Welcome to Workday's Third Quarter 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 conference. With that, I will hand it over to Mike Haase.

Welcome to Workday's third quarter fiscal 2016 earnings conference call. On the call, we have Aneel Bhusri, our CEO; and Mark Peek, our CFO. Following their prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Statements made on this call include forward-looking statements, such as those with the words will, believe, expect, anticipate, and similar phrases that denote future expectation or intent 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-Q, for information on risks and uncertainties 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. These non-GAAP financial measures, which are used as measures of Workday's performance, should be considered in addition to, not as a substitute for, or in isolation from, GAAP results. Our non-GAAP measures exclude the effect on our GAAP results of share-based compensation, employer payroll tax-related items on employee stock transactions, amortization of acquisition-related intangible assets, and debt discount and issuance costs associated with our convertible notes. 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. Also, the Customers page of our website includes a list of selected customers and is updated monthly. The webcast replay of this call will be available for the next 45 days on our company website under the Investor Relations link. Our fourth quarter quiet period begins at the close of business January 15th, 2016. Unless otherwise stated, all financial comparison in this call will be to our results for that comparable period of our fiscal 2015. With that, let me hand it over to Aneel.

Thank you, Mike. I'm excited to share some great news this afternoon, beginning with very positive momentum with our Workday Financial Management applications. In the third quarter, we welcomed insurance and professional services giant Aon as our largest Workday Financial Management customer to-date. The addition of Financial Management complements its existing Workday HCM and payroll applications. I'm also pleased to welcome St. Luke's Health Systems to our Financials community. Aon and Saint Luke's join our growing customer list of Financial Management customers that already includes Fortune 500 names such as Unum, Netflix, and J.B. Hunt, as well as large universities such as University of Texas at Austin and Yale. And 90 customers are already live with our Financial systems to-date. Q3 was also our best quarter in company history for Financial Management from an ACV perspective. As compared to the prior quarter, Q2 ACV growth for Financial Management applications was up well over 100%. As our customer community for Workday Financial Management grows, so does our suite of applications. Our budgeting planning and forecasting application, Workday Planning, remains on track for general availability in calendar year 2016. In September, we announced general availability of Workday Inventory. In the last quarter, we also announced continued investments in global capabilities for Financial Management, including the addition of new language translations for French and Spanish, as well as new country-specific configurations, including the U.S., Canada, U.K., Ireland, Netherlands, Australia, and New Zealand. Demand for our industry-leading Human Capital Management application suite also remains very strong. I'm excited to share that Workday was selected by FedEx, which is now our largest HCM customer. I'm also proud to share that General Mills and Denny's both selected Workday in Q3. In the last quarter, we announced plans to deliver Workday Learning, a new application intended to offer a more personalized meaningful learning experience, organizations to evolve and encourage career development at every stage of the employee life cycle. Workday Learning is being developed out of our Dublin, Ireland office and is expected to be GA in the second half of calendar year 2016. We also announced availability of Workday Student Admissions for our higher education customers. In September, we hosted Workday Rising, our ninth Annual Customer Conference. Thanks to those of you who joined our Financial Analyst Day. Each year at Workday Rising, we announce results of our annual customer satisfaction survey. For the past three years, we have earned a 97% customer satisfaction rating and this year that number increased to 98%. We believe this level of customer satisfaction is far unmatched in ERP software and I'd like to thank the extremely talented Workday team as always for their unwavering focused on delivering unparalleled levels of customer service. Congratulations to the entire team on an exceptional quarter. With that, I'll pass it over to Mark.

Thanks, Aneel, and good afternoon, everyone. Another quarter of record revenues, billings and cash flow metrics was driven by strong momentum in financials and accelerating win rates over legacy incumbents. Increasingly, new Workday accounts are discovering that the approach of do nothing is not a viable strategy in competitive markets for talent and customer engagement. Operationally, we continue to execute well. Over 70% of our customers are live in production and our customer satisfaction rate improved to 98%. We're also finding increasing demand among mid-sized companies for our fast-to-deploy professional service offerings, which get customers in production faster with core functionality. We're generating increasingly strong cash flow, have a strong balance sheet, and continue to build backlog. This strength allows us to continue to invest aggressively in both product depth and breadth and also in expanding our market presence. This quarter, we had a small non-GAAP operating profit, but we do not see this as an important milestone, and in fact, we do not expect it to reoccur until the second half of next year at the earliest. We have significantly more opportunity in front of us than behind us and we'll continue to invest in maximizing our opportunity for the foreseeable future. We're pleased with our third quarter accomplishments and want to thank our employees, our partners, and our customers. I'll now walk you through the financial details. Total revenues for the third quarter were $305 million, an increase of 42% from a year ago. The vast majority of our revenues today are in U.S. dollars, so there is minimal impact from exchange rates. Subscription revenues for our cloud applications were $243 million, up 48% from last year. The weighted average duration of new contracts signed in our third quarter was about four years, driven by large accounts with…

[Operator Instructions] Your first question is from Brent Thill with UBS.

Thanks, good afternoon. Great to see the nice win in the Financial side. Maybe Aneel, if you can talk a little bit more about the pace of go-live in the pipeline of some of the larger transactions of financials would be helpful.

Sure, pace of go-lives we're now up over 90 customers so well more than half of the financial customers are live on the system and we've got companies like Netflix that have been live for several years now. The implementations don't look that different from the HR implementations. They are beginning to ramp-up with our partners and so that's a great sign as partners begin to do more of the financial implementations that allows us to scale faster. In terms of the pipeline, I mentioned last quarter that the pipeline had doubled and as a result we saw a double in ACV in Q3. The pipeline in Q4 looks very strong and there are several more Fortune 500 companies in that pipeline.

Okay. And for Mark just on the build-out of some of these larger transactions that are stretching their billing out versus taking it up front. Can you just talk through that dynamic that you're seeing, is that a continuation of what happened in the last quarter?

Yeah, Brent, it's more of what we talked about from a guidance perspective is that we had expected that we would offer more flexibility particularly on the early period of a contract and the impact of that is that it not only defers the billing but it defers the revenue recognition. And so we made some color on the call with respect to the impact on rev rec. For example, in the fourth quarter, the impact on subscription guidance is three points from what we have executed in the second and third quarter and what we expect in the fourth quarter.

Okay, just to be clear, so there are some investor questions around, is that happening because of a unique customer issue or is there something competitively that's calling for that that that's coming into play?

I think it's more some of these very, very large customers that we're signing, the projects are unique and in any new push with a product line and the way we're pushing financials we are going to be more flexible there than where we have been with HR, which is much more mainstream at this point.

And then also as we looked at our go to market and our contract execution, we take feedback from our customers and one of the points of emphasis that's come back in contract negotiations has been requiring the first year plus up front on billings and so we're just looking also to streamline execution.

Great. Thank you.

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

Excellent. Thank you for taking the question, guys. I was just hoping to ask - maybe dig in a little bit into the competitive environment and just get some color on your statements about improving win rates against some of the incumbents. Anything in particular that's sort of driving that in terms of sales process or is it just product functionality of that you're getting better against the competition?

I would just echo what Mark had said. Q3 was very strong against all of the main competitors we have. It was just a strong quarter across-the-board. In terms of competitive dynamics, I think we've gotten back to focusing on the technology differentiation. We've really pushed customers to do their homework and prospects to do their homework on reference ability. Neither of our main legacy customers really have much in the way of large referenceable customers and as the customers do their homework, we tend to win the deal, so I'm not sure if we lost sight of it a few quarters ago but I think we've gotten down to some of the basics, Phil Wilmington has made some positive changes and they seem to be paying off very well.

Excellent. And then just a clarification just to bolster my understanding on the impacts from billing lesser percentage of ACV. Is there some -- at some point does that catch up to itself [indiscernible] you’re pushing out a billings period but at some point you're going to be billing. So at some point is there a catch up period of where what's today a headwind at some point becomes a tail wind because you kind of stabilize the amount of ACV that you're billing and sort of what was pushed out starts to catch up and if so when would that occur?

It absolutely does. It doesn't change the total contract value. It just changes the period in which we recognize and the way the accounting works is that we recognize the lesser of the amount of cash we collect in a year or the ACV, and so in contracts for example, in which we collect everything upfront and we still have a few of those we recognize that straight line over the contract period. In contracts in which we're collecting less cash upfront, let's say we collect 50% of ACV in year one, we're limited to recognizing 50% of ACV in year one so once we've passed that period and get to the second billing we then straight line it after that second or third billing period whenever -- so it does catch up and it's reflected in the backlog statistics that we're seeing.

Got it. So should that benefit subscription revenues in FY 2017 or is there still going to be a declining percentage of ACV bill so sort of the tide gets pushed further out?

We think it will normalize in 2018.

Okay.

And of course, depending on growth rates but it won't be in 2017 and in fact, we think that it will have up to five points of [gross] [ph] impact on fiscal 2017 on subscription.

So it becomes a benefit in FY 2018 then?

And beyond, yes.

Excellent. Okay. Thank you very much guys.

Your next question is from Mark Murphy with JP Morgan.

Yes, thank you. Congratulations on the strong billings results. Aneel, I believe in the past you have mentioned one of the potential drivers of your opportunity set being the cycle of the legacy deployments at PeopleSoft and SAP that either become fully depreciated or just outdated or perhaps are being sunsetted from a support perspective. And so I'm just curious what you're observing there in terms of the vintaging of those replacement opportunities?

Yes, no, it continues to be the largest driver of our opportunity set. I'd say the exciting piece is that that same driver we saw in HR is now beginning to manifest itself in finance and since these finance systems have not moved to the cloud over the last five years they are just five years older than when the HR systems began to move. So what we are finding is finance systems that are outdated on really old versions of the legacy platforms and really looking for a different way to run their business. And so the idea of a financial system with built-in analytics, with much better user experience and now being able to cover the legacy footprint in terms of functionality has really lead to the pipeline continuing to grow in a very positive way.

Thank you. And as a quick follow-up for Mark, I just want to clarify in terms of the percentage of ACV build. Does that actually come in a bit better than you had expected, for some reason I had thought there was a chance that that could dip a bit below 100% in Q3 and I think you said it came in right at 100%?

Yes, in the aggregate, we had a few customers that elected to pay everything up front. We also had a customer that took advantage of financing program that we have in plus and so we got that billing up front as well and so in the aggregate, the billings came in a little better than we had anticipated for the quarter. So the impact of billings is more reflected in the revenue recognition of subscription revenue than it is in billings for this quarter and for the guide that you got for Q4.

Understood, okay. Thank you very much.

Your next question is from Justin Furby with William Blair & Company.

Yes, thanks. Mark just a clarification. So if the billings came in better than you thought from a duration is the headwind you're referring to in Q4 a function of the Q2 being less up front or is it a function of your expectation for the fourth quarter billings being less up front? Or what drives that several point headwind to subscription revenue in Q4 if the terms were better than you thought for this quarter? And then I've got one follow-up.

Yes, Justin. We are not able to recognize revenue on the aggregate results. We have to do them on a contract by contract basis. And so in the aggregate although we were in excess of 100%, we had a number of contracts that we closed that were less than 100% so we have to recognize that revenue on a slower basis than ratably over the entire life of the contract and then we catch up in future years.

Got it. That makes sense.

Our standard term is still to collect at least a year up front. It's only in a handful of unique situations where that's not the case.

Got it. That makes sense. And then Aneel, on financials, when you look out to next year is there any way to give some sort of framework but what it could represent in terms of new ACV? I know it's still a very small piece of the business but when you look at new ACV next year could it 15, 20, 30% of new bookings or what kind of framework do you think about? And then how long are we from parity from a new bookings perspective between financials and HR?

You know that's still -- in terms of parity, that’s still a ways away just because the HR engine -- more because the HR engine just continues to grow at a very nice clip. But I would say without having finished the modeling for fiscal year 2017 we're expecting quite a bit from finance and a big part of it is not just that the product is ready. Next year our enterprise reps will be carrying both HR and financial so the coverage and the number of people selling financials grows pretty dramatically and that's a real big boost. That comes from the confidence that the financial products are ready for primetime and the results in Q3 prove that out. We’ll give more color as we get closer to fiscal year 2017, but we're counting on financials to grow substantially faster than the rest of the company.

Got it, thank you.

Your next question is from Raimo Lenschow with Barclays.

Thanks for taking my question and congrats on a great quarter. Two questions if I may. First of all, if you think about these big financial deals that you just announced and one was really good news, how do you think about the implementation times for that?

So the plan for Aon is they are going to do it in phases and the first phase will be in early 2017 and follow on from there, so a big chunk will be 14 to 15 month timeframe and that's typical for large HR project as well so it's about the same.

Okay. Perfect. Yes, makes sense, and then the other things what's the feedback from the -- you talked about less -- professional services because DSIs are getting ready and it’s kind of jumping on. What's been your feedback on the financial part? Is that too early for them to build already capacity or how do you think about the opportunity there?

No, right now, we do about half of the projects in financials so that at least was the case a quarter ago. That number will trend down. The big SIs are ramping up pretty rapidly as are the boutiques around financials so we have definitely begun to shift some of the work to them and you can talk to them but they are pretty excited about our financials product line. Aon is actually not just a new customer for financials, they are also a partner and they are going to be investing. They are going to use this project as a way to train up some skills and invest in the financials implementation capabilities as well.

Okay, interesting. Perfect, thank you. Well done.

Your next question is from Walter Pritchard with Citigroup.

Hi, thanks. Aneel, I wonder if you could talk about just on the competitive side, I mean you have some really nice wins in the quarter. Do you feel like you've reached a peak in terms of the competitive noise out there in the market and I'm just curious competitively what sort of tactics or moves you saw during Q3?

There were no new moves I think they are running out of new ideas. I didn't see any moves. And I think it's really important to recognize that when we win a company like FedEx, it's a phenomenal company and a phenomenal brand that's the equivalent of 20 or 30 other size companies. We're winning all of the large accounts and at the end of the day the models are all based on -- all the pricing models are based on employee counts, so we just continue to win both in the mid-market with our mid-market strategy but the large accounts we just dominate and the reason is because we have proof points of getting these large companies into production, one after another. We have another big Fortune 100 company that just went live which we’ll announce in a couple weeks. And it's not, I think really important, it's not just about selling these new accounts. It's about getting value and getting into production and we have that down and our competitors just don't.

Great. And then Mark just for you on so many adjustments here I think people’s heads are spinning in terms of trying to hone in on what you are actually -- growth rates really look like. When you I guess when we step back and look at it, it seems like the backlog and the bookings were pretty good kind of gives us a good understanding of what you're growing. Have you thought about giving that number and your pure sales force gives us that number every quarter and helps us kind of understand just what's really being signed and it cuts at a noise. Any thoughts on giving that on a more frequent basis that’s off balance sheet piece?

Yes. We have thought about it and we -- this quarter, I'd forecasted I believe will be ahead of last year or at least at parity to last year from a growth rate perspective on backlog. I'm hesitant to give backlog quarter-to-quarter. We're in a business that is a long cycle sales business and when we sell to a customer, they adopt across their enterprise as opposed to just in small pieces of the business and so I'm just hesitant, I'm hesitant to give backlog every quarter because it can be a much lumpier result.

Okay, understood.

Your next question is from Heather Bellini with Goldman Sachs.

Great, thank you very much. I just had two quick questions. I guess one would be it does seem like the financials in the quarter obviously was a large customer is very nice to see and people have been waiting for that. I was just wondering if you could give us a sense based on your comments about the salespeople carrying both quotas in your upcoming fiscal year. Is there kind of a goal that you could give us of kind of the non-education or non-profits, a target goal that you're kind of galvanizing the sales force around in terms of customer signings for financials in that category for next year that maybe you could share with us? And then I guess the other one would just be related to you mentioned that they are going to be carrying both quotas for next year. How do you think about the sales cycles so we can think about how the pace of the ramp now that they are carrying both quotas might start to flow through?

Well, we are not carrying both quotas they are carrying both products.

Right. That's what I meant, both products, sorry.

So that's a little different. The key with our sales model is built on world class pre sales expertise. We have amazing people in the pre-sales organization. So our sales people basically look to see where there's an opportunity. It doesn't have to be a platform deal where it's HR and financials together. If there's an HR deal up front, they’ll take down the HR deal. If finance is up front they’ll take down the finance deal. It just gives us a lot of flexibility to have one point of contact with the large account and serve their needs in whatever project that's most timely. We've seen that phenomenon play out in spades in the medium enterprise business where we have done quite well with the platform deals and we expect quite a few platform deals next year. I don't think we're at a stage yet to give any predictions into numbers of customers or ACV like we’ve talked about earlier. I just would say it's significant with the capital S.

Thank you.

Your next question is from Brian Schwartz with Oppenheimer & Company.

Yes, hi. Thank you for taking my question here this afternoon. Aneel, just had a question on the financials product capabilities. We did some work at Rising last month. We spoke to a couple of your largest and very satisfied HCM customers and based on their opinion, they didn't think the financials product was ready yet to handle the complexity of say a mega bank or a very large global supply chain which in a lot of ways is very consistent with the messaging from the company. And the question I wanted to ask you is when does the product road map tell you the functionality and the financials product will be ready for the entire Fortune 500? Thank you.

Well, I think as you know, if you've been following Workday, we're very focused on the service industries and we're specifically not going after supply chain companies and manufactures because they have requirements around inventory and ERP for finance that we are not planning on building. As it relates to the markets we go after in technology and healthcare and financial services, higher Ed, we can scale to the largest companies needs and on the planet so if you look at financial services, Aon is a Fortune 500 Company. UNIM is a Fortune 500 Company in financial services and JB Hunt is a Fortune 500 Company in transportation, UT Austin and Yale are as big as they come in terms of universities and then lastly, CHE Trinity a big health care 80,000 person healthcare organizations running financials. So for the industries we're targeting which pretty much everything except manufacturing and supply chain oriented companies which is only about 20% of the market that we're ignoring at this point, we're a pretty good fit across-the-board.

Thank you.

Operator, we are going to take one more question please, thanks.

Your final question comes from the line of Ross MacMillan with RBC.

Thanks so much and apologies for the background noise. I just had a question for Mark Peek. So when you provided the first sort of view on the impact to subscription billings or billings overall and subscription revenues from the flexibility on payment terms, I think we were talking about four points in the second half of fiscal 2016 and four points in the first half of 2017 and therefore, two points overall in each year. If I heard you correctly we're talking about five points or up to five points next year and I'm just curious, do you think you've now with that number sort of set a line in the sand so that it would be unlikely that it would be a bigger headwind than that five percentage point impact? Thanks.

Yes, at our Analyst Day at Rising we talked about a two and four point impact on four points on the second half of this current fiscal year. We didn't talk about 2017. I think five points -- it's up to five points and it's really the tradeoff of larger complex entities in which we're making these, the payment terms a bit more flexible with a little longer time to production. And as I said before, it's also a tradeoff on discounting and so we're not going to both discount and provide easier more flexible payment terms and so we're looking at the business as a whole in the long term economics.

That's great. Thank you.

Okay. Thank you very much.