Q3 2021 Workday Inc Earnings Call
Welcome to work on third quarter fiscal year 2021 earnings conference call at this time.
All participants are in a listen only mode. We will conduct a question and answer session towards the on other calls and.
With that I would now hand, it over to Mr., Justin Furby, Vice President of Investor Relations. Please go ahead Sir.
Thank you operator, welcome and Workday and Warner <unk>.
21 already on gold.
On the call we have a Neal Bush free and Chano Fernandez, our co Ceos.
Robin Cisco, our president and CFO.
But again, our vice chairman and.
Each line, our executive Vice President of product development.
Following prepared remarks, we will take questions on.
Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast.
Before we get started we want to emphasize that some of our statements on this call, particularly our guidance are based on the information we have as of today and include forward looking statements regarding our financial results applications customer demand operations and other matters.
These statements are subject to risks uncertainties and assumptions, including those related to the impacts of the ongoing COVID-19 and debt on our business and global economic conditions.
Please refer to the press release and the risk factors and documents, we filed with the Securities and Exchange Commission, including our most recent quarterly report on form 10-Q for additional information on risks uncertainties and assumptions that may cause actual results to differ materially from those set forth and such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of workdays performance.
These non-GAAP measures and 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 and.
And reconciliations with comparable GAAP results and our earnings press release and on the Investor Relations page on 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 include the lift and lots of customers and is updated monthly.
Our fourth quarter quiet period begins on January 16th 2021.
Unless otherwise stated all financial comparisons and this call will be to our results for the comparable period of our fiscal 2020.
Let me hand, it over to and Neil.
Thank you Justin and welcome to Workdays third quarter fiscal 21 earnings conference call.
All of you joining us they are in good health and how your families are doing well we have worked and encouraged by the recent news regarding vaccines coming to market early next year we.
We also know we can't lose sight of the fact that we find ourselves and particularly difficult phase on the spend on it.
On the health and self safety of all people is most important as we navigate these on certain times.
I'm very proud of our team who continue to support our customers. Despite the challenges that persist and remain very optimistic about workday suppose pandemic future.
As we know business leaders are facing a myriad of different challenges right. Now indeed, we are experiencing a health economic and social crisis simultaneously.
There's a lot of uncertainty and the world and it requires conversation and collaboration.
That's why in October we gathered global change makers together with our customer community per virtual that we called conversations for changing world.
We heard inspiring talks and the likes of Sherwin Williams, Reese Witherspoon, David Cameron and Trevor Noah.
And I was personally excited to have my friends and fell she goes and putting a dinner free minimum NASDAQ Chuck Robbins, and Cisco and such and the della Microsoft Joyner event to share their thoughts on leadership and how they are dealing with the challenges on today.
We received excellent feedback on the event from our customers and prospects. Many of you mentioned some important take away.
First we heard the call that business leaders simply cannot opt out at this moment companies have to lean and and be part of the solutions that address the most pressing issues that our society is facing today.
Many other conversations also touched on diversity and inclusion and they grow and commitment to re skilling, the global workforce and workday, we need to continue to be a driving force for the creation of opportunities and this digital economy for everyone not just a few.
And from a technology perspective, there was a common theme underpinning the conversations on event.
View that a must have ingredient for organizations going forward is to have a strong digital foundation and now is the time to accelerate that transition.
With this increased focus on digital acceleration we.
We believe that the flexible foundation and solutions that worked and offer are uniquely suited to the needs of businesses and these times built natively for the cloud and what people at the center of all of our solutions with that view as a backdrop, let's jump into our Q3 results.
I'm pleased to report that workday delivered a solid Q3 as organizations increasingly look to the cloud to drive change for and these dynamic times. Indeed, our customers are using workday solutions to digitally accelerate and move their businesses forward and well also serving as our biggest advocates to new customers, helping others realize the power of workday and navigate.
Their organizations through and the environment.
To that and we had another strong quarter for workday HCM with notable customer additions on the quarter and coating Novartis Draftkings CTO.
C B C Bank, a fortune 500 telecommunications company.
And second all he just ropey, our first notable win and Mexico since entering that market earlier this year.
Also celebrated several notable HCM go lives this quarter, including Walmart, who is now live across its 1.7 million employees globally and.
What we believe is the largest multi tenant worldwide cloud HCM deployments.
Also our strategic partner Accenture went live with Workday HCM and is now serving its more than half a million global employees other.
Other notable Q3 go lives include U P S and general electric.
Turning to Workday financial management, we saw continued momentum across our applications portfolio and I'm pleased to say, we reached 1000 customers that chose and workday per car finance.
Q3 financial management wins include state of Washington University, and Central Florida Fifth third Bank, The New York Times and Extendicare.
Amongst the many core financials go lives and the quarter I'd like to highlight been sick or Mercy health and progressive insurance.
And once again saw solid demand for our expanding suite of products that support the office of the CFO and chief procurement officer, including Workday adaptive planning prism analytics and spend management.
I'm also happy to share that we now have fully integrated the scout RFP and to the Workday organization and have rebranded as workday strategic sourcing.
Just part of our spend management pillar that is being led by Scout co founder and CEO, Alex you could be which.
The team had a record quarter, several big wins and Fortune 500 accounts that included a biopharmaceutical company food distributor and a large grocery store chain with over 100000 employees.
Turning to product we delivered our latest major update on September which include and availability of workday talent marketplace, enabling employers and skilled space talent matching to connect people with relevant work and growth opportunities. We also announced the availability of Workday accounting center and more intelligent planning capabilities, both milestones and are continuing.
Investments for the office of the CFO.
And lastly, with our focus on value inclusion and blogging and equity whereby we announced five central and five index to solutions provide the organizations with critical insights to drive positive change and building a workforce that's as diverse as the world.
In closing I would like to thank our employees customers and partners, who continue to push us forward. Despite these extremely challenging times as I look ahead to the other side of this pandemic.
Optimism for workday ecosystem couldn't be higher.
With that I'll turn it over to my friend and co CEO Chano Fernandez over to your channel.
Thank you and Neil before providing my update I would like to once again, thank our sales umbrella their services and what another solid performance in Q3.
I'm pleased with the continued progress that we have made this year, especially the caustic going on.
I know I will work and they.
Fair enough on our customers' rustic when did you say the due solely per se, but in the meantime, we are focused on building on maturing like line gross in deals and successfully implementing and supporting customers all fully there chwalk way.
For the second quarter in that role, we simple and Berkshire on rates exceed our expectations as Giovanni agents continued to boost for work Weve debt HCM and financials digital transformation, we have several other <unk> E weighted index their water, including multiple robots to sell is seeing.
She and wait a fortune 500 ports beans, when I speak said by.
What accounting standard once again late I mean for example, a notable h. our Phoenix platform wins, you are not ready to pay shell Goberman team that's there.
The meeting went their price also I know that a strong quarter on from a geographic perspective, you list and adopt free yards were standouts.
We have no last few years in Delaware focused go to market push we think our installed base I am very pleased with the success has to do that.
For the fourth quarter, you know roll our installed base being generated 50 per cent flat rolled Neil ACB bookings dream and ice strength across products, including cost being financed and some work force spanning basing on any decrease net earning on workday study.
Source.
We weren't brought actually living Econe center out workday extend on people and any peaks on to be linked to the performance on.
The army, we're excited about their long term prospects.
I work on par it sounds good well first starting in Q4, and we don't expect 50 per cent, that's gross to persist going forward, but we still see significant opportunity to drive meaningful growth somewhat when installed base sales team for many years and GAAP.
As we head into Q4, we remain cautiously optimistic we continued to face near term impacts the net newbies, but you could I mean, starting industries and we have seen a strength in the store base theme.
Partially offset each other and we're encouraged by improvements in our bottom line.
As we prepare for next year, we are increasing the space on hardware sales and marketing investment.
We believe now is the time to do so because we see a meaningful opportunity on the other side of calling on we're investing now just GAAP utilized on and that opportunity.
Yeah, I would turn it over to our president and CFO Robynne sisco over to you and Robby.
Thanks, John and as Neil and China. Both noted we executed well on the third quarter driving strong result, as many companies continue to pursue strategic HR and finance transformation, despite the uncertain environment.
Subscription revenue and the third quarter was 969 million a 21% year over here with the outperformance driven by favorable linearity and strong retention, which remained over 95% on a gross basis and over 100% on a net basis.
Professional services revenue was 137 billion and total revenue was 1.106 billion.
Revenue outside the U.S. was 272 million or 25% of the total.
That's correct and revenue backlog with 8.87 billion at the end other third quarter gross of 23% year over year.
The outperformance was driven by better than expected bookings and strength in our installed base team helped partially offset by net new business headwinds.
In addition backlog benefited from a year over year increase and contract duration, which we do not expect to persist in Q4.
Subscription revenue backlog and it will be recognized within the next 24 months with 5.94 billion growth of 21%.
Our non-GAAP operating income for the third quarter was 268 million, resulting in a non-GAAP operating margin of 24%.
The margin outperformance was driven by a combination of top line Overachievement continue.
And she need covered related operating expense savings and more backend loaded hiring versus expectations.
You free operating cash flow was 294 million gross at 14%.
As a reminder, we continue to work with our current interest customers that require more flexible payment terms.
It remains and near term headwind to cash flow and unearned revenue and it has no impact on our subscription revenue subscription revenue backlog or and long term customer economics.
We exited the third quarter with 2.9 billion of cash and marketable securities and and access to an additional 750 million through our unused revolving line of credit.
Our total workforce at the end of the quarter was approximately 12400 employees.
We expect our hiring to pick up and the fourth quarter and and ask why 22 across all areas, primarily and sales and marketing and R&D as we invest for future growth.
We're extremely pleased with our results and execution and Q3, particularly given the challenging environment and we see significant longer term opportunity ahead to support our gross aspirations.
Now turning to guidance, which despite our outperformance and Q3 continues to incorporate the near term uncertainty we see on the market.
Our updated acquired 20 on guidance is as follows.
We are raising our 421 subscription revenue estimate to be in the range of 3.773 billion to 3.775 billion or 22% gross.
We expect our Q4 subscription revenue to be 991, and 993 million 18% growth.
We continue to expect professional services revenue to be 525 million in fiscal 21, and 121 million in Q4.
For Q4, we expect subscription revenue backlog gross 14% to 16% and we faced a very difficult comparison from a strong Q4 last year.
We estimate Q4, and non-GAAP operating margin to be approximately 15% and we expect to increase our pace of hiring and our marketing and brand investments.
For the full year, we now expect to non-GAAP operating margin of 19%.
The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 26 percentage points and both the fourth quarter and the full year.
Right and why 21 capital investment guidance remains unchanged at 280 million.
We are still and our planning process for its worth 22, and because the near term uncertainty remains higher than normal we plan to provide guidance. After we get through our very important Q4.
He'd been line, however that while we have seen some recent stability and the underlying environment headwinds due to cope and remain particularly to net new bookings.
And given our subscription model these headwinds that have impacted us all year, well be more fully EBITDA and next year subscription revenue weighing on our gross in the near term.
On the margin standpoint. This year, we have demonstrated the long term scalability inherent in our model.
Investing for growth remains priority number one however, and and that's why 22, we expect to increase our pace of hiring across all areas.
Focus on sales marketing and product investments that are specifically targeted and accelerating pipeline growth.
In closing I'm incredibly proud of all our work makes you have remained focused on helping our customers, allowing us to deliver strong results. During these turbulent times.
With that I'll turn it over to the operator to begin the Q and I agree.
Operator.
At this time, we'll be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is the other question Q.
You may price starts to if you would like to move your questions on the queue for participants using speaker equipment and may be necessary feed a pick up your handset before pressing the star key one moment, while we pull for questions.
Our first question comes on the line of Kirk Materne with Evercore ISI you May proceed with your question.
Thanks, very much and congratulations on the quarter and Neil and shot I was kind of curious you guys mentioned sort of the bookings outlook is getting better you feel good about pipeline build you'll have conversations started to get a little bit more.
I'll be just about the long term, meaning you know things are definitely still not normal today, but when people are making investments on your technology, they're making you know decade long investment. So I was just kind of curious about how you feel about the confidence and sort of the pipeline build and maybe versus three months ago and and what do you think needs to happen so that on the net new sales.
And you have that starts to pick up meeting what are people talking to you about like Hey, we just need to know is it another quarter. Another six months just kind of curious what do you think needs to happen you other kind of get back to full guns are blazing on that front. Thanks.
Well so so the you know the first.
First comment I'd make is it really depends on which industry you're talking to.
There are a number of companies that are.
And whether the storm retailers.
Companies and as much as possible there trying to get back to some level of normal even though we know we're in the we're and frankly, probably the worst part of the pandemic. It just seems like we figured out how to work and the pandemic.
And those those conversations are indeed, a very similar to what they were pretty pandemic and people are very focused on digital acceleration and.
And that that future state on the platform side, but then we do have customers, who are we're really being impacted by co bid, whether they're and hospitality or nor transportation and for them. They are still on the sidelines and and I think you know that there will be a there will be a few outliers here and there, but I think.
The the best way to look at it is the world is trying to get back to normal, but there's a couple of sectors that are having a hard time getting back to normal.
Okay.
And then maybe if I could just had one follow on for Oh go ahead, John Im sorry, I was.
Good day would <unk>, one I think.
No I think that's summarized it well I think trial and I've been perspective, we continue to see improvements relative to get started on if I may.
And while it's early we're starting to see South and you where products are having a positive impact so feel good about and what we have in Q4 likely on the maturity of the deciding.
Ah I just wasn't quite classic gross Oh, that's on Yonah, but of course, we remain cautiously optimistic look and that's let up on what's gonna hopping.
And so with the second wave of color on how things are moving forward.
[laughter], if I could add one comment though Kurt.
You know, there's just there's been some.
Other companies and talked about how there it's been slow down on the back office I don't I don't share that point of view I think if you're a legacy provider where most of your revenues coming on the people if anything are saying like I really got to get off those legacy platforms and.
And so so so for us.
There are there are definitely companies and their their product line for us that I think are actually being accelerated by by the pandemic, where people just want to get off even faster than what they were planning on getting off before.
That's helpful and I guess, just one quick follow up for Sean I'll, just around the sales and hiring comments are there any particular product areas and or geographies that you see could you know that there's a big opportunity where it's more of a function of just not having your line.
I'll start sales bandwidth and that's just wondering if any maybe one or two either geography and or your product lines come up I realize you're going expand everywhere, but anything that stands out to you on that front.
[noise], where you're making investments carrying on number of areas. We can so some marketing easements and help out where girls and force.
Around the store base, especially the world markets, including Eyewear and me push in other countries medium and share price some of the vertical markets as well, we're moving forward with finance sales on on day and settles down you would areas like fitted on gold or me. So it's a it's a bit across the board right, but on the go to market perspective on us and we see.
Okay, I say say on my script that now is the time to do so so we kind of stressing on our pipeline for next year and maybe into your after.
And basically copy dice and those investments.
Okay, great. Thank you all.
Our next question comes from the line other Mark Murphy with JP Morgan You May proceed with your question.
Yes, Thank you and I'll add my congrats and Neil just on that last comment you made I'm curious you on a year or two when we look back on the response to the pandemic do you think it will have been larger tailwind for the HCM side and the business because companies.
GAAP to adjusted remote Workforces and all the re skilling or do you see it more on the financial side because of a greater need to.
Compress planning cycles, and you don't close the books remotely and in other words, where do you think the pain has been more acute or is it more on the HR side or more on the finance side.
You know I think it's going on I think it's going to play out differently for different product area. So for HR and.
Everybody is worried about employee engagement and remote workforce is right now and so you know we continue to see.
A very strong Oh continued momentum and HR and finance, we had an excellent quarter showing finance, but.
And I do believe there are some bigger projects that are being.
Held off until post pandemic and so you know that the idea of starting a big project and a fortune 500 company.
We're getting those but probably not as much as I think we'll get post pandemic and I think I think when people come out pandemic, they'll say I want to get rid of every legacy piece of technology I've got on.
Got to move into that.
This world of agile.
Hi, Joel.
Flexible systems that that support all different kinds of work environments, and you know and with our financial system, we were able to close looks remotely I.
I would say the one the one area that continues to be very strong and on the finance on his planning because people are and a lot of pressure to to come up with a new plans on a regular basis I don't know how many times, we've gone through and you planning cycle and some.
And then it started but it's such a fluid.
Housing environment, that's and so.
Putting a lot of pressure on planning and I think that that is driving that need for financials and then another area that we're seeing.
A strong.
Acceptances actually in the and the area of Scout and procurement.
Yes, because I'm trying to get a handle on their supply chains and their cost sharing you know during this environment.
And so but I think core accounting is going to have a pop post pandemic.
Okay, great and Rob and if I can sneak and just a very quick on and with the understanding that you are holding off on the guidance.
Is this this 14% to 16% subscription backlog gross guidance for Q4, I Arithmetically I feel like perhaps if that's a reasonable starting point on and how we maybe could think about subscription revenue gross and.
In fiscal year 22, just given that'd be the glide path and exiting the year and it's a pretty big bookings number right that that kind of waterfalls and to the out year.
I mean is there anything you would say to kinda dissuade us from <unk> at a high level, just thinking about and along those lines.
Oh.
Well, Mark I would say that obviously will be on a better position to talk about and what you might see subscription revenue. After we get through Q4, particularly given how on certain the environment is and the backlog guidance as I mentioned before considers our tough compare from Q4 of last year, where we accelerate and both net new bookings growth and backlog gross and we face.
That tough compare and environment, where we still see net new business and that's right.
Right now we're focused on continuing to execute well for Q4, we really have a better view and that's why 21 on our next earnings call and will show that we then.
Great. Thank you.
Our next question comes on the line of David James on afford you May proceed with your question.
Yeah, Hey, Thanks, guys. So Neil I think you hit on this a little bit last question on right, but the challenge over here and from exacts today is around kind.
And of employee engagement and and preserving culture during the pandemic and look I think a lot of that falls and the suite C suite, but some of it also to the HR. So I'm curious if there are opportunities.
That debt or consideration that kind of influence how you think about your ATM product roadmaps.
As you know work from home or work from anywhere it kind of becomes more permanent.
[music].
Well you know.
I've said this in the past if there are trends that are are you.
Beginning to take hold and before you know and economic downturn in many cases, they tend to get accelerated.
And I'm talking like Tele medicine, being one of those where tele medicine and had been around for a long time.
And then the kits and all this and its exploding.
This idea of a talent marketplace first internal and external is one of those areas for us where if you're in a low higher mode as a company and trying to get worked on you really trying to understand the skills you have amongst employees, what skills and they need to add with rescheduling and and learning and and how can you source.
That work that work that needs to get done from your from your existing employee base and this idea of a talent marketplace and it's definitely gains traction and the <unk>.
Do you have this gig worker project based work I think it's getting traction faster because of.
Because of the environment and I'd throw 'em I'd throw a re skilling into that as well the other the other piece is much is much deeper understanding of trying to get a sense of how employees are feeling about it.
On work environment, we all heard mental health as an issue and and the work force today.
Given the remote work and so within prison and within a day or are people analytics, we can do sentiment analysis and get a sense of.
You know what the polling questions than we do out of her HR system get a sense of how people are doing and I think you will see.
More investment from us and that in a fairly significant weight and employee engagement to really understand how were doing as you know company by company, how we're doing oh or how they're doing a relative relative to engage in there and poised and positive way.
And I found out and one last thing.
It's the big investment, we're making and.
And our and sharing our bide our.
Our vibe work and value value inclusion blogging and equity, creating an index.
Helping companies get a handle on their diversity and how they can be better and.
And that definitely has been accelerated by you know.
On the environment, we live and so quite actually quite a few changes and as a result on this environment.
Yeah, Yeah, no that makes sense and and if I could ask maybe one quick follow up on it for channel anyway to frame kind of what percentage of new customer relationships land outside of core HR today, and maybe how that compares and say two years ago or something on the product portfolio was narrower.
I mean EBITDA, David there is a higher percentage nothing out there today and I strain is anything it's just that are 18 bowls, we seeing net new customers and that's what we see now were installed base customers for some of those and were initially a she and customers are moving more to the financial goal and that is to me.
On wrong core accounting insistence on core finance, just where we announced we had heat housing customers, but I think even most important and as well that many of those are nice on I'm happy and definitely we have no maybe more levers penetrate the on officials to see if all we are planning on for pure me on on those.
Really helping customers and navigate change these stocks and so we've been talking about how anymore finance on that.
And he wouldn't be starting even on what sells customers and we today. So clearly on those products are giving us a bigger h. and and you know they are more lundy dairy and on the office and to see it falls on debt, where before that's going out where our portfolio is installed there on sort of that and Dean Tracy says what on the customers and we know.
And Nick I see systems and.
And do simple things like those and and books and multi and having flexible and on a giant GAAP systems to help and navigate these type assets.
And if you've got an increase on and as we said before on what I see on the pipeline. We remain cautiously optimistic that there's going to be et cetera, and poly on to that strength that we're seeing right now.
Yes, okay, great. Thanks for taking my questions.
Our next question comes from the line and Alex.
And with RBC you May proceed with your question.
Hey, guys. Thanks for taking the question maybe just the first one.
For you and Neal and and Charnaux.
Yes, yes.
Clearly the installed base selling is is inflecting. This year, 50% growth is quite quite an achievement I guess, what where are we in that journey in terms of the as we look to Q4 and be on how much room left is there in terms of installed base monetization and if we think longer term.
From maybe aneel like when does that new HCV headwind start to turn I know you know I'm not asking you to predict the.
Of course, the pandemic, obviously, but just when you is it as easy as when you start Comping you know some of the the total that impact the quarters next year or do you see something changing before then.
Yes, I'll address the product and the product component I hope I hope the idea of.
So on base selling just continues to get stronger and stronger because we're adding more and more skews to the cash.
Portfolio that we can go back to our customers are happy.
They've been made a bet on workday there are more things, we can do for them.
And so you see it and.
Additional skews were bringing to market and most recent one being the.
The total marketplace, but also the workday accounting center, so we're constantly coming what skews.
To to offer to our installed base in terms of the sales motion and and how that works on I'll leave that to channel.
Yeah, but you should think of you shouldn't think of the product line and static you should think other product line is as ever growing because there's still there's a lot of opportunity and HR for new modules and there's tons of opportunity and finds pretty modules.
Yeah, I, probably every week and Neil Alix and hope you're doing well I mean, there are many many new solutions that are that we brought to market lately I mean, even though of course, we've been talking on what they used to be sourcing are you seeing it and products like learning or freezing and and it takes a workforce planning theres still file.
And in turn sell side the penetration on ratios that we see in Londonderry asked like <unk> and clearly favorable to the north south on where morphine and traded products. These day and we're adding new products may help people and it takes on what they can stay and so we had a we had a great opportunity going forward are there in terms of on how do we see on debt net new site.
I mean, clearly fleet you know of course next year and I, especially the H. One we have 70 better calls and he should call and why would he has happened. This year certainly and you know we see that that you know south and help downhole lead going away would help us out, especially on the us flooding the rest of world.
And we'll obviously you know and some of these new products, even to penetrate and new customers and south that basically different levers that we did last day majestically score and child or finance sales I'm definitely less spend on me. If we you know and sounds that these rational or more mostly here or do you touched on day, hopefully we'll have a theater.
And moving up better place actually on the assets, we get into a world with their each day and you know what the outside of it and give us seeing on average they don't know right. So those verticals and we would be opening up and then obviously some of the new markets and we're open.
And excited at all and so.
On we'd be contributing so yes, there are there on a number of levers that would say and you know, especially on the world. That's always sounded all side definitely more and more risky use or some of the new industries or missed the industries and tenants be nearing 10, so that'd be not be much and they and they would be opening again, hopefully going into cost next year.
Makes sense and then maybe just a quick one for per Robyn.
And if you talk about the kind of investing for growth strata.
Strategy, which which makes a lot of sense given all the things and channel just mentioned, but I guess from a.
No we're not guiding but if you look at the margin expansion. This year clearly I don't think anybody's expecting and then close to that net for next year, but it is the guidance or or or the the color that you're providing is it fair to assume kind of a flat margin trajectory.
Dip and margins or worse or just a a much smaller expansion.
Yeah. So you know and you said, Alex investing for growth remains our top priority and we have a lot of opportunities ahead that we're excited about and and you know.
We've been talking about how we're going to pick up the pace of investment and Q4 and through next year, and we and when you think about our 19% and non-GAAP margin guidance for this year and that's almost 600 basis point improvement over half way 20, and under normal circumstances that would take two to three years for us to have that kind of margin expansion, but obviously this is Ben and Barry.
You need here and we still need to get through Q4 and finalize our plans for next year before we have a better view, but certainly you can expect our pace apparent and pick up and wait 22. Some of the current benefits that we saw this year likely to subside, particularly in areas like travel and he bands and given all that and it'd be reasonable to see our margins and.
Yes, you're coming off and this year as well and you can see that investment starting to have an impact when you consider our Q4 margin guidance and then the last thing to keep in mind is that and we increased the pace of investment you'll see an immediate impact on our expense and one of the resulting impact to revenue from those investments are going to take a bit longer.
Understood. Thank you so much and I hope you guys are all staying safe and well.
Our next question comes on the line on March most.
Bernstein Research you May proceed with your question.
Thank you and congratulations on a good quarter and there was a lot of hard work went into it. So two questions. If you don't mind channel with the worldwide locked down continuing how do you think about driving meal deal generation do we need to see a return to travel and conferences to fill the top of the funnel what do you replace the and per.
Person meeting and conferences was it just hiring more bodies and more advertising I mean, how does the business model from a sales point of view changing and then a follow up.
Yeah, I know its a great question I mean, I don't know if.
If I look at the pipeline and again remain cautiously optimistic if we had not on you could keep seeing turns on execution. We had a very good Q3, intentional tightening cash right or kind of again shooting for kind of same dynamics into Q4, especially that focus on and I think on we're putting on were doing these investments.
Not on some marketing that they're not only need more and more feet on the street and Jim based more feet on the street that they're planning on centers and we see opportunity for growth.
Obviously, you Socialist went up around marketing investments.
On Friday, and so on and support to support I think theres about where light line and be my generation and force.
And as I stated your off you're right on.
Yeah, if I can get that strength when I do I think the issue of course, you have net new customers. They are contributing and you have on.
Sales and you brought us and rescue use on some day things total baseball right.
Yes, and you're going to try and that would say that the team has done great progress on this issue.
[laughter] day.
Did that deal has thing and great job on managing their shortly after this point and we go to and I don't know I mean, I clearly if you would ask me to deal with the actions and I would be and she says that in front of customers because I think that definitely standard of what we do but I think we you know we are striving very nicely.
On that.
Instead of the let me on do better and more efficiently and.
So thinking major to be and not be Colby World delight. If you ask me I don't think we're going to able to pull back to see me enables and travel is than other people dance anymore therapy defeat the person that that people have tried that before that SAP and they still that that would be that would be better and we don't want it and multi but but I'm like DHL.
That being.
Has had a good performance on decent borrowing and mark.
Perfect really helpful question, we focus more on deals and often but wanted to ask about the process of driving customers to go like how is the locked down change the complexity or the time it takes to drive customers to a lot of condition.
Yeah, well I I would like to give a big shout out to I mean, my Kevin on the team.
Services, because they das and that's the job. We thought was 190 customers go index this quarter, but I think you know some of those are nitpick on his relative price would seem more mild.
And he is going not just curious what accenture, we silver bite on because I was really on you're seeing would you be assets or GE or you've seen progressive insurance or finance sales on finance just pour finances on going night, even spirit that until it is on the line are accomplished so I see cash that is a testament to the.
And workload.
On the service is still pretty good night fully remotely and we wouldn't be pandemic 80 per saying and take on these assets and then well.
Well were acknowledged on deposit.
We need to complete debt.
I read a taxable income.
Good day performance.
Oh, and so I'm all those on.
And so that's a.
That's a that's a great place to be.
Perfect. Thank you.
Our next question comes from the line of Keith Weiss with Morgan Stanley You May proceed with your question.
Hi, This is Josh bear on for Keith with with all of the conversation around pipeline and I'm building pipeline and and optimism there I'm I guess I'm wondering what's the strength and results how should we think about the current pipeline today versus how it.
How it compared to pretty Cove it.
Well I think it. Thank you Josh for your question and this is Josh speaking if your question is how we or it's already up be called examples there now and to be there, but we have not yet that day.
And called and levels of course, we see that we are getting closer, but I think what you should think Keith it cautiously optimism for on our point of view in terms of what we're seeing on the line generation on lively and creation to help us and they do and will grow.
On the social study and Florida and looking for work on budding obviously, they're easy simple ways by splitting front on five that is creating more near term 74, which we didnt know no debt what is going to be the impact or 100 on these good uptake and basically for all of us. They don't get this right. So I I guess, there you see situation, where we would like to go on.
More upscale intensified.
Hosting and borrow money going have evolving recognizing that we've seen gradually improves me at least for our business as youve heard on your seven stations et cetera, and he ran a much better place right now that.
And I keep marching on.
Great and I'm just curious if you have any insights into and what you're seeing internationally as there's different a different cove and waves and locked down and government and responses in different countries is there any difference and and and buying behavior.
And that you are seeing and different geographic locations. Thanks.
Thank you John No, we still see a big opportunity ahead.
Fox and the rest of the world markets and were 70 optimistic around the opportunity and and you know.
Additionally, we are making and be far off on what invest and instead, we are making right now and make a and b.
Because we you know see contribution on international revenue mix say continues to grow higher and we see continued to grow and higher.
Right.
Clearly there are countries that have been going on something on those down into assets and I can say it intensive than any of these assets and maybe on of course, you know when installed bases and no kids to us.
Noxious each and the U.S. I see where amazing you prepare to us and that's getting into rational I don't think on any did either she'd be still there and he's really driving and some of these findings creation line she's getting on what really excited again on class.
Getting on to the other thing and some of those markets are opening in terms of being a significant gross.
John and pharma.
Well there and next question comes from the line of Karl Keirstead with you be assets. You May proceed with your question I.
Thank you and I've got two for Robynne Robynne. If you don't mind can we go back to the Fourq.
For Q subscription backlog guidance of 14 to 16. So that's that's a seven to nine point a decel from Threeq, you, but it's actually only and one point tougher compare so maybe you could elaborate on the compare comment you made maybe you meant on the the net new ACB front and then also is there any duration compress.
And that might be impacting that for Q number and if not just just generally whether this reflects a demand backdrop that feels just incrementally tougher perhaps than what workday saw in twoq and threeq. Thanks.
Yeah. So the backlog was certainly important forward looking metric is not a precise age and you know it's impacted by things like duration, which and maybe I'll go on to your second question now we did see increased duration and Q3 that we do not expect to repeat and Q4. So that's part of it and the timing of renewals have an impact which can move.
Around and so those are things that just to keep into account when you're looking at our guide we have seen some stability and the firemen over the past couple of quarters, which along with the strong execution has helped drive solid backlog result, assay coronary, but the guidance does not consider the tough compare and when we look at last Q4, we did extend.
There are eight net new bookings and re accelerate the backlog gross and so that's the tough compare that we're facing in an environment that remained very very uncertain and so we've taken on all that into the channel and our guide and obviously.
Able to tell you more next quarter, but you know Q4 is a big quarter for us and we're now focused on executing against that quarter. Okay. That's helpful. Rob and thanks for unpacking that a little bit and then my second question is just on the go lives that to Aneel.
I commented on earlier kind of an amazing go live quarter for workday actually if I caught the mall Walmart Accenture U.P.S.G.E.. That's that's a lot of very large go lives did did any of those are collectively did they trigger any milestones that might have impacted the threeq numbers and anyway. Thank you.
I don't know if they trigger any milestones and trims and.
The number of I leave that to you Rob and.
You know again as channel mentioned, just a very appreciative and proud of Emily and her team and our and I'd say our business partners as well.
Who figure out how to get these large customers live during during this pandemic [noise] and.
And one of those going live in the quarter would be true.
Terrific and for them to go live with it and.
And the same on the same timeframe is really really remarkable per day.
Okay on the services perspective, and and bars I know, they're also very happy.
And maybe I will just add that you know.
And as you know and most of our implementations are run by our partners and don't result, and professional services revenue to workday. So yeah, we do prime about 20% and and while we do have some revenue they can get driven by milestone on fixed fee contract there really wasn't anything to call out and the quarter and terms and big milestones net driving.
Got it okay. Thanks very much.
Our next question comes from the line of Brad Zelnick with Credit Suisse. You May proceed with your question.
Excellent. Thank you so much for taking my questions. Firstly, you mentioned Workday accounting Center, a few times, which we've been hearing about more recently from the field can you help us understand what exactly is it how do you see it impacting your competitive positioning and perhaps what is it replacing and why.
Tony you want to take that went on that one.
Well, if you want to take that might be.
Yeah, Pete you're taking on and then maybe a channel just talked about where where work and PD.
Yes, So accounting center has been really important for us.
And being able to open up certain verticals, especially like the financial services vertical for financials, and and you did hear us earlier talk about how.
It helped us in the fifth third bank win this quarter and a few of the previous on bank wins that we've had in previous quarters. So to answer. Your question. What is it accounting center is a way for our customers to bring and all of their operational data and bring it into workday and ER and secure it then do.
On a counting on it and have that accounting roll up into their GL.
So.
If you were for instance in the insurance industry and you wanted to take a look at something that is happening at the GL level, but you want to go all the way back and drove back to the individual policies and claims for instance, you'd be able to do that right inside of workday.
It's replacing a lot of data management infrastructure that would otherwise have to be managed by the CFO and the CIO and ER and our customers are finding its value having it in a single system and being able to do all the analysis and get their answers right there and for them.
Cool. Thank you very much for that maybe if I could just ask a follow up of channel. Another pipeline question and I appreciate your comments, which sounds very encouraging, but maybe just to dig a little bit deeper as you analyze and scrubbed the pipeline and you look at opportunities that are pushing out versus maybe shrinking and size, but still.
Using versus competitive losses and started to bring those up but if you break if you break it down into various stages and consider things like time to close and forecast accuracy and how that's all changing what are some of the more detailed takeaways that you can share that tell the story of what's actually happening in the field and and the environment right now and ultimately support your confidence.
On this environment and thank you for the question, Brad and this environment and most Viki and it's a fact that we can see kind of push opportunities more than any other thing you know a few quarters ahead and that of course concept because of the uncertainty on environment on basically some cash.
And maybe net new customers and some industries just basically the hottest skied induced fees. There is yes that more uncertainty on on on you know they are more basically balancing out which on the projects and it should be it's not anything you know, which must and lesser on all right. So I would say that the highest seemed like there.
And then share the east is you know since you had social opportunities going five into a few quarters more than one other thing any on that change right and you haven't seen any changes and turn so.
Compared to these and kind of momentum or over there. Thank you for bringing it up.
But that's the one that force you know so.
Depending on these on so.
On the.
So we remain very focused on day sales and if I think GH and therefore, some maturing and we have had great conversion on freight rates and racism debt last quarters Q on Q3, but when we look for war on again.
And just before we got on with respect to enter and so you know how is it different all these uncertain and simple way for people.
Thank you so much for the color and for taking the questions.
It will not be taking two more questions. Please limit yourselves to one question. Thank you. Our next question comes on the line and Brian sales with Jefferies. You May proceed with your question.
Rob and not to dwell on the Q4 back on guide, but I don't think you've ever seen a 800 point de sell on at the mid point. So I think I was just asking.
You know did something happen in Q3, where somebody's deals got pulled into the backlog from Q4 or.
We realized obviously environment, but I think I was just trying to reconcile that tonight.
I think if you haven't seen it and the model and the past.
Yeah. So you know no nothing happened to the backlog and I'm, sorry, I plan on Q4 still looks good and.
Were you we continue to execute well when you look at the combination of duration, which helped us and Q3 and Q2 and I'm very very tough compare and from last year and pre Coa days and all the uncertainty that we're seeing and the law of large numbers and this is just our best view right.
Now on brand and so you know, it's obviously our biggest quarter of the year a lot of uncertainty still out there even though we have seen things stabilize and so we're just focused on execution. This is the best assets that we have so far in terms of our view and the backlog and we're obviously update you next quarter.
Thank you.
Our next question comes from the line and Daniel Jester with Citi. You May proceed with your question.
Great Good afternoon, and thanks for squeezing me in.
Just maybe a bigger picture question on M&A, you scallop has obviously done well adapters and done well overtime now that you've incorporated the businesses. How does that change how you think about inorganic activity, especially given the comments on the call today about sort of ramping investments and into next year. Thanks.
You know I I don't know if that changes our view I think it just gives us confidence that if we find the right.
The right kind of company that is a good fit culturally that is a innovative [noise].
Gross company and that's complementary from and technology perspective, not overlapping that no debt that is something that we now feel very comfortable.
You know Tom Mogens really led that.
That effort and we feel comfortable we can integrate those companies into workday.
But also with the commitment that overtime, we will harmonize and technologies. So we don't we don't become a.
You know on Frankenstein like some of our legacy competitors have become.
It's really important that we can maintain that a that unified view across for applications and so that that's [noise].
And that that's key to driving and so I I think you'll see more from us for sure are coming down the pipe, but I also think they are going to fit the bigger because they're going to put the adaptive and scout models, it's not going to be up and just doing a big acquisition that is overlapping technology wise I debt does not actually slows us down.
Great appreciate the color best of luck and fourth quarter.
Ladies and gentlemen, thank you for your participation on today's conference. This will conclude workday third quarter fiscal year 2021 earnings conference call. Thank you again for joining us.
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