Q2 2023 Workday Inc Earnings Call
So operator.
Welcome to workdays second quarter fiscal 2023 earnings conference call.
On the call, we have Aneel, Bushard and China Fernandez, our co Ceos.
Barbara Larson, our CFO and Pete shrimp, our chief strategy Officer.
Following prepared remarks, we will take questions.
Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast.
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.
<unk> those related to the impact of the ongoing COVID-19, pandemic and recent macroeconomic events on our business and global economic conditions.
Please refer to the press release and the risk factors and documents, we file with the Securities and Exchange Commission, including our 2022 annual report on Form 10-K, and 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 in such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of 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 our Investor presentation and on the Investor Relations page of our website.
The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link.
Additionally, our quarterly Investor presentation will be posted on our Investor Relations website. Following this call.
Also the customers page of our website includes a list of selected customers and is updated monthly.
Our third quarter fiscal 2023 quiet period begins on October 15 2022.
Unless otherwise stated all financial comparisons in this call will be to our results for the comparable period of our fiscal 2022.
With that I'll hand, the call over to Aneel.
Thank you Justin and welcome to Workdays second quarter fiscal 'twenty three earnings conference call.
Pleased to report that workday delivered a strong second quarter, thanks to healthy demand across all product areas and geographies.
We closed on two of the larger deals that had pushed from Q1, which we referenced on last quarter's call.
Our results, which outperformed across our key operating metrics underscore the continued importance of digital transformation for finance and HR.
And even with the uncertainty in this environment, we remain confident in our long term growth prospects because workday continues to serve as a mission critical partner to our customers with a proven track record of success.
Before I turn it over to China, we will share more on our go to market success, and Barbara who will provide specifics on our Q2 financial results and outlook.
I'd like to share some second quarter highlights.
We had another strong quarter for workday, HCM, where the migration to the cloud continues with notable customer additions, including the electro Lux first student group of Dow Korean Air and Raymond James.
And as always customer success remains a key differentiator for workday.
In Q2, we had several HCM go lives, including Cox Enterprises, Southwest Airlines and United Overseas Bank.
Turning to Workday financial management, we saw very strong growth in the second quarter as we added two fortune 500 core financial management customers and I'm very excited to share that one of those with Salesforce the global leader in CRM.
Already a longtime workday HCM customer and partner sales force was expanded use of Workday now includes workday financial management, along with accounting Center Workday adaptive planning prism analytics and more.
Our growing partnership reinforces the opportunity we have to help support customers in the cloud with this broad relationship Salesforce becomes one of an increasing number of high profile customers to expand from workday HCM to both HCM and financial management.
Although new financial management customers in Q2 included American electric power.
It was the second of our Q2 Fortune 500 wins.
Apex Fund company, David Busters Express LLC and the state of Vermont, While key go lives in Q2 included Comerica Bank RSM and the University of Virginia.
In addition to the strong growth from our core suite of HCM and finance applications Q2 also saw notable mentum across our broader portfolio of solutions.
Workday adaptive planning recently celebrated its <unk> anniversary as part of Workday.
And I'm happy to share that we now serve more than 6000 planning customers, including over 20% of the fortune 500.
It was also our second full quarter with <unk> as part of Workday and we're already seeing solid results as it is opening up new opportunities for us to expand our relationship with customers, who want to embrace a more holistic workforce strategy.
We also continue to see strong adoption of workday extend in prism analytics as both solutions are providing organizations, including the office of the CIO with the ability to adapt in today's changing world.
With extend customers build apps that are tailored for their unique use cases, which can eliminate the need for other custom development tools over the last year, we have more than doubled the number of customers and now have more than 750 applications that have been developed on the workday platform.
In prism analytics with now more than 1000 customers is enabling organizations to bring operational data into workday to drive real time business insights.
These solutions are not only critical to our customer community for enabling a new level of engagement with our partner community as well.
And speaking of our customer community customer service has always been one of our core values. As a result, we strive to maintain a customer satisfaction rating of over 95% and I am pleased to announce that in 2022, we surpassed this rating again as we have for more than a decade.
Achievement is a direct testament to the amazing work of our employees and their commitment to helping our customers thrive.
We look forward to sharing more about our product innovation customer success and market opportunity in September at Workday rising our annual customer conference. This will mark the first time since 2019 that we were able to hold workday rising in person and we are so excited to get more than 9000 members of the workday community together in Orlando with thousands of attending virtually.
What is always a special event.
In closing, we had a strong second quarter and first half of the year, while we recognize that the current environment will likely moderate the pace of growth in the second half of the year, we firmly believe that the strong get stronger during periods of economic uncertainty and we will continue to manage the business with that mindset and expectation all in support of driving enduring growth for many years to come.
With that over to your channel.
Thank you Neil and thank you to everyone for joining today's call.
I wanted to begin by expressing my sincere thanks to the entire global organization for an incredible Q2 ever.
Every one of our nearly 17000 Walgreens really leaned in and drove this result.
And then couldnt be prouder of our execution great job team.
Our strong Q2 results were driven by momentum across several of our key growth initiatives, including customer base International medium enterprise and the office of the CFO at this time into what would a strategy on the significant long term opportunity that we have ahead.
In addition, as Aneel mentioned, we closed the two largest deals that slipped out of Q1.
While the near term market environment remains uncertain and we are not immune to it we continue to see organizations of all sizes prioritizing their investments with workday to continue their digital backbone transformation and drive increased agility and flexibility.
From a geographic standpoint, we executed incredibly well across our global markets.
In the U S. We saw healthy growth in the large enterprise, including five fortune 500 core HCM or themes wins I mean their medium enterprise. Our suite approach continues to resonate driving another quarter of very strong results.
International performance was again, a highlight as our investment in key regions and the ongoing journey to the cloud are resulting in significant growth.
In EMEA, we had outperformance across a number of key countries, including France, Germany, and the United Kingdom.
Finally in <unk>, we had very solid performance in our strategic markets like Japan and Australia.
As you know we go to market with land and expand sales motions on both teams drove healthy growth in Q2.
<unk> already mentioned several of our core HCM and fins wins, many of which were new customers to workday.
We also closed several strategic deals across our American land motions, including planning experience wins at Exxonmobil on media buying and have become first led wins at 300000, plus employee global organization at <unk>.
<unk> in Europe .
In addition to strengthening our land motion our customer base sales teams in Q2, once again drove very strong results, including solid renewals on a meaningful acceleration in deal ACB with broad based strength across a number of solutions, including core fins extend.
Laramie payroll and talent optimization.
We're also seeing momentum built within our planning versus customers, who are expanding their footprint by adding core HCM and financials. Cardinal health is a great example of this.
Started as a planning first relationship expanded their footprint to include core fees in Q2.
Industry is another area of significant opportunity and investment.
Im pleased to share that financial services is our first industry to exceed 1 billion. Meanwhile, recurring revenue.
Some of our most strategic transactions and go lives in Q2 came out of our financial services statement, including new lines that are Nielsen reference on rate won't change apex pump expansion deals of bank of Montreal, and Cushman <unk> Wakefield angle.
And go lives at United Overseas Bank Comerica older established industries, including healthcare and education and government also saw continued momentum and we are gaining steam in vertical such as retail hospitality and technology media wins included Salesforce Valera goalposts.
Needless to say we have several other industries that are in the past $1 billion and beyond.
Our expanding partner ecosystem is becoming an increasingly important driver of our growth industry success and the excitement. We're seeing we think our apartment community for the joint opportunity in front of <unk> wasn't full displayed recently articulate our onward apartment events.
The strategic system integrators, such as Accenture, Deloitte KPMG and Pwc are not only ensuring successful deployment, but also serving as an innovation engine addressing our customers' needs.
There were also targeting industry accelerators with specific solutions and use cases, we look forward to sharing a lot more on this at workday rising in a few weeks.
As we move through the second half of the year, we expect the environment to remain uncertain and we see signs that in surfing deal cycles, particularly some of our more strategic opportunities. There is increased scrutiny on potentially longer sales cycles.
Bias do extra work before making investment decisions during these uncertain times.
The good news is that when companies go through their due diligence, we typically come out on Paul given the compelling return on investment on our reviews total cost of ownership that our solutions provide our track record of successful deployments of scale on a reference base of thousands of customers, who kind of speaks to the meaningful business.
That <unk> delivers with that I will turn it over to our CFO Barbara Larson over to you Barbara.
Thanks, Sean and good afternoon, everyone as Aneel Antonio mentioned, we delivered a strong Q2 as enterprises of all sizes increasingly realize the need for a flexible modern finance and HR solutions to navigate their businesses and drive change during these uncertain times.
Subscription revenue in Q2, with one $3 7 billion up 23% year over year and professional services revenue was 168 million up 15%.
Total revenue outside of the U S with 383 million, representing 25% of total revenue.
24 month backlog at the end of the second quarter was $8 $3 7 billion growth of 22%. The outperformance was driven by strong new ACD across both our land and expand sales motion along with solid renewal with growth and net revenue retention rates over night.
5% and over 100% respectively.
Total subscription revenue backlog at the end of Q2 with $13 $4 7 billion up 27%.
Our non-GAAP operating income for the second quarter with $302 million, resulting in non-GAAP operating margin of $19 six per ton.
Martin over achievement was driven by a combination of topline over performance the timing of certain projects and some favorable expense variances.
Q2, operating cash flow was $114 million, which reflects typical seasonality from our annual merit cycle increase.
In addition, with the final two days of the quarter falling over a weekend.
Roughly $40 million of collection shift out of Q2 into early Q3, which will have a positive impact on our third quarter cash flow.
Our largest investments continue to be in our people and attracting top talent to workday during the quarter. We successfully added approximately 1000 net new employees ending Q2 with a global workforce of more than 16900.
Our hiring was focused on adding key talent across strategic growth areas of the business.
Notably go to market resources and product innovation.
Overall, we're extremely proud of the strong companywide execution in Q2 and remain focused on leveraging our leadership position to drive sustainable 20% plus subscription revenue growth on our path to $10 billion in revenue.
Turning now to guidance, which reflects the momentum in our business and the mission critical nature of our solution, while also balancing and uncertain macro environment, which aneel in China I described.
With that context, we are maintaining our guidance for FY 'twenty three subscription revenue of $5 five $3 7 billion to $5 $5, $5 7 billion, representing 22% year over year aircrafts.
We expect Q3 subscription revenue to be one or one 8 billion to one or two <unk> billion, 21% year over year growth.
Still expect professional services revenue to be $650 million in FY 'twenty three as we continued to tightly align with our growing partner ecosystem to help ensure customers have successful implementations that support the highest levels of customer satisfaction and business value.
Q3, we expect professional services revenue of $164 million.
We expect 24 month backlog to grow approximately 19% year over year in Q3.
We now expect FY 'twenty, three non-GAAP operating margin of 19%.
I think a more measured pace of hiring in the second half of the year as we continue to monitor the macroeconomic environment.
Investing for long term growth.
Longsight ongoing expense discipline remains our priority.
We continue to have confidence in the strength of our business model and then achieving 25% non-GAAP operating margin and 35% operating cash flow margin at $10 billion in revenue.
For Q3, we expect non-GAAP operating margin of 18%.
GAAP margins for the third quarter and the full year are expected to be approximately 22% and 23 percentage points lower respectively than in.
non-GAAP margin.
The FY 'twenty three non-GAAP tax rate remained at 19%.
We're raising our FY 'twenty three guidance for operating cash flow to 164 billion.
We now expect capital expenditures of $450 million this year to support our customer growth and continued business expansion.
As a reminder, during the third quarter, we plan to pay off the principal balance of our 115 billion convertible debt in cash.
When this occurs our non-GAAP diluted share count will decrease by roughly 8 million shares.
Due to the late Q3 timing this share reduction will not be fully reflected in our non-GAAP weighted average share count until Q4.
And finally, I'll close by thanking our amazing employees customers and partners for their continued support and hard work.
We look forward to seeing you on September 13 to either in person or virtually for our financial analyst day part of the broader workday rising program being held in Orlando, Florida.
We will share more insights on our strategic product initiatives and long term market opportunity.
With that I'll turn it over to the operator to begin Q&A.
Thank you we will now conduct a question and answer session.
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You May press Star two if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before questions. Just darkies. Once again, please limit your questions to one one moment, while we poll for our first question.
Our first question comes from Kash Rangan with Goldman Sachs. Please proceed.
Alright, Thank you very much I wonder delightful way to spend Thursday afternoon listening to your earnings conference call.
And even in China addressed the team a couple of things in my mind, one as previous quarter, you're one of the first companies to talk about deal slippage et cetera, and how did that end up for the for this.
This July quarter, what were the sort of customer behavior that you saw in the month of July and also question philosophically as we open up and you have your first in person user conference in a few years.
Are the opportunities that are afforded to workday as you enter calendar 'twenty three as a result of doing all the in person activities that you Couldnt do as we were all working through this pandemic be it growth rate acceleration in new product adoption strategy whatnot, just curious to get your thoughts thanks, and congratulations again.
So I'll answer the first part and then hand it over to China.
No we did not see a slowdown in July cash we did have a few deals slip from Q1 to Q2, but.
Doug Robinson team closed those deals we are very cognizant of.
Macro environment heading into the second half of the year and so we are we are taking a cautious stance on hiring.
We didn't see any slowdown in July it was about a stronger months.
Could have hoped for.
Rising as a great opportunity for us we always do better when we're in person, it's just that simple.
It's a chance to get reconnected with customers make sure we're doing a good job for them, but.
But equally importantly is the product portfolio has grown its a chance to showcase some of the newer products and have.
That customer base motion continued to thrive so.
Jonathan anything you want to add.
Thank you Aneel. Thank you Kash.
Neil commented, we saw strength across the whole quarter from beginning to end.
Generally seen more uncertainty on the scrutiny on the pipeline going forward.
Regarding to rising we are very excited after three years 70 young it's about.
Ensuring a great relationship with the customer community and that bodes very well.
With workday.
And clearly as customer base becomes.
Now part of our business is a more opportunity and a great opportunity for us to build a good pipeline.
Fabulous Thank you congrats.
Our next question comes from Mark Murphy with Jpmorgan. Please proceed.
Thank you very much it's impressive to see these two big Fortune 500 core financials wins do you get the sense that the Covid log jam is somehow clearing up there. Despite all the recessive headlines or do you see many finance teams still kind of lagging.
The smooth sailing they might need to do a cloud migration.
Perhaps you would have a little extra core fins pipeline building up that might get released at some point if thats. The case and then Barbara just curious if there's any sense for the magnitude of change on the hiring pace that youre contemplating for the rest of the year.
I'll ask Pete to answer the first question on <unk>.
On financials.
Im sure there was definitely some pent up demand but.
Pete you want to.
Hey, Mark good to talk to you.
Right now from what we're seeing we're not seeing any difference in demand for our HCM and financials from what we've been seeing in the past.
And Thats.
Obviously, good news as we saw here in Q2, but what we will say is as we go into more uncertain economic environments, which.
Our likely happening.
Typically in those situations buyers on the financial management side tend to.
Delay those deals a little bit longer. So that's just based upon our experience being in this market for a while.
And that's what we're kind of expecting to have happen to go for it going forward.
And then hey markets Barbara on your question on the hires I'm not providing a specific target other than to say, we expect fewer higher as compared to the first half in the second half. So we will continue to be flexible and disciplined based on the environment, we see in the second half.
Understood. Thank you very much thank you.
Our next question comes from Kirk <unk> with Evercore ISI. Please proceed.
Yeah. Thanks, Thanks, very much and I'll echo the congrats on the quarter actually maybe this one is sort of echoes Mark's question, but I was curious.
Yes.
When you look at the pipeline build right now relative to whats you guys can't control what sort of happens at the end of the deal cycles necessarily but I was just kind of curious if the macro is having any impact at the front end of that.
Funnel are you still seeing the same number of deals come in.
When does talking about sort of companies maybe taken a pause is it sort of just at the end.
I guess is there anything you can do to make your products more modular in nature. So that they can continue through the process without getting sort of stuck at one point within the sales funnel.
Oh, China.
Yes.
Thank you Kirk.
We felt good about the new pipeline build that we saw in the quarter.
Solution selling across geographies.
Barring any meaningful changes in the macro we feel good about the pipeline we have for the second half.
Certainly we are never satisfied we are focused on continuing to build pipeline, particularly with some of the faster since motions like our customer base amongst young our Atlanta first motions, because we can certainly create new opportunities and we can still closing within the within the first call.
Thank you.
Our next question comes from Brad Sills with Bank of America. Please proceed.
Oh, great. Thank you wanted to ask a question about the comment you made earlier aneel on a couple of the fins wins being planning first customers is there another set of it.
The installed base of other modules around <unk>.
Brewing here that we could also see some upgrades.
That could come from and then just any commentary on that planning first pipeline is kind of a leading indicator potentially for morphine additions. Thank you.
But we're now up over 6000 planning customers in each one of those to me as an opportunity to sell our core financial products and that is probably the one land products in the world of finance that we could go in with first and have it be meaningful.
And it's played out that way and it plays out that way more and more the more we get into.
Financial planning and we continue to workforce planning, but the more we do financial planning, it's a great. It's a great win because that's probably the one app that's our lead into core financials.
Thanks Neil.
Our next question comes from Michael <unk> with Wells Fargo. Please proceed.
Hey, there.
And congrats on the results here for me as well.
You started somewhat of an investment cycle ahead of all the uncertainty I am just wondering if theres anything you could point back to that Youre, finding is able to provide a bit of a favorable offset it sounds like youre not seeing as much of the shift in buying behavior as others across software pointing to and maybe as a second part of the question. If you do see demand signals start to <unk>.
Slow you did have some comments, suggesting second half growth could still moderate how quickly are you able to toggle towards expense control and dialed back as needed. Thank you.
Well I'd say on the first on the first part of the question.
Who knows how the future is going to play out, but I think one thing that's different about.
But worked in some of the other cloud companies is that we are still very lightly penetrated in our install base when I look at how much revenue we drive it's not as high as some of our peers in the cloud and so that's always a good place to sell during tough economic times your customers that are already committed to workday they already happy.
And Amir and so I would say less about toggling about expenses.
About targeting to a different sales strategy.
And then I think what we're also doing is we're dusting off the <unk> analysis that we used to do many years ago. During the OE to nine collapse, where we had to prove out our <unk> in order to even get invited to the game.
This market has not been about <unk>, it's been about digital transformation, but we do have a very compelling TCR story as well.
Peter Barbara one anything you want to talk about the expenses Barbara I think on the expenses as we said we're moderating the pace of hiring in the second half being cautious going in into the second half.
But we're going to continue to add resources at the same time, we're going to be flexible based on the environment. We see it in the second half. So we feel confident if we need to toggle some of that hiring down in the second half that we can do that.
Thank you.
Our next question comes from Keith Weiss with Morgan Stanley . Please proceed.
Excellent. Thank you guys for taking the question.
Great quarter, you guys put up and I think you could probably see kind of in all our questions. A lot of us are trying to figure out like how did you guys pull this off while a lot of other of your peers are struggling and I think youre trying to get at it and you talked a little bit about being more lightly penetrated.
Into the base I was wondering if you could expand on that because a lot of US think of you guys are just having a really good presence and a big presence in HCM, particularly in the U S. Maybe a little bit lesser in Europe Vincent.
On the comp.
Do you mean by lightly penetrated in the base. It's just that there's a lot more to upsell and a lot more product to give to your customers and why is that such an advantage at a time like this.
I would just echo what I said on the previous answer happy customers always an easier sale than a net new customer that doesn't have experience working with you in terms of penetration I'll turn that over to China to talk about where we are trying to China and Doug really were the drivers of our.
Back to the base motion and is still relatively new for us. It's only a few years old versus I think other companies have had it.
More land and expand where we don't really have that opportunity we land expand it and then we want to add more modules.
Oh, yes.
Thats correct Keith.
I would say first that our key growth drivers they don't well during the quarter both customer base.
International City office of the CFO on medium enterprise deal behaved pretty well across geographies and across different solutions in terms of the penetration as you know we've been focusing more on the customer base because we've been heavily net new during a very long time and we've been doing investments that are paying off.
And clearly we've also been innovating and adding a significant number of solutions. That's another thing when customers are happy and seeing value on we're focusing on should with the return on investment with those solutions. They tend to buy more and that is exactly what is happening across the segments. Clearly there our penetration is lower when you compare to where there appears to have been.
More heavily focused on customer base for a longer period, but that was say both have been net new logos and customers would never done business with them and customer base behave very strong this quarter, having said all that as we're seeing we're starting to see a bit more scrutiny, particularly around the owned the largest deal cycles there.
Customers would go into a bit more through another cycle of approval on or a bit of reassurance on default implementation projects or whatever.
Most likely we'll inventing or potentially some of the sales cycles and larger transformational transactional deals around HR financials.
Got it if I can sneak in a last one for Barbara.
You've talked about sort of more conservatism in the back half guidance and I'm, assuming the outperformance that you guys saw in Q2, particularly like that 24 month backlog would've normally trends related into sort of a raise of the guidance and you didn't raise the guidance can you give us some kind of sense of the magnitude of that conservatism in the back half now.
Yes, I'll, just say coming off a quarter as strong as Q2, we would have liked to have been able to raise our outlook for the for the full year, while we outperformed and the business remains resilient. We also see evidence of an increased scrutiny and certain sales cycles. So our outlook assumes a continuation of this in the second half.
Got it.
Thank you that's very helpful.
Our next question comes from Alex Zukin with Wolfe Research. Please proceed.
Hey, guys since Keith as both of the exact question I was going to ask I'll try to basically do it.
Kind of go at it a different way.
It feels like.
Neal what youre, saying is that.
There is a lot of surface area that you have left to.
To kind of go after inside of your client base and based on the PCL analysis I'm. Assuming there is also an opportunity for a lot of your customers to consolidate particularly on the HCM side from many point solutions to a platform how is that message kind of resonating in your conversations.
How long before that type of a playbook.
Can be run.
At the at the financials level I realize obviously youre going in with a full suite right away, but just walk us through those dynamics if you could.
Well.
I'll just offer up a high level view that happy customers are the most important thing.
That we have right I mean, if you have a happy customer theyre just inclined to buy from you and what we've seen especially in large enterprises. They typically don't tie the HR and financials decision together, they're separate decisions and a lot of these solutions like planning are also separate decisions. So as long as we keep that base happy.
When these customers look for new solutions, we do have quite a bit of surface area.
Especially in the HR, especially the HR base, where we've got.
Over I think 4000, HR customers and 1400 finance customers. So that you can just see where that gap is but also every time, we come out with a new module, that's something we build toward acquisition.
It's an opportunity to go back to that base.
One thing I'd add there Neal just to give everybody. Some perspective on it is we've got 22 skus in our HCM portfolio and we've talked about the fact that 14 of them have been made generally available in the last four years to.
To give you some perspective on that and what you can read into that is <unk> got a large percentage of skus that are not penetrated into that base yet it's what we've been working on for years and we do.
Just repeat again what.
Neil in Chino said, which is focusing on making our customers happy delivering the value that we've been talking about delivering to them makes them want to buy more things from us and so that's a key part of that strategy.
Perfect and then maybe just as a follow up I want to clarify because I wanted to drill in on this.
It sounds like what Youre, saying is July has been really good but then from what I think China and Barbara are saying is that there is more scrutiny on sales cycles. There is more conservatism in the guide.
But I guess is that something you're actually seeing.
Or you are preparing to see and adding a kind of a heightened level of conservatism in the assumptions that youre, making around close rates.
And in pipeline generation et cetera.
I think channel is best to answer that one.
Yes.
Next I will reassure Q July has been very strong but in terms of the sales cycles moving forward, particularly some of the larger ones around HCM themes. We are seeing some more scrutiny already on those sales cycles as you can imagine cell phone cycle something wrong. So we definitely have different <unk>.
Is that they move from one to another can disengage some milestones and it's kind of easy for us to check on.
The base that those deals are moving and as you can see the solid thing our community and lengthening or potentially lengthening the sales cycle.
Got it perfect. Thank you guys.
Our next question comes from Scott Berg with Needham. Please proceed.
Hi, everyone congrats on a good quarter and ill.
Change it up from the macro questions at the moment and industrial later.
I had a question on the announcement during the quarter about any fed rate status, and particularly particular Fps moderate security impact level.
Should we think about that opportunity and fed I know you guys had some general.
Success in the government angle as a whole through throughout the domestic United States, but is that something that can be meaningful over time or is it really just kind of a maybe a smaller.
Incremental opportunity it.
It can be very meaningful over time, but it's going to take some time for it to develop those sales cycles are longer than commercial sales cycles. They always have been.
And so so now as we as we have gotten that fed ramp.
Certification.
Now the sales cycles begin and they can be 12, 18, 24 months sales cycles, so, but it's a meaningful it's a meaningful opportunity.
There's a lot of ex people soft customer is still running people software.
So so it's one that we.
Invested in because we see it as a big opportunity, but also going to be patient and it takes a while for the pipeline to develop.
He didn't want anything.
I think you said it very well.
We see it as a over $2 billion opportunity for the business, but and something that we've been investing in for a while it will take us some time to see that pay off because of these longer sales cycles.
And I think also the government is.
It should be a great customer for us another another customer that we can sell more things into than just core HCM overtime.
Our next question comes from Brent <unk> with Piper Sandler. Please proceed.
Good afternoon, thanks for taking the question.
Obviously with increased scrutiny around around larger deals I appreciate that but we're also seeing.
Tightening across the broader enterprise my question here with your focus around cross sell.
The narrative around cost savings vendor consolidation to bundle HCM and fins with some of your larger customers youre starting to get some higher prior profile Fortune 500 wins, there love to hear if.
There is an appetite.
To further.
<unk> vendors from a cost savings perspective.
<unk> bundle HCM and fins, specifically with some large U S customers. Thanks.
That trend is definitely happening and we saw it happen with a series of big financial wins in the second quarter, but I wouldn't underestimate the strength of our medium enterprise business and.
I don't see the same belt tightening in the medium enterprise business and they tend to buy the whole platform.
So.
It's a pretty healthy market for us, it's kind of a run rate business and.
And then they tend to they tend to want to have the fewer fewer vendors as possible because they don't want to spend all the money on best of breed and integration John .
John anything you want to add.
Very well said Aneel I would just say that.
Some of the larger customers they do retire double digit number of legacy systems.
So we're trying to do right now is our new was mentioning before he is ensuring that they understand very well the total cost of ownership and the benefits that our solution will provide under return on investments and of course, we get in contact with other customers have already implemented and <unk> seen those becoming tangible so thats. The playbook. We are we are.
Putting in play.
Gone before us with tunnel this downturn cycles some of us. Unfortunately.
There is an advantage was done some time on that.
<unk> management team and we're still not where it can be for US I mean, you mentioned, so we're playing that playbook.
Appreciate the color. Thank you.
Our next question comes from Brad Zelnick with Deutsche Bank. Please proceed.
Great. Thank you so much for taking my question and congrats on a great set of results I wanted to follow up on peak in Alex's line of questioning about happy customers, but also maybe from a little bit of a different angle as you, presumably still having the large renewal cohort flowing through the model that we talked about last year is the.
Current environment in any way impeding the magnitude of expansion that you would otherwise expect upon renewal and is that factoring into what appears to be a conservative backlog guide for Q3, understandably. So just given the environment. Thanks.
Okay.
So for the backlog guide in.
In Q3, our guidance takes into account the best view of the business that we see it today.
And that that's reflected in our 24 month backlog guide for Q3 keep in mind, the timing of renewals can fluctuate from quarter to quarter and have an impact on that on that backlog growth and if you. If you recall at the beginning of the year, we did discuss our expectation for the renewal base to return to a more normalized rate of growth for.
The full year, which continues to be our view.
Great and any color on just the expansion rate that youre seeing upon renewal.
No.
It remains very strong, but I think it is a testament to the mission critical software applications and the customer satisfaction.
On the renewal ratio remained stable alright, very good I'm very healthy.
Across the board excellent.
Fantastic to hear thank you.
Our next question comes from Ari <unk> with Cleveland Research. Please proceed.
Good afternoon, and thanks for taking the question congrats on the results just wanted to follow up on some of the.
Fortune 500 wins in the quarter.
What do you think finally drove those to go over the goal line and more broadly whats the timeline you're thinking about for go lives for those.
The reason I'm asking just.
Wondering when.
And when do you think there could be more of a hail halo effect from some of these higher profile wins.
I'm going to assume you mean on the finance side because on the HR side, we've always had a stream of fortune 500 wins I think at this point, we're over 50% of the.
Well over 50% of the Fortune 500, running us for HCM.
On the finance side I think it's a combination of the system's aging it's a combination of our product.
Becoming more mature new products like accounting center that are really strategic to customers and in.
Prism analytics. So now we've got the full suite.
And people have to modernize that they really don't have a choice.
I think this is just it's just a healthy run rate business as opposed to this moment in time, where it's going to go through the roof.
It's not that kind of business.
But the more the more data points, we have customers choosing US then going live obviously the better we are Comerica went live this past quarter that was that's a fantastic reference for us.
A big a big regional banks only live is a great data point for us.
These projects are 12, 12 months to 18 months it all depends on the scope of what Theyre trying to do.
And so it's a pretty reasonable timeframe to get these get these projects line or if it's a.
If it's a smaller scale implementation just core accounting it can be done in less than a year, but if it's a series of modules.
12, 12 to 15 to 18 months is pretty reasonable.
Thanks.
We have time for one more question and our final question will come from DJ Hynes with Canaccord. Please proceed.
Hey, guys congrats on the quarter.
John when you talk about scrutiny on deals we've heard that from a lot of companies now for work there what is what exactly does that mean I mean is it haggling.
Haggling on prices it more reference checks is that about implementation timelines and processes like what what's involved there and any color would be interesting to me.
Yeah.
Thank you for the question Vijay <unk> Barry that you can think about it sometimes is yes.
Scrutiny around implementation timeframe under readiness they have from their side on the partner side of it on our side in terms of resources.
Also means many times prior to prioritization is from projects on which is willing to hop fans. We typically come out on top because we're mission critical because it came on the ROI and the PCL, but youre competing international new projects. It also means.
Our level of approval on or two additional levels of about <unk>, one point up to the board depending on the level of approval. So those are some of the things that it typically means that around business gains of our monitoring of cobalts around.
Our utilization of projects in our Bronco insurance in terms of success and implementations have an ability on resourcing, some cost opportunities and impact on potentially any other investments on opportunities. They are they are minor that you are considering.
Yeah, Yeah, Okay makes sense, thanks for the color.
Thank you. Thank you for the question.
I will turn the call back over to management for closing comments.
Everybody have a good night.
Ladies and gentlemen, thank you for your participation on today's conference. This will conclude workdays second quarter full year 2023 earnings call. Thank you again for joining us today and have a great day.