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

Kevin Ma - Credit Suisse Justin Furby - William Blair Mark Murphy - J.P. Morgan Keith Weiss - Morgan Stanley Kash Rangan - Merrill Lynch Brent Bracelin - KeyBanc Capital Alex Zukin - Piper Jaffray Kirk Materne - Evercore ISI Ross MacMillan - RBC Capital Markets Brian Schwartz - Oppenheimer Scott Berg - Needham Pat Walravens - JMP Securities.

Good afternoon ladies and gentlemen. Welcome to Workday's Second Quarter Fiscal Year 2019 earnings call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the call. And with that, I will hand it over to Mr. Mike Magaro, Vice President of Investor Relations. Mr.

Magaro, the floor is yours..

Welcome to Workday's second quarter fiscal 2019 earnings conference call. On the call, we have Aneel Bhusri, our CEO; Robynne Sisco, our Co-President and CFO; and Chano Fernandez, our Co-President. Following Aneel and Robynne's prepared remarks, we will take questions.

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

These statements are subject to risks, uncertainties and assumptions.

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

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

You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link.

Also, the customers' page of our website includes a list of selected customers and is updated monthly. Our third quarter quiet period begins on October 15, 2018. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2018. With that, let me hand it over to Aneel..

Thank you Michael and hello everyone and thank you for joining us today. I am pleased to share the details of another strong quarter and Q2 continuing our momentum as a vendor of choice for companies embarking on digital transformation across cloud finance and HR.

Our customer satisfaction rate remains among the highest in enterprise cloud software and the success of our customers is an incredibly important part of our enduring business longer term. Let me share some of the highlights from Q2 beginning with HCM.

And as of today more than 35% of the Fortune 500 and approximately 50% of the Fortune 50 have selected Workday for core HR. Our continued success amongst the largest companies in the world is a direct reflection of the value we place on live, happy and referenceable customers.

In the second quarter some of the new customers we added include Eli Lilly and Company and Bridgestone Americas in North America, Siemens Healthineers in Europe and DBS Bank in our Asia-Pacific region. Notable go lives in Q2 include Humana, Michelin, Samsung and Target.

We believe that our global HCM leadership position is once again being reinforced by industry analysts. Gartner published its Magic Quadrant for cloud HCM suites for midmarket and large enterprises on August 15, 2018 and once again positioned Workday as a leader.

We also continue to see strong traction in cloud financial management where we had over 60% new customer growth in Q2 and also added another new Fortune 500 customer. We now have over 530 Financial Management customers including 8 in the Fortune 500.

In the second quarter Group Foncia, Kemper Corporate Services, and Horizon Healthcare Services are few of the many new customers who selected Workday for core Financial Management. Also and equally important, we had several customers go live in Financial Management in Q2 including Continental Casualty Company and Advantis Healthcare.

As we have continued to push into the financials marketplace over the past several years, it's become very apparent that for many companies the first push into the cloud is in the area of financial and operational planning.

This market dynamic is the main reason we accelerated our path into planning with the acquisition of Adaptive Insights which closed August 1. With Adaptive Insights we now have the ability to sell best-of-breed planning on a standalone basis or as part of a broad ERP suite.

Since the close, Adaptive Insights has been operating as Workday business unit under the brand Adaptive Insights a Workday company. Adaptive Insights CEO and my good friend of 15 years, Tom Bogan is reporting directly to me and has joined the executive committee of Workday.

We are thrilled about the combination of Workday and Adaptive Insights which will enable customers to better plan, execute, and analyze across the enterprise all in one system, the leading cloud platform to drive their financial and business transformations.

The acquisition increases the power and reach of the combined companies who share a common employee first and customer centric approach to developing enterprise software. Additionally, we have decided that our single planning solution moving forward will be the Adaptive Insights business plan in cloud.

This represents a huge opportunity for us to increase the speed to market on our long-term vision of companywide integrated financial workforce and operational planning for all enterprises large and small. With an improved value proposition for the office of the CFO we strongly believe that over time we will drive more sales for financials.

We believe having Adaptive Insights as a single planning platform reduces the complexity for both customers and employees. We are committed to unifying Adaptive Insights with Workday not bolting it on.

This means the Power of One will stay intact ultimately equipping our customers with access to one source for data, one security model, one user experience and of course one Workday community that enables them to plan, execute, and analyze all in one system.

Our investment in broadening our platform and extending our product capabilities is creating many levers to drive enduring long-term growth, while Human Capital Management is our most mature segment and has fueled much of our growth, penetration rates for cloud HCM remain low globally and HCM only represents approximately 25% of our total addressable market long-term.

We are in the early days of our journey as a company and remain focused on investing to drive customer success and to help transform the way our customers do business. We look forward to sharing more about our products and market opportunity next month at Workday Rising, our annual customer conference.

The financial Analyst Day takes place on October 2, in Las Vegas and we look forward to seeing many of you there. And now over to you, Robynne..

Thanks Aneel and good afternoon everyone. As Aneel discussed we continue to see momentum in our business driven by our differentiated technology and unique focus on customer success. In the second quarter we delivered total revenue of $672 million reflecting year-over-year growth of 28%.

Our Q2 subscription revenue was $566 million up 30% year-over-year. Our subscription revenue outperformance was driven by net new customer growth as well as a record high for renewals achievement as a percent of the original contract value, a clear benefit of our consistently high levels of customer satisfaction.

Our Q2 Professional Services revenue grew 17% to $106 million. Total revenue outside the U.S. was up 48% to $156 million representing a record 23% of total revenue. Subscription revenue backlog was over $5.5 billion growth of 26% year-over-year.

Consistent with prior quarters, approximately two thirds of the subscription revenue backlog balance will be recognized over the next two years. Non-GAAP gross margins for the second quarter were down slightly to 74% primarily as a result of a decline in our Professional Services margins.

This normal seasonal decline was primarily due to the costs associated with our Annual Global 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 $68 million an operating margin of 10.1%.

This includes the impact of $3 million of expenses related to the Adaptive Insights acquisition which was not contemplated in our previous guidance. Our investment philosophy remains focused on growth and ensuring we deliver the best products to enable our customers to transform the way they do business.

We remain early in addressing our long-term opportunity with the majority of our products still in the beginning phases of their growth curves and you should continue to expect that we will reinvest any incremental topline over performance this year.

Cash flow from operations was $58 million in Q2 led by stronger than expected collections in our seasonally lowest cash flow quarter. Our trailing 12-month operating cash flow was $512 million, up 36% year-over-year. Our trailing 12-month free cash flow was $338 million also up 36% year-over-year.

Note that in calculating our 12-month free cash flow we've excluded $161 million related to our owned real estate projects. Moving to the balance sheet, total unearned revenue at the end of Q2 grew 21% year-over-year to just under $1.5 billion. The current unearned revenue was $1.4 billion in line with our expectations of 25% year-over-year growth.

Noncurrent unearned revenue was down 14% year-over-year. During Q2 we completed the settlement of the convertible senior notes that became due in July. The face value of the notes was settled with $350 million in cash. We also issued approximately 1.5 million shares per the terms of the conversion provisions.

The shares issued were offset completely by our exercise of the related hedge and as a result the note settlement had no net impact on our share count. Our biggest investment continues to be in our people and in attracting top talent to Workday.

During Q2 we successfully added and integrated over 500 net new employees bringing our total workforce at the end of the quarter to over 9100. We continue to execute very well operationally and finished a great first half of the year despite the difficult comps. Now let's turn to guidance.

Please note that our guidance incorporates the impact of transaction and integration costs as well as the ongoing operations net of purchase accounting adjustments related to the Adaptive Insights acquisition which closed on August 1.

Additionally, given current FX rates our subscription revenue guidance includes a headwind of several million dollars in the second half. For subscription revenue we're raising our full-year estimate to be in the range of $2.341 billion to $2.348 billion or growth of 31%.

This guidance includes an estimated contribution of $42 million from Adaptive Insights. We expect our Q3 subscription revenue to be $609 million to $611 million or 31% to 32% growth inclusive of $18 million from Adaptive Insights.

We expect Professional Services revenue to be approximately $424 million in fiscal 2019 of which approximately $9 million is from Adaptive Insights. For Q3 we expect services revenue of $112 million with $4 million coming from Adaptive Insights.

We now expect our non-GAAP operating margin to be approximately 4% for Q3 and approximately 9% for the full year. This 300 basis point reduction from our previous full-year margin guidance is related solely to the Adaptive Insights acquisition.

Approximately $40 million of this headwind comes from one-time transaction and integration costs with the remaining coming from ongoing operations. The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 31 percentage points in Q3 and 27 percentage points for the full year.

Our previous expectations of organic short-term unearned revenue growth in the low 20% for the third and fourth quarters this year is unchanged. Adding in Adaptive Insights however we now expect the growth in short-term unearned revenue could be up to 25% in Q3 and Q4.

We expect operating cash flow to be approximately $550 million for the year reflecting the full impact from the Adaptive Insights acquisition. We still expect FY '19 capital spend to be approximately $200 million for our development center project and an additional $200 million for all other CapEx.

And finally, I'll close by thanking our amazing customers, partners, and employees for their continued support and hard work, which allowed us to deliver great results for the first half of the year.

We are also thrilled to welcome the incredible Adaptive Insights team to Workday and are excited about what we will accomplish together in the second half and beyond. We look forward to seeing many of you Workday Rising in October as we share more insights on our strategic product initiatives and long-term market opportunity.

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

[Operator Instructions] Our first question comes from the line of Mr. Brad Zelnick from Credit Suisse. Sir, you may ask your question..

Hi, this is Kevin Ma on for Brad. Thanks for taking the quarter and congrats on the quarter.

Can you give any update on how you are thinking about the go to market strategy with Adaptive and coordinating the sales force with Workday's enterprise reps?.

Sure. So we're going to continue to sell Adaptive as a standalone best-of-breed planning product through the Adaptive sales force which will continue to grow both in their medium enterprise as well as large enterprise business. You'll see them continue to focus on selling planning standalone.

If it's inclusive of a larger ERP deal with financials or HR then the Workday reps will take the lead with support from Adaptive and we are figuring out the compensation model just to make sure that everyone is acting in the right mode.

It's really important for us to continue to leverage Adaptive's place as a best-of-breed solution and so it will be sold standalone whether or not the customer is a Workday customer..

Got it, thank you.

And just as a quick followup, can you give any color on how much Adaptive contributed to subscription backlog for the quarter?.

Adaptive is not in subscription backlog for the quarter since we closed that transaction the first day of Q3..

Our next questions come from the line of Mr. Justin Furby from William Blair. Sir, your line is open..

Thanks guys, and congrats. And I guess couple of questions for Aneel. Maybe a first one in terms of subscription growth this quarter, it looked like it was more or less stable from Q1 at around 30% and in last few quarters you had some pretty notable deceleration there.

So I guess I'm just wondering if you feel like the business is nearing a floor in terms of organic growth over the medium term and what do you think Adaptive does you sort of called out the inorganic pieces, but when you look out over the medium term, what do you think it does to your organic growth in terms of planning and driving that business but also driving financials deal? Thanks..

Yes, you know in terms of subscription growth I'd probably defer that question to Robynne, but I think we've been pretty clear all along that the first half of the year had pretty challenging comps from last year and the second half of the year the comps are easier.

In terms of Adaptive, what we recognized through the past few years of selling core financials as soon as we introduced planning we had a new entry into the sales cycle. The planning area was viewed currently as a good place to start in the transformation to the cloud and very strategic to the office of the CFO.

What we found is that, while we were making traction with our own development efforts, we were two years or three years behind where the market needed us to be. So with Adaptive we very quickly get into the market with a leader defined by Gartner in the Magic Quadrant and those will open more doors for us the broader Financial Management suites.

So it's the double bonus of now being viewed as a leader in that space as well as opening up the doors to the larger core Financial Management business and so we're very excited about it.

Also the acceleration that we see – the acceleration we see as a big potential for us is in large enterprise that has historically not been a focus of the Adaptive sales organization.

They are going to move into large enterprise and of course we have hundreds of large enterprise sales reps that will be able to introduce Adaptive into the large enterprise accounts..

Okay got it.

And then maybe just one more on the HR service delivery market it seems like that is a opportunity and the market is starting to really inflect and I'm just wondering if you guys plan to at some point enter that market directly or if it is really to leverage partners because it seems to me as a pretty big opportunity within your installed base there? Thanks..

For the time being it is leveraging partners, but it is definitely one of the areas on our roadmap as we explore new areas of growth..

Okay, great. Thanks guys..

Your next question comes from the line of Mr. Mark Murphy from J.P. Morgan. Mr. Murphy, you may ask your question..

Thank you. I'll add my congrats.

So Aneel, I was thinking back here 12 to 18 months ago and you seemed to be entering a pretty unusual period where there were many large enterprise HCM deals and it ended up including Walmart and Target and Dow Chemical and BT and many others and I think you had a single quarter where you closed 13 Fortune 500s and I think it was partly due to some of the competitors products that were being sun-setted or end of life.

What are you observing today in terms of the HCM replacement cycle and when do you think is the next point in time where you would expect to see kind of an unusual cluster of the large enterprise deals coming together like that?.

Well, the large enterprise deals are continuing to come and they are coming to Workday and I think we're getting far more than our fair share. I think this past quarter we had eight Fortune 500 accounts that became Workday customers.

So it continues to be a very strong market and it's the second quarter which is not typically a Fortune 500 quarter that typically is our fourth quarter. So we don't really see anything changing that dramatically. I think if anything what we're seeing are some of the multinational Fortune 500 accounts not based in the U.S.

coming to market and looking for a partner to help them move HR into the cloud and go through their HR transformation. And I'd say most of the international markets are three or four years behind the U.S. and so some of those markets are really beginning to pick up now..

Okay thank you, Aneel.

As a quick followup for Robynne, I just wanted to ask you what are you observing today in terms of the typical subscription fees that are being generated in financials versus HCM for instance and I mean, if you're comparing like-for-like size of organizations, so if a company has 10,000 employees and you look at the ratio of the subscription fee for financials relative to HCM, what exactly are you observing there and what do you think it would look like in the long run?.

Yes, Mark. So the way our list price works is it’s about a one to one ratio and we’re seeing very consistent discounting rates across both of those products.

And Chano, is there anything you want to add?.

That's accurate, that's what we’re seeing..

Thank you..

Our next question comes from the line of Mr. Keith Weiss from Morgan Stanley. Sir, you may ask your question..

Hi, thank you, guys and thanks for taking the question and a nice quarter. Similar question to what Mark was asking but on the other side of the business in terms of financials, one of the things that we noted in our recent CIO survey and in a couple of other recent CIO surveys is, ERP refreshes and ERP investment is rising at the CIO priority list.

I want to ask you if you’re seeing that in your interactions with customers are you seeing financials kind of rise in priority? And then I have a followup..

Absolutely, and I think the combination of core fin procurement expenses and planning all together we can be an ERP replacement today and it definitely seems to be the next area of focus from IT, it was CRM then HR, IT, and I think it’s now, I think finance is the next big one to tackle.

And one of the reasons why it hasn’t, it’s been clear one of the reasons it hasn’t taken off in the past is that the products including ours were just not ready to take over that operations of the truly large multinationals, but from a future function perspective and we’re confident that they are today and so when they go off do their analysis, they are confident with the fact that, hey I’m not actually giving up anything on the functionality side and I’m making a huge leap forward on the technology side..

Got it. Got it and then the followup question was on sort of the mid market opportunity, any kind of changes that you may put your sort of go to market or the mid market focus with Adaptive, because I know they had a really big new market presence within their customer base.

Does that become a new sort of distribution avenue for financials to come into the new market for you guys or with the core financials?.

Well, we’ve had a very strong run in medium enterprise since about a year and half ago. Chano really created hard and fast lines between large enterprise and medium enterprise all the way through the sales organization, all the way down to the rep level and all the way up to the senior sales executive level.

I think that with Adaptive our medium enterprise business lines are very nicely with their medium enterprise business and I think we’ll be able to take their product into our existing installed base medium enterprise accounts and sell into other accounts together.

The big benefit though is frankly taking their great product and moving it into the large enterprise market and our 2200 large enterprise customers. That I think we all agree is the biggest opportunity.

Is there Chano, do you want to add anything?.

No, I think you’re right. We had a great financials basically quarter also in the medium enterprise, we commented on the customer growth of 60% year-on-year that was tremendously strong and particularly in that part of the market.

We’re very excited about with Adaptive expanding the capabilities we have particularly around financial planning and sales operation planning where we have not been playing that much before is being more work force planning. So I think that would be a great offering and we are coordinating on the lining in that mid-market.

So we see extended having - and has opportunity there besides the one with large enterprise here in the U.S. and particularly in the rest of the world where the Adaptive coverage is also shorter than basically the footprint we have as a channel there..

Super, helpful. Thank you so much..

The next question comes from the line of Mr. Kash Rangan from Merrill Lynch. You may ask your question..

Hi, congratulations on showing the strong sequential billings acceleration, I think you guided to that and you delivered. I’m also curious to get your thoughts on how to think about backlog growth rate.

Certainly, we’re seeing more seasonality on the backlog sales, sequentially it did grow but it has grown a little bit faster, so I’m just wondering if the business is becoming more seasonal therefore or the weight of backlog performance, is it going to be really shifted towards the second half? And maybe a quick followup, Aneel how do you expect the Adaptive acquisition to catalyze the sales cycles of financials customers and potential prospects and how they are likely to close on the broader geo [ph] opportunity not just the planning aspect? Thank you so much..

So Kash on the backlog we are seeing multiple dynamics there including the seasonality that you’ve talked about, we also had very difficult comps in first half of last year, so that impacted the backlog revenue growth and we saw some headwinds in Q2 from both duration and FX. As the renewal cycles also can move around that will impact as well.

So on a quarter-to-quarter basis, it could vary a little, but we do expect that on the longer term it’s going to be a good indicator of our growth long-term..

On the second question Kash, there is no question that we believe planning will accelerate some of the core financial business as well.

But I think the most important piece is that much like Workday, Adaptive is very focused on customer success and if they are able to get in the door and win even just the planning business, we will get a shot at the HR business and the finance business down the road.

So it just gets us in the door and once we get to the door, we are confident that we will prove ourselves from a customer success perspective and it’s one of the reasons we were so drawn to Adaptive. They have the same exact focus on employees and the same exact focus on customer success and I think it’s just going to dramatically open up the market.

So you go visit a customer they are not ready to swap out their core accounting system, but they are ready to take on a planning system. Well that’s fine. We will get in the door and when they are ready to switch to core accounting, we will be the best positioned both from a product integration perspective and a relationship perspective..

Wonderful, thank you so much. All the best..

The next question comes from the line of Mr. Brent Bracelin from KeyBanc Capital. Sir, you may ask your question..

Great, thanks for taking the question here. I guess Robynne, I wanted to follow up on subscription backlog kind of growth metrics. If I look at our analysis over last year, it looked like you doubled the number of Fortune 50 customers in year ago.

I guess my systemic question is, when do those compares start to ease, is that really kind of the April quarter of next year, just trying to understand if you think about the growth metrics on subscription backlog has decelerated I get the tough compares, it sounds like there is FX as well.

But when are we through the bulk of the tough compares there?.

Yes, so if you take out the very large deals, we’re through the bulk of the tough compares right now. So it was really the first half of last year where we had really strong reacceleration of net new ACV and so we do expect net new ACV growth acceleration in the back half of this year as the comps get a little more favorable for us.

I think the wildcard here is that large deals of Fortune 500 and the Fortune deals and when those come to market which can make the results lumpy, certainly when they do come to market we really like our odds to win them and we’ve got great competitive win rates in that space as Aneel talked about, but they are a little hard to predict in terms of timing..

Great, and then Aneel one for you here as we think about eight Fortune 500 wins this quarter, one Fortune 500 cloud financial win, what is the pipeline activity, we continue to hear more around ERP refresh cycles and modernization projects, how is the pipeline on cloud financials in the Fortune 500 look for the second half?.

Chano?.

Well, we have a solid pipeline growth for both financials on our international business in the second half. From a mix perspective really the financials continues to grow as a percentage of the mix, although clearly we have given sustained growth in ACA and the mix shift is moving slowly.

But there are some large deals there in the second half, it’s always difficult to predict exactly the timing if those deals are going to happening in Q4 as we have expectations for during Q3 and Q4 or a couple of them may slip one or two quarters right given the timing basically of those discussions.

But we had good coverage and healthy pipeline for that financials opportunity in the second half..

Very helpful, that is all I had. Thanks..

Our next question comes from the line of Mr. Alex Zukin from Piper Jaffray. Sir, you may ask your question..

Hi guys, thanks for taking my question and congrats.

Yes maybe just a bigger picture question in terms of the Fortune 500 HCM deals that you expect this year versus next year versus last year not just for you but for the industry as a whole and maybe with the positive economic backdrop and budget cycles, are you seeing in any way an acceleration of that cycle this year and again how should we think about that, the proportion of that activity over the course of this year and next year?.

It’s a good question, I’m not sure we see an acceleration of activity. I definitely think we’re through the early adopter segment of companies moving to the cloud.

I would hope that we have a shot at getting to 50% of the Fortune 500 and we’re within distance of that over the next couple of years, if you look at the number that we’re signing every quarter.

I think actually the bigger phenomenon is that these Fortune 500 accounts once they are live are coming back and taking on more modules and we have shared this at past user conferences, we will share it again, but for that first dollar spend on core HR, it can be $2 or $3 more in terms of add-on products whether it’s payroll or learning or recruiting time now planning.

There are so many areas that once we get that customer into production, it’s so important that we get them into production they come back and buy more. That is probably the biggest phenomenon we have seen as these big companies have gone live there are customer base sellbacks as much stronger than it was maybe two or three years ago..

Yes, that is helpful. And then Aneel maybe just another follow up on Adaptive, you mentioned in your prepared remarks that Adaptive will become your planning cloud solution.

I’m curious can you maybe drill down into what exactly you mean about are you going to rewrite their product on your platform or are you going to standardize on their platform to preserve that power of one, and maybe just drill in a little bit deeper on that and also how long do you kind of expect this process to take before you can really start making the meaningful sales?.

Well, I think we’ve make meaningful sales immediately just selling it. It was a thriving business before Workday and I hope hopefully we can have it do even better. So there are a couple of things into making it our platform. Number one, Workday had its own planning product, Workday Planning that was primarily focused on Workforce Planning.

Our original take was that we will continue to build workforce planning and Adaptive would focus on financial and operational planning. As we dug into it and understood the real breadth and power of the Adaptive platform, they are not that far away from Workforce planning.

Today it made sense just to say let’s put all of our eggs in that one planning basket. So we will be over time sun setting the Workday workforce planning product and moving all those customers to the Adaptive planning platform.

In terms of the integration, I will get into trouble with the development team, but I will put a range 12 to 18 months to completely have it unified, but you will see it in steps.

The first step will be very tight integration and making sure that the data models are in sync over time user experience and security and I think within 12 to 18 months, you will not be able to tell the difference that one product was built separately. The beauty of it is, is that it’s not a transactional application.

Planning is really built around a modeling engine. Workday did not have a modeling engine in its platform. So that is additive and now we’re just making sure that the data models, the metadata models, the security model, the user interface are all harmonized and that’s something that we have had good experience with in the past..

Great, thank you, guys..

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

Thanks very much.

Aneel, I was wondering if you could just talk about adoption of the Financial Management product by vertical? I know your strategy in the financial management world is a lot more sort of industry focused, so I was just wondering if you could just comment on the industries, you are seeing good adoption or maybe the ones that are sort of either ahead or a little bit behind what you are thinking maybe at the start of this fiscal year? Thanks..

We do have a much more industry focused approach to financials, number one because the financial products themselves require more industry capabilities than the HR products do. HR is pretty homogenous across different industries. With financials we started out with E&G, Education and Government, we continue to do very well in that space.

Many of the largest universities use Workday Financials as well as Workday HR. That was followed on by healthcare and we continue to land some of the largest healthcare transformations as they move their financials into the cloud.

Technology continues to be a strong area for us largely now on the back of 606 and people having to go through the painful change of their RevRec and within Workday that is already built in and easy to use. And then other business services, Professional Services, those have all been good areas for us. Financial services has been strong in pockets.

Insurance has been one of our most I guess strongest markets of moving financials to the cloud. Wall Street Banks have been slower, so if I were to say where I would hope we'd see more traction, it would be in Wall Street Banks.

Wall Street Banks were also later on the HR side due to the heavy regulation and just the amount of work we have to produce for regulators. So I suspect that in the next year or two, you'll start seeing the big investment banks coming to market with financials for the cloud. I don’t know Chano, if I missed any..

I think you covered it pretty greatly.

What I would say is when you look at the pipeline particularly on our core financials verticals, they have been there for longer Education & Government and Healthcare, you see that kind of 70% of the deals are kind of ERP deals kind of hovering - having both ACA and financials on the industry component as part of the mix of the pipeline and clearly our win ratios are stronger into the verticals that Aneel mentioned and those services and people focused than outside of our core verticals..

Great, thanks very much..

Our next question comes from the line of Ross MacMillan from RBC Capital Markets. You may ask your question..

Well, thanks so much and my congrats as well. May be two for Robynne. Robynne just the commentary on the tough comps, I think from the HCMs late last year are you exclusively saying that we should look for the backlog growth to reaccelerate in the second half? That's question one.

And then question two FX, you mentioned this, but I don’t - you said several million, but I just wondered, are we getting to a point now where the international non-U.S.

dollar denominated business is getting significantly now such that we should start to think about constant currency versus reported growth, and I wondered if there was any more color on that as you think about the back half. Thanks..

Yes, sure Ross. With regard to the backlog growth and the tough comps, so I wouldn’t expect backlog growth re-acceleration because it’s such a large number $5.5 billion and so the backlog has reached the large numbers there where it would be really hard to reaccelerate growth.

So we do expect to see a reacceleration of our net new ACV growth, but that likely won’t lead to a reacceleration of backlog growth. We do though expect the seasonal pattern to backlog growth to still hold going forward, so relatively flat Q2 to Q3 and then our more significant uptick in Q4.

We still are watching the backlog numbers, still a fairly recent metric for us now that our peers have started to adopt 606 and report this number we're still beginning to evaluate the patterns and think about how we want to look at that and talk about it going forward.

With regard to your second question on FX, the FX doesn’t always impact us as much as some of our peers because we are functional U.S. dollar currency and most of our entities out of which we sell which means once we contract, enter into a contract then the FX rate gets locked once it's billed and then we actually hedge it going forward.

So the real FX impact is on new deals during the quarter and the year whereby we may have gone into the year with an assumption of British Pound deal translating into certain amount of USD and that may fluctuate over time. So not as big of an impact for us as some of the other companies out there but still something we are keeping an eye on..

Great, thanks for the clarification..

Our next question comes from the line of Mr. Brian Schwartz from Oppenheimer. Sir, you may ask your question..

Yes, hi thanks for taking my question this afternoon. Aneel, I wanted to ask you how you are thinking about capitalizing on the opportunity and operational planning? The reason I ask is that if I recall Adaptive Insights I think about 20% of the users are actually business users and are using it for operational planning.

I think you mentioned Adaptive has a modern sales planning product that they just came to market. You are also talking little bit more about ERP here on the call. So I just want to ask you how you're thinking about investing in capitalizing on the operational planning, positioning that Adaptive Insights already has in the market today? Thanks..

It was definitely one of the parts of their strategy that was very attractive to us. That was not the Workday planning strategy. Before Adaptive, we were pretty narrowly focused on financial planning and workforce planning.

Adaptive had several years ago embarked on sales planning as sales and operational planning as its next push after financial planning. We are only going to accelerate that with more development resources for them and after that they’re going to focus on Workforce planning, so that we can retire our product and who knows after that.

There's lots of different directions, it is a really powerful planning platform built around very powerful modeling engine and with their new versions they are able to scale to largest companies in the world. So maybe manufacturing is not and raw materials and part is not something that happened to the next two to three years.

But there is no reason it couldn’t be part of the Adaptive platform long term..

Our next question comes from the line of Mr. Scott Berg from Needham. Sir, you may ask your question..

Hi everyone, congrats on a good question as well. I guess one quick one for you and a quick followup for Robynne. For you Aneel, you had mentioned that Target went live already and knowing when that contract was roughly signed. It seems like your implementation cycles have actually become faster in HR.

But can you talk about maybe impacts that you’ve seen with getting better and improving those process and how it might be speeding up maybe your sales cycles and customers willingness to dive into something like financials..

I’m not sure they have gotten faster. They are definitely more predictable and we've seen Fortune 500, even Fortune 50 companies go live in 12 or 13 months and Target had a great team in place. They really focused on the implementation and got it done in a very quick time.

We have seen that in the past with companies like Bank of America, with AstraZeneca. It can be done in that I’d say 11 to 13-month timeframe is best-in-class for a Fortune 50 type company. I would say that what’s making it more predictable are the tools that we’re delivering for the implementation side.

We've had an ongoing development effort to streamline the inputting of data to streamline the process configuration where many of the functions are now automated. We actually did these things for the medium enterprise to bring down the services cost. But we’re now able to leverage some of these tools in large enterprise as well.

So it’s definitely a big area for focus. We've got some of our best people working on it based in Dublin to just make implementations faster and simpler..

Got it, very helpful and then the followup for Robynne. Robynne, you specifically called out improved renewals, I think you said record high renewals.

I guess the question is, was that on a gross basis or a net basis, if the gross basis maybe what is driving the improved renewals, I don’t know if you can point to anything, if on a net basis what are customers buying more say maybe a year ago?.

Yes, so we have been reporting fairly consistently that on a dollar value basis, we have been over 100% right and last quarter was really just a very stellar quarter for renewals. And I'm going to turn over to Chano to comment here in just a minute.

But we actually have an increased focus on renewals and trying to sell more into that base and make sure that we’re maximizing the renewals and that was an organizational shift that Chano affected at the beginning of this year.

Do you want to comment on that Chano?.

Yes, so our customer base is basically increasing. We make a change in the go to market as some of you have noticed which is putting more focus in terms of our customers for our cross selling and up selling efforts and that seems to be paying off.

We look at basically at the pure data from the first half of this year and clearly we’re just double down the efforts with engagement on those customers making sure that we plan ahead of those renewal cycles properly. So if anything they come as expected or better than expected.

That thing has happened particularly in Q2, we are highlighting positively. On top of that clearly we take those opportunities for an increase basically adoption of new products or [indiscernible] use and has come also on board very nicely within Q2.

But to answer your question with more door to door [ph] compared to the initial contract in terms of performance..

Helpful, thank you..

We will take our final question from Mr. Pat Walravens from JMP Securities. Mr. Ravens, you may ask your question..

Great, thank you and I will add my congratulations.

I mean as you have geared a little bit, Aneel if you look at the $40 billion CRM market, under what circumstances would it make sense for Workday to offer sales marketing or customer support solutions?.

You know, I have said this really since we started the company. Marc Benioff and Salesforce have been great partners and they have chosen not to enter our space and we’ve chosen not to enter their space largely because the partnership we have together I think benefits both companies. If that were ever to change then we might reconsider it.

But I don’t see it changing and they continue to be one of our best partners and it’s nice having partners where you're not competing, it just changes the relationship. So I don’t see that as one of our future growth areas. There are so many other things for us to do.

When I look at the world right now 90% of our business comes out of HCM, financials is growing at a nice clip, Prism Analytics relatively new growing at a very nice clip, planning relatively new and then of course the Workday Cloud platform coming to market and is slowly coming to market it is already in limited general availability.

But we can already see a lot of demand for that. So we've got enough irons in the fire so to speak that will keep us busy for the next several years without even considering a different category..

Even Aneel you mentioned that HCM only represents 25% of our total addressable market. I mean when you look at the international markets we are in so early stages with that extends over there the opportunity when they are still super significant besides all the other areas and products we just mentioned.

So we have no, we see no problem in terms of shortage of market opportunity right now that we need to execute on..

Great, thank you..

We now conclude this call. Thank you for joining us today. Have a great day. You may now disconnect..