted into a fan through the HR project and that individual he or she looks at the other projects and says hey, where else can I work with Workday. And we obviously talk about finance. I also think it’s about having references at scale.

And just this past quarter, we had Denny’s, we had Panera, we had Yale go live and they are all large in their own sectors. The Aon deployment is we are halfway through it. It’s going very well. So now these large customers can look at some proof points of big companies having shifted over and that’s actually having a very big impact..

Great, thanks. Congrats on the quarter..

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