Welcome to Workday’s First Quarter Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. With that, I’ll hand it over to Mike Haase.

Welcome to Workday’s first quarter fiscal 2016 earnings conference call. On the call we have Aneel Bhusri, our CEO; and Mark Peek, our CFO. Following their prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our Web site where this call is being simultaneously webcast. Statements made on this call include forward-looking statements such as those with the words will, believe, expect, anticipate and similar phrases that denote future expectation or intent regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. In addition, during today’s call we will discuss non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of Workday’s performance, should be considered in addition to, not as a substitute for or in isolation from GAAP results. Our non-GAAP measures exclude the effect on our GAAP results of share-based compensation, employer Payroll tax related items, on employee stock transactions, amortization of acquisition-related intangible assets and debt discount and issuance costs associated with our convertible notes. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our Web site. Also, the Customer’s page of our Web site includes a list of selected customers and is updated at the beginning of each month. The webcast replay of this call will be available for the next 45 days on our Company Web site under the Investor Relations link. Our second quarter quiet period begins at the close of business July 17, 2015. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2015. With that, let me hand it over to Aneel.

Thank you, Mike. Thanks to many of you for joining our Analyst Day last month. I hope you took away from that day two things. First is that we really see the world through the lens of the consumer Internet. This is where the innovation is happening now. And second, now that the cloud is the standard, it’s time to look beyond just the platform. Businesses are looking to grow. It is absolutely critical that data and transactions are together in one single application in the cloud. Workday was built this way on a clean sheet of paper 10 years ago. Our customers can take action from within the system and can make real business decisions in a moment. Only Workday customers can do this. In the first quarter, we took decision making to new levels with the delivery of our first insight application Workday Talent Insights. Workday Insight apps apply data science and machine learning methods to help customers make smarter financial and people management decisions. With Workday Talent Insights customers can confidently tackle talent related challenges, such as identifying a top performer at risk of leaving the company, or pinpointing issues with hiring initiatives that could impact business performance. Companies that use this can gain a competitive advantage on talent. We also delivered Workday Professional Services Automation, a capability that allows organizations that manage projects to optimize project performance with one system that delivers insight and analytics on people, revenue spend and profitability. And our Global Payroll Cloud continues to grow, both through integrations with our partners and with the delivery of our own applications. I’m happy to share that Workday Payroll for the United Kingdom is now available and Workday Payroll for France remains on track to be delivered in calendar year 2016. All this innovation was…

Thanks, Aneel, and good afternoon, everyone. We started fiscal 2016 with a strong first quarter generating record quarterly revenues, record 12 months operating cash flows, and generating $50 million in free cash flow over the last 12 months. We added a record number of new customers during the quarter. And as Aneel discussed, we are very pleased with the market traction for financials and anticipated continued growth throughout the year. The attach rate for Payroll is very strong, at about 50% of our total customer base and about half of them are live. Over the past year, the attach rate for Payroll is even higher with customers with annual contract values greater than $1 million. In our customer accounts, we do not categorize Payroll as a financials application, but in most of our customers the Payroll function resides within the finance organization, which increases brand awareness. We have also seen a high attach rate with our recruiting application and about half of our new customers in recent quarters buying recruiting and over 50 recruiting customers now live. We have a strong balance sheet, which allows us to invest with more than $1.9 billion of cash and marketable securities and we have $653 million of total unearned revenues. We are pleased with our first quarter accomplishments and want to thank our employees, our partners, and our customers. I'll now walk you through the financial details. We are now a $1 billion run rate company with total revenues for the first quarter of $251 million, an increase of 57% from a year-ago. The vast majority of our sales are currently in U.S. dollars, so there is minimal impact from exchange rates. As mentioned last quarter, we are offering subscription contracts in six foreign currencies and expect a higher percentage of non-U.S. dollar…

[Operator Instructions] Your first question will come from Mark Murphy with J.P Morgan.

Yes, thank you very much, and congratulations on the results. Aneel, you had commented last month that I believe you have 13,000 servers today and you see that growing potentially as high as 70,000 servers in the next three years. And so I had two questions on that. First, how different have you found the transactional intensity to be in financials versus in core HCM? So does that mix of servers over time shift dramatically towards financials due to the processing intensity? And then secondly, just directionally, what do you think will happen to the MySQL database footprint over time within our infrastructure layer?

Sure, Mark. That was actually Stan Swete who went through those numbers at the meeting. So I would probably defer that question back to Stan. I can offer up a couple of high level comments. His estimates were based on utilization of roughly around 5% and with our open stack project and elastic cloud that’s well underway we hope to do quite a bit better than that. No question that the financials involve a lot more or processing, in particular, around the analytics, and the analytics around financials are much higher. So I think the best thing to do is just to have Stan -- we will get Stan to get back to on a more specific answer to those questions.

Your next question will come from Heather Bellini with Goldman Sachs.

Great. Thank you. Aneel, I wanted to go back to the comment you said about talking about Payroll and the success you’ve had there thus far. I’m just -- given it resides in people's financial when they think about financials, who are you displacing for Payroll? And as you get your foot in the door, what are you seeing about how the adoption of this offering is helping you expand into more financial RFPs? If there is anything you could share with us that you’ve noticed over the last year or so.

Heath, it’s a great question. I don't know the exact percentages, but quite a few times we see Payroll as part of the finance organization. We displace the same legacy systems that we do for HR and Finance, SAP, PeopleSoft, Oracle. Probably in the order of PeopleSoft/Oracle then SAP. When you get to the mid market, we displace ADP and in those cases the customers usually bring some Payroll operations back in-house. So it's really the same cast of characters with the addition of ADP as it is for the HCM world. In terms of opening the door to financials, absolutely it does. Today we have done minimal marketing to our customer base something that we will greatly increase over the next few quarters. We wanted to market to them in the right way and at the time we thought that the products were ready for them, and so going through the Payroll and HR lens into our customer base is a great way to solve financials.

Great. Thank you.

Your next question will come from Walter Pritchard with Citi.

Hi. Mark, you’ve typically given us some updates around material milestones in financials and if you are at 100 was the last one. Should we expect to hear -- I'm trying to understand sort of what the milestone should be that we hear and anything else you can offer up to help us understand some of the traction that you are seeing there that sounds like you are excited about from the call -- David’s comments on the call.

Sure, Walter. At the Analyst Day in mid-April we talked about a 135 financials customers, and so you should expect us to -- to hear from us when we had a 1,000 total customers and then some other milestone in financials and we will probably let you know how many financials customers we have when we hit a 1,000 total customers.

I think the next milestone would be 100 live financial customers as one that we would like to highlight.

Okay, great. Thanks.

We are making great progress towards that everyday.

And your next question will come from Karl Keirstead with Deutsche Bank.

Thank you. Aneel, Workday is now large enough that single deals don’t move the needle too much, but a quick check on Google suggests that combined headcount of Coca Cola, Dell, and Hitachi might be over 0.5 million. So those are big, big clients and so I just wanted to ask you did they all drop in the April quarter? Was that the quarter when those deals were signed, and is Workday taking over the entirety of the ATM needs for those entities? I know maybe you’re guarded in terms of how much you can disclose about single deals. But any color might be helpful given how large those organizations are? Thank you.

So I believe we are taking over all of the core HR functions. I'm not sure about Payroll for all those companies. We don't have Payroll products in all the markets. So I’ve to get back to you on that, but it is for their entire population as it relates to HR. and in terms of the quarter, Mark?

Yes, they all were deals that were signed inside this quarter.

Okay, great. Congrats on those deals.

Your next question will come from Raimo Lenschow with Barclays.

Thanks for taking my question. A question for Mark. Mark, the operating cash flow this quarter was very good. Can you talk a little bit about the drivers here and how you think about cash flow for the rest of the year? Thank you.

Sure. Yes, the big -- the biggest driver of course for cash flow in Q1 was the large accounts receivable balance that we had at the end of the fourth quarter that will be based on the seasonality of the fourth quarter. We have been at the stage where we have been operating cash flow breakeven and driving free cash flow and over the last trailing 12 months is now $50 million of free cash flow. When you look ahead to the second quarter, we expect there to be a seasonal decline. We guided $160 million on a trailing 12 months basis, which is actually on a trailing 12 also a decline. And that's largely due to the fact that in Q1 of this year our billings as compared to Q4 were down sequentially whereas a year-ago, they were actually up sequentially. But we expect strong cash flow characteristics. So it's just the nature of our business, particularly, as we get more and more maturity into the renewal cycle.

Thank you.

Your next question will come from the line of Brent Thill with UBS.

Good afternoon. Question for Aneel and one for Mark. Just for Aneel, on the three large deals that you mentioned, are those all HR or is there a component beyond HR that they're taking?

I think specific to those deals, I think several included Recruiting. I will have to check with you on that. They are all core HR and we have seen high attach rates on both Payroll and Recruiting, but I will get back to you on the details of that one.

Okay, that's great. And Mark, just on the billings guide for the year, when you look at the billings growth last year obviously you have -- you face a tough compare, but the guidance at least the low end kind of assumes effectively a cut in the growth rate, a pretty material deceleration. I'm just curious, other than the big comp, is there anything else that we should be aware of that may be impacting that -- the billings forecast you gave for fiscal ’16?

It’s a combination of factors. The first is that the large deals although they are becoming a -- more routine for us they still are unpredictable as to which quarter they are going to fall. And so when we look ahead to the pipeline, particularly ahead to the quarter, we take into account the probability of having some of the larger accounts all within a given quarter or within the fiscal year. We also as we grow, we have largely been a core HR in North America to rely on most of our bookings this year. We have more of an impact from both financials and from -- and particularly from Europe, there is some impact of FX looking ahead on European booking since we are now selling in other currencies. But for the most part it's -- we feel strong across all the sectors of the business and it’s largely just the result of the numbers keep getting bigger.

Great. Thanks.

And your next question will come from Brendan Barnicle with Pacific Crest Securities.

Great. Thanks so much. I had two for Aneel. Aneel, in the past you’ve talked about moving into vertical markets and now that you have got analytics up and ramping. When might we start to see some of those vertical specific products? And then second, as you expand out these offerings, when do you have to start to maybe change the go-to-market strategy and reorganize the sales force to reflect the diversity of the products? Thanks.

Okay. As it relates to the vertical or we call them industry initiatives, we began that few a years ago by first building public sector and educational functionality into our HR and financial product lines and then announcing the student system and we are well along the way in delivering the student system. For the foreseeable future, you will see the industry initiatives more in the core HR and financial products. So we announced the availability and capability of Professional Services Automation, that's an important financials feature for professional services and software into companies or any company that drives revenue off of project. We talked about average daily balance and other financial services capabilities and that's helping our finance product do very well and financial services and we have inventory coming later this year that will open-up the doors more broadly for healthcare. So for the time being beyond the student system, its really more about billing the industry specific capabilities for our financial products and opening up the doors in that way. From a go-to market perspective, we are still aligned by products, but we do now have specialist in the services and sales organization that understand the needs around education and government, financial services, healthcare, and a couple other industries that are tying the product back to specific value propositions for the customers.

And your next question will come from Justin Furby with William Blair and Company.

Hi, guys. Thanks. Couple of questions. First for Mark, it sounds like a listen had a record number of Q1 signs and some large deals that’s clearly as part of that. I'm wondering why last year if you look at the numbers, you added something like $100 million of incremental billings year-over-year and this year it’s something closer to $60 million. It would seem to imply that deal sizes in aggregate are coming down. And I guess, is that the right takeaway and what drives, if you look at your Q4 versus Q1, do you think you are starting to look more like an enterprise software company with bigger Q4s, weaker Q1? And then I have a follow-up for Aneel.

To answer the last part of your question first, we are seeing a much more seasonality and I think part of it is our presence in the market is becoming stronger and there are just more cycles at the end of the fourth quarter as enterprises spend their budgets and began to formulate projects so they can start them to begin the new year. On a year-over-year basis, a year-ago we had -- that what dominated the call was the fact that we had several large deals really brought in $15 million to $20 million of additional billings from the second quarter into the first quarter and so that has some impact. It was a bit of a tough comp for us in Q1.

Okay. And then Aneel, you guys talk a lot about the 95% plus customer retention metric or customer satisfaction metric and it seems like that’s really important internally. I guess, I’m just wondering as you now hit a $1 billion run rate, how big of a governor that becomes on your overall growth profile and I would love your thoughts on just the partner ecosystem as well and whether you think they are big enough or if you have to start adding net new partners into the mix?

Our partner system -- our partner ecosystem is definitely big enough, but like us they have to keep up with the hiring to meet the demand from the customers and something that we monitor pretty carefully. But we’ve got several large partners all investing heavily in Workday, Deloitte, Accenture, IBM, Aon Hewitt, Price Waterhouse, KPMG, all the big shots are making big investments in Workday, and beginning to do it outside of North America as well. So we see the investment there and you see the percent of the Workday work in the ecosystem continues to trend favorably downwards. So -- but they all have hiring to do and it's a tough market to hire faster.

Okay, great. Thank you.

Your next question will come from Rick Sherlund with Nomura.

Thanks. Two questions. First, are there any pressure with these big contracts to defer billings? If it takes a year or two to roll the system out and they’re paying for it upfront, is there any pressure to kind of change the terms that might affect your billings? And second, Aneel I’ve heard you talk about the value proposition the software being, the predictive capabilities because of in memory. I'm just curious after analytics, if there are products that you can monetize, that you would anticipate going forward, maybe financial planning, but there could be a lot of real-time systems that we might consider being incremental in the future in separate products?

Okay. I can take the first part of the question, Rick. Certainly the larger customer and also the larger the relationship where perhaps they’re taking on some additional functionality, we are willing to work on the billing term. But for the most part and on average, we’re -- on a dollar weighted average; we are still billing one-year of ACV upfront. So its -- it doesn't have a significant impact on the model, but from time to time, we'll work with customers in special circumstances. But it’s also reflected in the other terms and conditions of the contract.

And I would just add that, we don’t get a ton that sort of pressure from commercial organizations. We get a lot more of it from state and local companies that are trying to fit things into fiscal budgets. And it's working with them to jump through hoops to get through their budget approval cycles, which are different than commercial organizations. As it relates to the in memory analytic capability, for the time being the real focus will continue to be on these inside applications. We have announced -- or we have delivered the first one Talent Insights. We are planning on delivering several more for the rest of the year. But I would hope within 2 to 3 years, we have got 30 to 40 of these applications beginning with the cross industry cover of -- coverage of HR and Finance applications, but then moving into industry specific analytic solutions as well. And what we see from our customers is great interest in learning more and beginning to subscribe for these new offerings. So there is a lot of work for us to do just on these Insight apps to build a full portfolio of it before we think about applications outside of that framework.

Okay. You next question will come from Ross MacMillan with RBC Capital Market.

Thanks very much. One for Mark and one for Aneel. So Mark, I think we are all trying to go back to the billings number and think about your comment about 100% renewing billing then think about last year’s incremental net new and this year’s incremental net new, and I guess one thing we haven't talked about is pricing on deals. So I'd be curious to get a sense for your comments around pricing on either new business or renewing business? And then Aneel, I was just curious when you think about progress with financials, are there any incremental catalyst that you see over the next 6 to 12 months that could really sort of spur adoption whether it's Insight apps or anything else that you see in the product pipeline that could really create a catalyst for adoption? Thanks.

Yes, I will start with pricing and tackle renewals first. Our renewals rhythm is still at the very early stages and so it is not yet material part of the overall billings model. That said, for the last several quarters it's been over 10% of billings. And what we are seeing is that: A, customers renew. B, they tend to renew at rates that are ahead of the original rates from the original contracts. And C, it's an interesting time for them to consider additional products that we are finding that we can add Payroll and Recruiting during that time horizon. But again, its sort of early stages of the renewals market for us because for the most of our history we were taking 3 to 5 year long contracts. On the new business, we have maintained relatively good discounting discipline and the overall aggregate discounts really haven't moved much in the last year or plus. We face competitive pressure on pricing, but our customers see the value proposition and actually being the vendor that can deliver a product and a service.

And on the second part, I think in some ways we've been our own worst enemy. We are very careful about announcing products and making sure that they truly are ready for the customer environment, something our competitors don't always do. We really want to make sure that if a customer subscribes to the Workday financial products that will work and they will be happy and referenceable. And we feel like we have reached that milestone. We talked about being 15 to 18 months away at the time of the IPO and we are now little bit over two years pass the IPO. Workday 24 really feels like a seminal release for us in many ways, functionality and scalability wise. So what we need to do now is just to kick start the pipeline building engine. And I think the activities that we can do to drive that are marketing towards our very happy customer base of over 900 HR customers, doing some pretty aggressive ad campaigns and awareness campaigns. It doesn't have the -- the product line does not have the awareness or anywhere near the awareness of the HR product line, so we have some work to do there. So those are a couple of things that we can do to kick start the pipeline building. I will say that we have several Fortune 250 accounts that are in various stages in the pipeline right now. And having been part of those conversations, our current product and the roadmap over the next 12 months holds up very well for getting these companies live in the timeframe that they're looking and leaving one of the legacy finance systems. So our belief that the financials are ready for prime time is being proven out in the market and we will see the success over the next few quarters as some of these details begin to turn from pipeline into reality.

Thank you.

And your next question will come from Jason Maynard with Wells Fargo.

Hey, guys. Good afternoon. I actually had two questions. One, Aneel, was kind of drilling down onto your prime time comment for the financials. With this new added capability in the maturation, how would you sort of describe the sweet spot customer now for this release? And I know you provided some pretty good detail back at the April Analyst Meeting around this, but would you -- if you had to sort of zero in and say okay, we can now tackle this scenario in a real repetitive way that we can build sales motions around that? Appreciate some color there, and then I have a follow up.

So I think for the time being in the customer is a non-supply chain, non-manufacturing based customer, we have a pretty good chance of being able to support them both from a scale perspective and a functionality perspective, both finance functionality as well as the global foundation. The global foundation continues to evolve over time just like it did for HR. But we feel very confident about that and I will hope over the upcoming months to year, we would have a vehicle for being able to sell our financials into the manufacturing and supply chain worlds as well.

Can I -- maybe the follow-up question then would be, do you think we are at the point in the cycle where customers buying criteria requires HR and financials to be procured from the same vendor or are customers still making these cloud selections sort of independently? I’m going to look at the entirety of the HR suite; I’m going to look at the financial suite? And do you see any synergy yet in your cross-selling activity, going back into your customer base and saying okay let's bring financials to the account? Thanks.

Well, we’ve definitely seen the trend in the mid market towards buying a platform, buying HR and Finance from the same vendor and we obviously love that trend. I would say when you up market, I would expect that same trend to continue. It’s still relatively early in the days of selling finance large-scale to large-scale companies running in a pure cloud environment. I think if you were to look at the Fortune 500 data or Fortune 1000 data, my guess is with a 135 customers and the number we’ve live, we’re well ahead of our two legacy competitors. But that just tells you it’s still early on. I sure hope and I think the market will drive to suites. There is a natural fit between HR and Finance organizationally and in terms of the data that’s used, especially for non-manufacturing companies, most of the expenses is people related expenses. So if the mid market is any precursor to what's going to happen in large companies, we definitely see a shift towards buying the full platform.

Great. Thank you.

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

Okay. Our final question will come from the line of John Di Fucci with Jefferies.

Thank you. Thanks for taking my question. I just have one. It sounds like you signed several marquee names this quarter, but billings rose certainly moderated and that’s where some of the questions are here. We realize we shouldn’t really just be focusing on just quarterly results alone, but in the recent quarter did heated competition play a greater role than it has -- than has been the case previously? I think, Aneel, you’ve mentioned some of the almost irrational tactics by Oracle, and then we’ve heard about some of them in the field, too. Are we seeing any of that in these results?

I don't think it's any different in terms of the tactics in the first quarter than it has been in previous quarters. I mean I’d say every quarter is an ebb and a flow. I’d say right now Oracle has their act together better than SAP. SAP seems to be in a bit of disarray. So from our mind, that sort of all evens out.

Okay. Well, thank you.

Okay. Thank you. End of Q&A