Q3 2020 Earnings Call
Welcome to workdays third quarter fiscal year 2020 earnings call.
At this time, all participants Arnie listen only mode. We will conduct a question and answer session towards the end of the call to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
And with that I'll hand, it over to Justin Furby Senior director of Investor Relations. Please go ahead Sir.
Welcome to workdays third quarter fiscal 20 earnings conference call.
On the call we have Aneel bhusri, our CEO Robin Cisco or co president and CFO , Chano Fernandez or co President and Tom Bogan, Our executive Vice President of the business planning unit.
Following anyone Robbins prepared remarks, we'll take questions. Our press release was issued after close of market and its 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. The documents, we file with the Securities and Exchange Commission, including her most recent quarterly report on Form 10-Q .
For information on risks uncertainties assumptions that may cause actual results to differ materially from those set forth in such statements.
In addition, during today's call will discuss non-GAAP financial measures, which we believe are useful supplemental measures of workdays 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 web site.
A 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 January 15, 2020, unless otherwise stated all financial comparisons in this call will be to our results for the comparable period of our fiscal 2019 with that let me hand, it over to Aneel.
Thank you Justin good afternoon, everyone and thank you for joining our third quarter earnings call.
As we highlighted in a rising user conference in October we are firmly established as a leader in cloud H.M. applications and increasingly strengthening our leadership position in the broader cloud finance management market.
We're very proud of the company, we've dealt with now over 3000 customers globally.
Were 70% of which are alive in in production.
These customers have deployed workday to help transform both the way they engage their employees and operate their business. We're excited by the success stories as was the thousands of other companies we have the opportunity to help along the transformation journeys.
With that let's quickly review, our third quarter results.
Starting with H.C.M., we continue to gain market share with an industry, leading true cloud platform, which we believe has the deepest part capabilities and unparalleled user experience in the highest levels of customer success. In Q3, we added six more fortune 500 customers and 11 in the global 2000.
A few of the new HCM customers include.
Hazard Busch Inbev Magna International Royal Bank of Canada, Sutter Health.
The notable go lives in the quarter included Glencore National Edgy, Dow Chemical company and Telstra Corporation.
Turning to Workday financial management, we saw continued momentum for our suite of applications in Q3, with new customers, including consumer direct care you have changed the state of Iowa, and WPP Group USA.
We also had a natural and organics grocery store chain with over 85000 employees at financial management to its existing use of HCM.
We now have approximately 800 total financial management customers, which include noble go lives in Q3 of Rivera at American family insurance.
In addition to core financial management adoptive insights business plan in cloud and Workday prison analytics continued to be a strong upselling add ons to our core applications in Q3 alone.
After been sites added approximately 200, new planning first customers and approximately 50, new platform and upsell deals to new and existing work that customers.
The momentum in customer success was best captured at our annual user conference Workday rising.
Between our U.S. conference in Orlando in October and our European Conference in Milan last month, we walk up more than 15000 attendees, including more than 9700 customer participants representing 20 250 organizations.
Workday rising once again revealed our annual customer satisfaction rating, which was 97%.
We're very proud of our customer success.
Conference they haven't workday as they embark on their digital transformations for finance and HR globally.
Innovation has always been up before fund at Workday and it continues to be a key to our success as I highlighted at rising spend management as one of the areas, where we're putting more focus on investment.
We have decided work their procurement and worked inventories as part of our single system to streamline to procure to pay process and improve operational efficiency driving down costs, while enhancing supplier collaboration and engagement.
We expect to accelerate a reference in this area. The proposed acquisition of Scout RFP, leading cloud based platform procedure sourcing and supply or engagement.
Netscout, which has been to work they've ventures portfolio companies since 2018 workday provide organizations a comprehensive source to pay solution with best in class strategic sourcing to help transform the procurement organization and deliver better business outcomes, including reductions spend.
Their policy compliance and maximized engagement across key stakeholders.
We're also thrilled to welcome scouts employees, who share our passion for customer service and fun to work there.
We look forward to expanding our efforts in this area and we'll share more information after deal closes, which we expect to occur in our fourth quarter.
As we continue to focus on long term growth. There are few leadership changes I'd like to highlight first the appointment of rich sour as our new executive Vice President General Counsel and corporate Secretary.
Which brings with him over 20 years of experience at Microsoft and we're excited to have him on board.
I'm also pleased to show that we had 11 seller has taken on her new role as our Chief marketing Officer, and executive Vice President of corporate strategy. When is the tenure workday veteran and one of our strongest sports is of our products values envision.
Moving forward will ensure a corporate strategy is in lockstep with our go to market strategy.
And I'm also excited to share the appointment I believe it heavily into the role of our first chief customer officer overseeing the newly created customer experience organization, we're bringing together professional services education services customer success and customer support under one leader to continue our relentless focus on the customer and the drive new innovations that will deliver even.
More value to our existing and future customer base.
We were in great position heading into Q4, and we look to finish the year strong.
Now over to you Robyn.
Thanks, Aneel and good afternoon, everyone on today's call I'll provide highlights of our third quarter results update our guidance for the fourth quarter, and then provide a preliminary and high level view of fiscal 21.
We delivered another solid quarter in Q3 with total revenue of 938 million, reflecting year over year growth of 26%.
Our subscription revenue was 799 million at 28% and professional services revenue came in at 140 million up 18%.
Revenue outside the U.S. increased 38% year over year to 234 million, representing 25% of total revenue.
Subscription revenue backlog was 7.19 billion at the end of the third quarter growth of 22% year over year.
Backlog growth was driven by solid results across net new bookings add on business and net retention, which was once again over 100%.
Subscription revenue backlog that will be recognized within the next 24 months also grew 22% to 4.91 billion.
Current unearned revenue was 1.8 billion in Q3 at 23% year over year, well total unearned revenue grew 20% to 1.8 billion.
As a reminder, you adaptive insights acquisition closed in the comparison period, a year ago, adding 140 million to the subscription backlog 90 million of which was recorded on the balance sheet as unearned revenue.
This onetime benefit created a very tough comp for Q3 for both backlog and unearned revenue.
Our non-GAAP operating income for the third quarter was 143 million, resulting in a non-GAAP operating margin of 15.2%.
Margin over achievement was driven by a combination of topline overperformance and favorable expense variance.
Strong sales execution, and a significant improvement and linearity within the quarter resulted in our strong topline beat.
Additionally, we saw some marketing spend and hiring originally anticipated in Q3 move into the fourth quarter.
Operating cash flow in Q3 was 258 million more than double our operating cash flow from Q3, F. White Knight team.
We continue to invest in our people and then attracting top talent to work day.
During Q3, we successfully added an integrated over 400 net new employees, bringing our total workforce at the ended the quarter to more than 11800.
We are focused on maintaining operational efficiencies that will allow us to drive long term enduring growth.
Q3 was a solid quarter that positions us well as we head into our seasonally strongest and most important quarter of here.
Before providing updated guidance I want to briefly touch on the Scout IRF P. acquisition, which we expect to close later this quarter.
We're excited about the opportunity we see ahead in the broader spend management category I believe scouts best of breed technology will accelerate our positioning in the market.
It is important to note however that scouts revenue base, it's still relatively small and when combined with the timing of the transaction and the required purchase accounting adjustments. It has a negligible impact on our fourth quarter revenue outlook.
With that I'll now turn to guidance.
Our focus remains centered on investing to support our long term growth opportunity.
Based on our Overperformance in Q3, but keeping in mind, we face another very difficult comparison in the fourth quarter.
We are providing guidance as follows.
For subscription revenue, we're raising our f. right 20 estimate to be in the range of 3.85 billion to 3.87 billion or 29% growth.
We expect our Q4 subscription revenue to be 828 million to 830 million representing 23% growth.
We are raising our professional services revenue guidance to 529 million for fiscal 20, as we continue to focus on driving the highest levels of customer success.
For Q4, we expect professional services revenue of 134 million.
We now expect F. White 20, non-GAAP operating margin of approximately 13% up from our prior guidance of 12.3%.
This guidance incorporates estimated expenses related to the pending scout RFP acquisition.
The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 27 percentage points in Q4 and for the full year.
We still expect subscription revenue backlog growth in the low twentys and the fourth quarter and there's no change to our flight 20 operating cash flow guidance of 790 million.
We have slightly lowered our f. for 20 capital expense forecast for both owned real estate and all other capital expenditures driven largely by the push out of certain projects into F. why 21.
We now expect the F. why 20 capital outlay for owned real estate projects to be 110 million and our outlay for all other capital expenditures to be 250 million.
Well, we're early in our every 21 planning cycle and still have an important Q4 to close we'd like to provide a preliminary and high level view of F. White 21.
As a reminder, and as we discussed in detail at our recent analyst day, we have a lot of new products coming to market enough for 21, including Workday cloud platform people analytics and our employee experience solution.
Given the timing of these launches and the time it takes a new product impacts subscription revenue growth at our scale. These emerging products wont start to have any notable impact on our revenue growth until fiscal 22 and beyond.
In addition, well we're very excited by the pending Scott RFP acquisition and the long term opportunity that we see ahead of us in the spend management category Skout is expected to contribute less than 1% to our subscription revenue growth in F. White 21.
With that context, we're currently planning for F. Why 21 subscription revenue of approximately 3.73 billion.
Cost of approximately 21% year over year.
We continue to expect pronounced and compounding seasonality towards Q4, with our Q1 being the seasonally slowest in terms of net new bookings.
We currently expect subscription revenue in Q1 of F., why 21 to grow approximately 4% sequentially from Q4, F. White 20.
We remain focused on investing to drive long term durable growth well progressing towards our 25% plus non-GAAP operating margin goal.
Well, we are still in RF for 21 planning process early view of F. White 21, non-GAAP operating margin is approximately 14%.
Which includes roughly one half points of expected dilution from the Scout RFP acquisition.
Said another way without the Scout acquisition, we would've expected a non-GAAP operating margin of approximately 15.5%.
I'll close by thanking our amazing customers partners and employees for their continued support and hard work, which allowed us to delivered great results in the third quarter and have set us up for a strong finish to the year.
With that I'll turn it over to the operator to begin Q anyway.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q you May press star too if you like to remove your question from the Q for participants.
Using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys, one moment. Please a while we poll for questions.
Your first question comes from a line of Mark Murphy with JP Morgan. Please proceed with your question.
Yes, Thank you very much and congrats on the results and meal I'm curious if you're seeing any material difference in the volume of 80 M. projects that are presenting themselves. If you were to look within the fortune 500, or the global 2000 odd today versus say 12 or 18 months ago.
So whether there or whether there's a natural cycle there they kind of ebbs and flows over time and then also looking way out into the future is zero timeframe, where do you think that that volume would converge in financials I, perhaps five to 10 years down the road.
So as you know I think our growth on the pipeline I'll ask a child underway in the second free trial has actually been fairly steady over the last not just 12 18 months, but last three or four years. This was another strong quarter in terms of fortune 500 wins unfortunate 2000 wins.
As we get too as we begin to close in over 50% of the Fortune 500 running working we're all that path to get there. We do look at the broader fortune 2000 marketplace for HR and we look at and we looked at more of the international opportunities in front of us.
Still a lot of healthy growth in front of us.
For finance and I'll, just bucket everything else because in many ways. The rest finance planning now now procurement and.
Oh and prism are really about the office of of the CFO .
Business continues to grow at a rate north of 50% as we shared with you. It's 20% of the business and I think that is durable growth from that business for many years to come I would hope in five years that.
But that business is on par within five years up businesses on par or bigger than the HR business. It just takes time and and I would I would point you to the transition.
That sales force went through you know there are there a six years old than US you know one of our.
Best partners. They went from being a sales sales company to a sales and services company to a sales and service and marketing company, adding platform now they've got to analytics, we're going to that same journey and growth rates kind of ebb and flow was a different pillars take off so I'm very optimistic on what we continue to see as Ah.
Student growth and HR, but but healthy growth rates in the in the office of the CFO .
However, you want to add channel market and head out to be feel idea Datapoint said. These skew fee. We close seeks fortune 500 say HCM finance our customers, how you're going was for.
To give you another data point, the pipeline going to fortune 500, or large customers more than fortune 500, Dr. HCM customers for the next 12 months, he's saying, but generally stronger than it was 12 months ago. That's that's another data point so.
No direct correlation that a you know some of those pending passed the merit hydrants 75.
EBIT or take a fortune 500 customers are aristide coming to market I just noticed exactly basically do you know directory linear every single quarter outcome.
Thank you very much.
Your next question comes from the line of Kirk maternity with Evercore ISI. Please proceed with your question.
Oh, yes, thanks, very much I was wondering you've heard us follow up on China was comment around around the pipeline and just sort of what's in the expectations I guess why I really this is a preliminary got for 21, but is there anything I guess do you expect that the financials demand will remain kind of the way we've seen it all of them or is there opportunities for.
That said just sort of pick up I'm, just trying to get a sense on I guess, you know what's embedded in that number, especially around the sort of the the financials business because I think we understand the HR businesses, where that's trying to assess thanks.
So we've got a you know we've got another quarter to get through but I think as we think about fiscal year 21 cautiously optimistic that all the pieces are coming into place planning and by the way I should mention were actually are hosting the meeting from adaptive.
After its headquarters in Palo Alto today, which is a which was a nice thing at a fun thing.
The planning and analytics and now with a with procurement.
All the pieces are coming together to I think drive a really exciting story and so nothing else I don't I don't expect the momentum to slow down maybe there was a chance it picks up you know time will tell.
Good question to ask what's in the quarter.
Okay, maybe like just as a quick follow up on that on that point, then no coming away from the from rising it seem that the combination obviously, having analytics and planning and financials together, you'll makes that entire decision more strategic first for Cfos and I was wondering if you just add some color aneel on whether or not that actually is what what you're seeing in your conversations means.
Thank you, it's getting beyond just sort of moving your financial system to the cloud is becoming much more of a strategic imperatives and is that kind of why you feel you know still very confident about where this is going thanks.
Absolutely I would say.
Before before planting analytics really took off for workday, we had a very competitive.
To answer offering and I think two things where I play one.
The CFO market in general wasn't ready to move into the cloud and number two just having a next generation.
Accounting platform or financial platform.
Was was necessary, but insufficient.
The the areas of planning and analytics, that's really what drives CFO decisions today, but they all we also realized that they do need to modernize their.
Accounting system from a you know from a from a financial transformation perspective, so all of a sudden now it is not just hey, we have to modernize it from a technology platform perspective, but look at all the benefits we get from a from a planning perspective from an l. logs perspective, and yes, even from a core accounting perspective, what we can do in terms of machine learning what we can do.
In terms of.
Tagging. So that you can create richer analytics all those come to play the stores just much stronger going into this year than it does it ever husband and I think that the last piece that was that that has come up more and more recently has been the Ah you know the area procurement and the off and that the chief procurement officer and with our.
No the pending acquisition of Scout, we fill in that one whole, where we can be you know best in class than that and that pillar, which is increasingly important too.
Thus the office and finance.
Thank you.
Your next question comes from mine of Kosh Rangan with Bank of America Merrill Lynch. Please proceed with your question.
Hi, Thank you very much I mean, it looks like the trends in the quarter. We're certainly very encouraging linear to improve your backlog growth was a pretty solid.
And the market certainly.
Seems to be wide open for financial and whatnot. So I'm just curious what are the factors that could cause you to take up and even more positive.
View of the company's a growth expectation in fiscal 21 say certain things happened in Q4 that materialize what could cause you to a ticket and even more positive U.S. bothered about bid and secondly, as a company becomes Multiproduct company. How is the go to market just trying to hear the company like a change. Thank you so much.
I'll take the I'll take the first part now Scott Shaw are weighing on the second part.
You know what welcome what could we see Q4 and going into next year I I'd see I'd say.
And increasingly.
An increasing percentage of fortune 500 accounts coming to market for financials. We we've after waiting for a long time, there now coming out of steady pace.
What we saw an HR there was a period of time word accelerated if that happened with finance then then I could see us.
And I can see us.
The more up optimistic when I look at our win rates, they're very high when I look at the pipeline growth, it's very healthy.
The ones that moved the needle so unpredictable our other large fortune 500 transactions and if those started coming in and bigger numbers.
That would improve our our Ah you know are opting for upside. So do you want to add shadow.
Go to market and any other comments on that.
Cash and I won't go to market I think we highlighted beat us our financial analysts date, I think you should expect kind of three big focus one around.
More to the degree to bear to got four close in the coming years I've said go why couldn't Teeny you did did robotic spine. She will not do opportunities. We highlight do they have with only a wrong. We live in for same penetration wanted to go back to follow same.
On December one on an increased focus on now were sitting through back to the customer base, especially with up world. There are portfolio solutions that we have today.
If I could add one more piece of in a potential upside.
And when we acquired adoptive you know little over a year ago, we're very focused on financial planning, but as they move into workforce planning sales planning operational planning, there's upside there in terms of providing a broader planning footprint, which you know we frankly, it hadn't really thought about a year ago.
Thank you so much.
Your next question comes from a line of Brian Schwartz with Oppenheimer. Please proceed with your question.
Yeah. One question just on predominant them one on the macro in regards to prism can you provide an update at all in terms of the cadence that the business is starting to experience a new use cases says around prism and I'll, let acts and then maybe any feedback you can share with thoughts in terms of the groper growth rate or maybe the.
Shape that overall size of the business today and then the macro question I wanted to give you any all just kind of when you're thinking about the puts and takes a of all of next year's guidance that that robin guided to in the commentary do you think that the overall environment are you expecting the environment to be stronger.
To be weaker or were similar to what the business experience. This year. Thanks.
[laughter]. So that's that's a lot of questions [laughter] <unk> on the first one.
You know prism started out as a very powerful.
Analytic platform that came pre populated with effectively the workday data model in <unk> and the work they data and then we'd bring in other types of data and customers would right.
Queries and analytics against that what we saw were a series of trends that pointed us in terms of building out use cases on the first one was people analytics and people analytics is being received are extraordinarily well by our customers. They view us as Oh, Hey, that's a great platform in terms of prism, Alex but you are in applications.
I'm going to give us some applications capability and with people that makes analytics. We delivered on that you can expect the same overtime on financial analytics spend analytics.
Additional additional pre packed instead of analytics that are that are being informed by watching our customers and working with our customers you see what use cases they deliver.
Robin do you want to comment on gross I'm presuming that was another probably question then I'll come back to the macro yeah, we're still seeing healthy growth on prism. The numbers are still fairly small relative to your core fans and the H.C.M. So it's not hugely moving the needle on our growth that we expect that with the high growth rates in prison middle kick start contributing more and more.
The overall growth next year.
On your on your Ah.
Macro question just looking at each other here I think what kind of expecting it to be the way it is.
Yes, there is doing it for a period of time, there's just been uncertainty in the area. It's it's hard to say, it's gonna get worse are gonna get better.
It's it's not.
It's not a.
It's not easy to predict we have the election next year, but I think when we look at what we see in the pipeline even with the uncertainty our ability to close business Q3 was a really important data point.
We had we had some some concerns there might be some slowdown, but we had really good quarter and the business that we wanted to close closed. So I go into Q4 optimistic and into next year I would say next year cautiously optimistic that it's going to be.
The same.
And I think I think that's probably I think the world just getting immune to uncertainty and and.
And you know people are just going about their business as as if that's it.
It's going to continue into right direction and and ignore the headlines in the press that would generally get a scared five or six years ago.
Thank you for answering all those questions. Thank you.
Your next question comes from a line of Mark Moerdler with Bernstein Research. Please proceed with your question.
Thank you and congratulations on the quarter also I'm can you give us some more color on the types of companies that are selecting workday financials at this point the markets with a single country versus global financial and financial implementations and how that is changing and also a quick follow up.
Can you give us a sense of how the backend technology integration of adaptive is going thanks.
So John will take the first one on and then maybe Tom Tom Bogan can take on the second part.
On the company's selecting find on shelves are mostly global companies. They mainly on the sector, where more focus on windows, Our financial services healthcare professional ambitiousness everybody sees some old errors.
Clearly see you asked them on Western Europe , or most bunch in turn so if.
Financials cloud customer side of the ones would you see more debt predominantly but I would say is mainly we thought we said go about focus we're seeing I don't I would say, 80% all the deals that we do our basically without global footprint, taking advantage as well if I were localization Sunday strength of the solution as a whole.
Yeah on the technology integration, we're making very good progress at the time of the acquisition, we indicated that it would be a journey a that would take us roughly 24 months to complete Oh, the full integration. Our design focus is to have an experience where customers have a seamless experience.
There there were starting inside the core workday applications or were there starting inside the planning experience Oh, we have a design group of a set of customers who worked very closely with us or helping to guide our development efforts in initiatives are we still have some work to do but we're really pleased with the progress thus far.
Excellent. Thanks.
Your next question comes from line of Ari Tour, John men with Cleveland Research Company. Please proceed with your question.
Yes can you guys hear me.
Yes, we can.
Great. Thanks for taking the call and great do that I've heard me here exiting the quarter.
Can you talk a little bit more about the strategy with professional services into that like 21.
Should we expect a change in.
The mix of the business contribution overtime there. Thank you.
No I I think our strategy has been the same for the last four or five years. Once the large integrators embraced work day, a week, we tended to take it back seat to to them running the projects that's.
You know the accentures the the KPMG Pwc use the Lloyds I'd be m.. So the world a light for the World. We have those are probably the big six Oh, I'm, sorry, but I missed in trouble no.
This is a big six.
They have become very good partners over the period of time and so our professional services is very focused on a being the product experts that that basically supplement those large firms on ER on although on the large scale projects and a handful of cases, there will be a customer that just wants to deal with one vendor and work they will do.
Two.
I'll do the prime work on the implementation side as well, but that is not that it's not our course Roger of course strategy is to leverage the great partnerships. We have a there's just a there's just a huge demand for workday skills right now and in particular as as financials and planning in prison I've taken off we've had to we've had to supplement the market.
As they're ramping up their skills in those areas, but but no change to strategy or to model.
Got it.
Thank you.
Your next question comes from mine of Scott Berg with Needham and company. Please proceed with your question.
Hi, everyone. Thanks for taking my questions and I jumped on late so I apologize if my two questions been asked but first of all free there any alert or channel with the US Scout acquisition can you help us understand maybe it's just a product that helps you maybe change the trajectory or the adoption of financials ultimately.
Or is this just another way to get up footprint like a adaptive was within these customers to when they're ready to make these Ah you know the changes to cloud based ERP that you're at a time position to potentially when that business.
Oh, so I I think actually adapter was slightly differently than that I think in some cases adaptive is there before us and a lot of other cases adaptive lives. The reason why we were chosen for the broader financial footprint.
As as the office of the CFO or the opposite finance has really turned their attention to moving into the cloud it's become clear that part of the way they see the financial solution definitely improve includes best in class experiment.
And that's why we've seen companies like Cooper continue to do very well have a lot of respect for them. So for us in order to I think it does two things it creates a new revenue opportunity and down the road it could even be a standalone revenue opportunity first spend management, but in the short term it makes our financial products that much more competitive.
And there's new revenue specifically for the for the Scout product that we believe it's a it's an amazing product in an amazing team and now we get to leverage our sales force and our customer base to see how much more Scott we can sell so I think there's multiple dimensions to it.
One of which is included increasing our competitiveness in core financials, but to also adding some new revenue opportunity for us.
[noise] very helpful. Thank you and then a follow up perspective.
Robin you've made a couple of at least for workday larger acquisitions over the last 18 months between adaptive and it's got now going forward, but as you look at these acquisitions is you know I guess help us get us done some maybe what the gross margin or operating margin contribution of these acquired assets is longer time will they be dilutive.
She is a core workday.
Financial profile or is there a way that maybe there are additive in terms of raising your margin profile longer term. Thank you. Yeah. So I think longer term there definitely additive because we can operate at a larger scale and so you know get better economies of scale as we run the larger combined entity that we are in a shorter term abhi.
See their dilutive adaptive was dilutive scout will be dilutive as I discussed next year I, but the goal if it they would actually be additive to our margins longer term.
I would just said there was nothing in their gross margin profiles that are without different from workday, it's much more about where they were on their stage of stage of growth.
And then we can we'd have the ability to leverage our sales channel, but from a gross margin perspective that was not on it not impactful that's correct.
Your next question comes from line of Keith Weiss with Morgan Stanley . Please proceed with your question.
Excellent. Thank you guys for taking the question I wanted to drill down a little bit into the progress you guys are making instead of improving and expand into capability do up selling into existing customer base, particularly around ATM or just looking for an update on kind of in house.
How that's progressing a number one and number two for for Robin I'm really sort of nice upside on margins. This quarter. It sounds like a decent part of it was from sort of the pull forward of what sort of the push out of marketing expenses just wanted to sort of double check is to make sure is there any kind of fundamental change in how you guys are thinking about.
The the margin profile in sort of the speed with which you get to that 25% or is this just really sort of timing impacts in terms of above of margins.
Yeah. So I'll start with the margin question I'm really no change in how we think about margin expansion going forward. We certainly expect to continue to March towards the 25% goal that we've set forth.
This is really about a couple of things this quarter, one the topline overperformance, which was driven largely by better linearity frankly in month, one than we have seen in over five years. The company. So we certainly don't expect that that's going to keep repeating itself, but it was a big win for US This quarter and then that push out of expenses like I said into Q.
For really is just a timing issue I said, we will continue to get margin expansion and see a efficiency gains across all areas of the organization going forward, including R&D.
Excellent.
Your next question comes some from the line of Mark Massaro Marson with Baird. Please proceed with your question.
Good afternoon. Thanks for taking my question I was wondering are Neil regards to the financials type one and it sounds like you know it's growing steadily Oh I'm wondering what do you think you.
What would need to occur in order for the trajectory the slope of the growth.
In terms of about pipeline to really increase what sort of feedback would we need to get from existing clients.
In order to get an even higher level of interest.
That's the first part of the question and then the second part of the question is you made a comment with regards to maybe within five years financials could get to the same level of revenue was HCM would not require a smoke changer or how are you thinking about that.
<unk>.
Well in the second part just say when we're talking about financials I am talking about the broader bought a broader officers of finance.
Oh solution. So that doesn't include analytics and that doesn't include planning and and I'm presuming. That's the way that's the way we think about it internally not just the core accounting products.
You know, which it is that full suite is really what is is a enticing. These cfos to move their plants applications into the cloud I mean are moving all of those collectively into the cloud.
In you know in terms of what would change the slope I mean, I think we see the pipeline is being very very healthy and I'd come back to what I'd said earlier it would be.
A growing percentage of the deals coming from Fortune 500 accounts and that's the that's what propelled workday on the H.C.M. side, when we really went through.
For the hyper growth era was when before it's a 500 market almost in mass decided to go to the cloud.
That's it's it's happening now, but it's not happening at the pace that we saw an HR that the market came at once so that would be one thing I don't know in China, you want to add anything else.
Well, we shared them on a couple if I were financed yet I know these days is what would be as note. The care between 80 seeing adoption on financials adult children until we know core fine and she also Virginia Ledger was very soon we got to differentiate that H.T. aim was it is started more would dodge customers undefined I was just so they'll be only starting it started more with media enterprise customer.
Well, we're seeing more lately, maybe because of the maturity of this solution as much a review of the market I'm confident seen through that these brings a a good to value proposition to the office with the CFO . He just some more large customers started starting to move right. We mentioned today customer say WPP ordering HCM customers 80000 grows every customer.
That just became general ledger customer as well for us on San Jose last ones right. So we we are expecting from wouldn't get biplanes, reflecting that due to lead pieces moving care right. What we're seeing us where when we evaluate that were obviously chase setting value in terms of customers say in financials.
He said daddy's, increasing nicely through presenting of course larger customers adopting financials and that's what we see represent a little bit biplane. During <unk>. We we know we remain committed to be variance quarter per quarter.
And I done with one area that we're not necessarily counting on for for growth, but we're seeing signs of interest and excitement is the state and local market, we've experienced great traction of our financial products and HR products in higher education.
The state and local market has been much slower for both areas and with.
The state of Iowa, turning to our products for financial management that is a nice data point.
It was the states are a huge market it was a hugely.
Successful market for us at Peoplesoft, and we've been waiting for that market's.
To to start moving to the cloud and hopefully that a couple of data points would have suggested that might be happy and that's not something where we're really planning on right now.
Great to hear thank you.
Ladies and gentlemen, we have time for two more questions. The first question comes from one of city kind of brought he with Mizuho.
Oh, Thanks for taking my question I, just want to do a little bit into it international market or could you give us some color or the progress on the Internet I'm, sorry, I'm a channel you talked about 40% fell seven growth outside North America. So just wondering in your this does 21.
Great and what are your engine some back into their growth outside of North America.
Yeah. It seemed that was more rabin, providing basically they did the growth of the international market dried we're pretty pleased with the opportunity deemed the rest of the world. We're pretty pleased how those markets are growing I mean, I don't want to set up proxy for every single quarter, but at least usually twice the they've speed that.
Which we're seeing good old thing I wouldn't North America markets, which is natural due to the lower penetration there that we commented on that you live in Pursing. The global 2000 companies in those market. We had great performance contributions during Q3 places like Dan That's your money out yes, we said lying in places.
Like Canada, some good girls insanity continental markets in Europe , So were pretty pleased how international lease he's basically performing these days.
We need a couple of leadership changes that they were require on westmark were much more because I did for the potential non day opportunity on girls that we also see will be presenting on the pipeline going forward.
Thank you.
We will take our final question from a Brad Reback with Stifel. Please proceed with your question.
Great. Thanks, very much [noise] Robin if I look at the 20% organic <unk> guide for fiscal 21, it would seem to imply a mid teens [noise].
H.C.M. growth rate, so I'm trying to figure out how much of that natural D cell in the business versus conservatism. Thank you.
Yeah. So you know a couple of things there as I talked about during analyst day right our exit rate for the ATM growth is 20%.
That certainly will fluctuate throughout next year given the large deal activity. That's that's in the old talked about perhaps that's one thing also yeah. We have a really big Q4 ahead of us to close and that Q4 business will have an impact on next year. So it's still very early days. So we look forward to you're getting back to you with an update on next year.
Our next earnings call.
Perfect. Thank you very much.
Ladies and gentlemen that concludes workdays Q3 earnings call. Thank you for joining us today.
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