Welcome to Workday's First Quarter Fiscal Year 2021 Earnings Call. [Operator Instructions]. And with that, I will now hand it over to Justin Furby, Senior Director of Investor Relations.

Welcome to Workday's First Quarter Fiscal 2021 Earnings Conference Call. On the call, we have Aneel Bhusri, our CEO; Robynne Sisco, our Co-President and CFO; Chano Fernandez, our Co-President; and Tom Bogan, our Vice Chairman. 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. 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 pandemic on our business and global economic conditions. Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, 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 Workday's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and on the Investor Relations page of our 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 includes the list of selected customers and is updated monthly. Our second quarter quiet period begins on July 16, 2020. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2020. With that, let me hand it over to Aneel.

Thank you, Justin, and welcome to Workday's First Quarter FY '21 Earnings Conference Call. Before we get into our results, I want to express my sincere appreciation to our more than 12,000 employees who have responded in such a remarkable way to support one another and our customers during these uncertain times. This team continues to push forward across all areas of our business, and I've never been more proud of them. As we continue to navigate this period, we have stayed very focused on our core values as our North Star. That means our employees come first, always and without exception. I also wanted to express my sincere thanks and gratitude to our customers, many of whom are on the front line and putting yourself in harm's way every day. Thank you from all of us at Workday. Over the past few months, we've worked closely with our customers to configure their Workday solutions to help them navigate new challenges and opportunities presented by this current environment. We've also heard from countless customers who, like us, are using Workday to seamlessly close their books 100% remotely for the first time ever. We have health care customers that are relying on Workday to redeploy critical people resources with great agility. And we have heard from our Planning customers who are using our solution to dynamically adjust their financial workforce plans. In fact, in late March, we saw a more than 30x increase in the number of scenario models that our customers were running. These are just a few examples where Workday has empowered our customers to better navigate this challenging and fluid environment. Just before today's call, we announced one more. Workday and Salesforce have been great partners for a long time and now have countless joint customers. When the…

Thank you, Aneel, and good afternoon, everyone. I'd like to spend a few minutes providing an update from the field. Before I do that, I would first like to thank our entire go-to-market team for their response to this new selling environment. Though I may be biased, I've long held the belief that we have the best sales team in enterprise software. And I have never been more confident in that belief than right now, having watched our teams engage with and take care of our customers and prospective customers over the last few months. As Aneel mentioned, there were many highlights in the quarter, including the Financials first win in April at Fannie Mae. Key to signing this deal was Accounting Center, one of our new products that will enable Fannie Mae to account for and analyze their vast loan portfolio. The medium enterprise team also had another stellar quarter, continuing a multiyear trend we have seen since introduction of our Launch program, a preconfigured deployment approach with a streamlined sales and delivery, which has dramatically reduced the cost to deploy. In addition, momentum with our back-to-base team continued in Q1. With 50% plus new ACV growth, performance with our back-to-base team spans across customer segments and products, including core fins, Adaptive Planning, Learning and Prism Analytics. The mix of new ACV coming from installed customers has been on the rise for us over the last few quarters. We continue to add resources to better target the growing installed base opportunity, and we expect to continue to lean into this effort in the quarters and years ahead. We had considerable sales momentum across all areas of the business entering FY '21. However, as COVID-19 forced a lockdown across much of the global economy, we saw higher-than-normal deal pushouts, particularly…

Thanks, Chano, and good afternoon, everyone. Despite a challenging environment, we reported solid first quarter results, which we believe is a direct reflection of the mission-critical nature of our solutions. I'm going to briefly recap our first quarter and provide updated guidance for FY '21, and then we'll open it up to your questions. We had our first-ever $1 billion revenue quarter in Q1 with subscription revenue of $882 million, up 26% year-over-year, and professional services revenue of $136 million, up 10%. The total revenue outside the U.S. was up 30% to $256 million. Subscription revenue backlog was $8.19 billion at the end of the first quarter, growth of 20% year-over-year. Subscription revenue backlog that will be recognized within the next 24 months was $5.52 billion, growth of 21%. In Q1, our retention rates continued to be strong with gross retention over 95% and net retention, which includes upselling at the time of renewal, over 100%. As Chano mentioned, our add-on business is growing rapidly, and we see strong sales back into our customer base both during and outside of the renewal process. Our non-GAAP operating income for the first quarter was $130 million, resulting in a non-GAAP operating margin of 12.8%. To help support our employees during these unprecedented times, in April, we paid a onetime cash bonus equivalent to 2 weeks' pay to all our nonexecutive employees. This added $79 million to our first quarter and full year FY '21 expenses, both GAAP and non-GAAP, that was not contemplated in the guidance provided during our Q4 call. Excluding this onetime bonus payment, our Q1 non-GAAP operating margin would have been 20.6%, well above our guidance, driven by top line outperformance, lower spend on travel, some noncritical program delays and more measured hiring. Q1 operating cash flow was $264…

[Operator Instructions]. Our first questions come from the line of Kirk Materne of Evercore ISI.

I hope you all are doing well. Chano, you mentioned that customers are obviously deferring decisions. I don't think that's surprising to anybody. Is that just a matter of just business confidence in sort of managing budgets? And can you talk a little bit about whether or not that conversation is different if you're having an HCM discussion versus a Financials discussion, or it's more -- it's pretty similar across both those product offerings?

On the HCM or fins, it's a good question, but I would say that so far, we haven't seen one of these necessarily more or less impacted than the other by COVID. In both cases, there is significant ROI that we deliver to our customers and significant business benefits. But both of these are, as you know, very important systems. And the drivers of the change vary by company and situation. So it could be the need to have more agility or a burning [ph] platform or an executive change, and what we're seeing in our data is that no one area, either HCM or fins, is necessarily more or less impacted in the near term by COVID. In terms of the overall -- sorry, go ahead, Kirk.

And if I -- please, you go.

No in terms of the overall, I think you asked about the pipeline move if I'm -- am I right?

Correct. Yes.

Yes. Well, certainly, as we've said on the prepared remarks, our pipeline has definitely moved around. And in some cases, deals push out a quarter or two maybe in the large enterprise and really not significant or no changes in the medium enterprise, but I would say we don't have enough data yet to really call this accurately at this point in time. Definitely, this is something that my team is carefully monitoring.

If I could just ask one quick follow-up. You mentioned the back-to-the-base growth was really healthy this quarter. And I was just curious, given the fact that some of your customers might be pushing back bigger decisions for now, are you able to sort of toggle the sales force to focus maybe more on those back-to-base opportunities within your existing customer base? It would seem that the hit rate on those might be a little bit higher until some of the uncertainty dies down.

Yes. Thanks to you, Kirk. As you know, we already did significant investments at the beginning of this year to prepare for -- to cover the demand on the back to the base because we have a happy customer base, a great subset with SKU and solutions. So definitely, that demand was already increasing. So we felt ourselves very well prepared for it. And as we said, we had a good growth in that back-to-base customer in Q1, but we also had the same in Q4 as well. So, we feel prepared for that market motion.

If I could just add one comment to Kirk's question. We did go through a similar environment with '08 -- in '08, '09, and we really focused in on a couple of things. One was a quick payback for customers and rapid implementation cycles, where we could get HR up and running in 6 months and Financials maybe in a little bit longer than that, and we're just dusting off that playbook and using it again to -- for the net new business. I think that's important to recognize now. It's very similar to '08, '09 from that perspective, and there is a way through it.

Our next questions come from the line of Keith Weiss of Morgan Stanley.

Hope everybody is safe and healthy out there. This is a question for, I think, either Chano or Aneel. One of the things that I get asked a lot by investors is the priority for core HCM and core Financials when we get to the other side of this COVID-19 crisis. Can you talk to us a little bit about sort of the conversations you're having with your customers on where they think sort of these HCM investments and Financials investments will fall on their kind of priority stack, if you will, once the spending opens up again, once those IT budgets start to get spent again?

Well, I think, first and foremost, on the finance side, I think this crisis will be a catalyst for people switching from on-premise into the cloud for finance. And we were already seeing the growth rates but -- the growth rates at healthy levels, but I've talked to lots of CIOs, who said, I wish I had everything in the cloud right now. I am struggling with my on-premise, both because of the labor required and people required to be on site and because those systems are really not very agile or flexible, and we see our customers coming up with new reports with new work streams, all these things that they're able to do in Workday. And so, I think it's going to be a high priority on the finance side. On HR, HR is going to continue to be healthy. I think what we're going to see is a growing emphasis on the area of skills, the Skills Cloud, Learning, Talent Marketplace. All the areas where we're going to have over 30 million people unemployed, we've got to get these folks back to work, and we got to get them the right skills. And I think a lot of companies are going to be working probably alongside some of the states and local governments to figure out how to get these folks back to work, and that will be right up our sweet spot. Chano, do you want to add anything?

No.

And then perhaps one follow-up for Robynne. First of all, super cool of you guys to give that bonus to all the employees. I'll hook you up with the Morgan Stanley CFO, and maybe you guys could have a chat. But nonetheless, the full year operating margins still come up versus your prior expectations definitely from what we had in our model. How should we think about like -- and it makes a lot of sense, right? There's no travel going on, and a lot of events are coming out of the equation. How should we think about the durability of that margin gain, of that 16% if you will, as we move our model forward into FY '22? Is that the new base, and then it's going to grow from there or is this more a temporal step-up?

Yes. That's a great question, Keith. And it's -- given all of the unknowns that we're facing right now, it's really hard for us to look into FY '22 at this time. And we certainly do plan as we start to see recovery, particularly in Q4 hopefully, that we'll continue to invest in the business. So not sure that this is the new baseline, but we certainly believe that we are showing the value of our business model and how it can leverage as we scale. But we still have a lot of important work to do. And we've got a long term, very massive opportunity ahead of us. So we will continue to invest.

Our next questions come from the line of Heather Bellini of Goldman Sachs.

Hope you and your families are all doing well. I just had 2. I was wondering if you could talk to us about how your salespeople and your partners are kind of dealing with lead gen in this environment, kind of how have they adapted, if there's some stuff you can share with us there on how they might be creative on that front. And then, Robynne, I know this isn't something that you normally comment on anymore, but just given the environment and your comments about 2Q and 3Q being probably the more challenging quarters that you're going to face, any high-level comments even about how to think about unearned revenue trends for the July quarter?

Yes, Heather. So I think we definitely expect that unearned will lag behind our backlog growth, right, and will continue to do that. And part of that has to do with the fact that, as Chano and I both mentioned, we're trying to be more flexible on cash, particularly for customers that have been most impacted. And Chano mentioned that a lot of his new customer negotiations, really, that's what they're pushing on. And so we really want to use our balance sheet to help them out during this time. And so as you know, that will impact the billings and the unearned as well as the cash flow. And you should expect to see that throughout the rest of this year. The good news is that actually doesn't impact our revenue recognition profile, and so we think it's a good investment. And that flexibility has and we believe will continue to allow us to maintain our discounting levels.

Heather, in terms of the -- thanks for your question, and I hope you're doing well, keeping healthy, too. In terms of your question on demand gen, our sales team obviously had to pivot during the course of Q1 to a fully virtual environment. But the reality is that we have always had a pretty significant portion of our sales cycle done virtually anyhow, particularly in the presales portion and the demoing of our software. And so what has changed is that we have moved the entire process virtually. In terms of what we adapted, as I said on some of my remarks, we adapted our messaging and areas of focus by solution and industry. And we clearly focus more, double down on those go-to-market motions that we have more confidence that would yield best returns during these times. And obviously, you can think -- focus more on some of the surging industries or some solutions, like it could be Planning or Prism, Learning or Scout, some of the motions that we think will produce better results.

Our next questions come from the line of Mark Murphy of JPMorgan.

I'll add my congrats. I am interested in how you would characterize the environment so far in the month of May, just in terms of generating pipeline and booking new business. Should we think of that as being kind of a night-and-day difference versus late March, early April? Or is it something you'd call directionally better, but it will still kind of take some time to get back to the original plans? So I'm just trying to understand if you think it's improving or degrading kind of between late March and the month of May.

Chano?

Mark, it's early days, but we're still below our normal engagement levels and also below our normal pipeline builds. But there has been a significant uptick in engagement and positive sentiment relative to, I would say, 4 weeks ago. So much of our activity, as I said, is now focusing on certain industries where we're seeing the greatest near-term demand, but we also continue dialogue in verticals that are more impacted by COVID to ensure that we're well positioned as we emerge from this environment, Mark.

Okay. And then as a follow-up, Robynne, I'd say it's understandable that you're withdrawing the subscription backlog guidance in the back half. But that said, just considering that you still landed essentially within the original Q1 guidance for subscription backlog, I think, surprisingly and during a real chaotic period of time, do you see high odds that, that backlog growth is going to end up, say, materially below this type of glide path that you're on? Or is the confidence a little better than that, but it's just kind of such a wide range of potential outcomes at this point that it's hard to know?

Yes. Mark, it's pretty wide, I think...

Let me start with this. I think what everybody needs to recognize is that no one knows how it's going to play out over the next couple of quarters. We don't know if there's going to be another outbreak. And so everything that we are saying is our best information at this point in time, Keith. I mean if you know how it's going to play out, please let me know. So with that, Robynne, jump in, but I think that has to be the backdrop on everything right now.

Yes, that's right. And as you know, the backlog is tied to net new. It's also tied to renewals, and then it's tied of duration. And we really haven't seen -- we don't have enough data yet to predict those, how they could play out over the back half of the year because we just have far less visibility.

Sorry. I realized that was Mark. Sorry, Mark.

Yes. It's fine, Aneel. You can call me Keith. It's fine.

Our next questions come from the line of Kash Rangan of Bank of America.

I'm curious, the net new ACV growth of 50% within your base, how does that compare to recent quarters? And how sustainable is this? And also curious, what kinds of products are you having the biggest hit rate with the installed base?

Well, I'll let Chano answer the first part. I would say that it's a lot of the -- not surprisingly, the customers that are adding are adding on to core HR and core finance. In this environment, and Tom can comment on it, both Planning and Scout RFP have been very strong solutions. People are really struggling with the legacy Planning tools. And I mean I even look at Workday how many plans we've generated in the last couple of months because no one knows how this is all going to shake out. And with Scout RFP, it's a quick implementation that you can get in control of your spend in a very global and unified way, and that's another thing that's been doing well. But maybe I'll let Tom comment and then Chano comment.

Yes. Thanks, Aneel. That's right. What we've seen is a real uptick in interest in Planning. Companies are running, as you would expect, significantly more scenarios, as Aneel said. I think there was a period of time in March, we saw about a 30x increase in terms of the number of scenarios that our customers are running. So it's not surprising. So I think the importance of planning, and particularly cloud-based planning solutions, where the whole team can be connected to holistically, has resonated with customers. We've seen tremendous interest in Workforce Planning. Everybody is thinking through what the next-generation workforce looks like. There's obviously fundamental changes being driven to both location and the way we work, and that requires a focus on Workforce Planning. And then, as Aneel mentioned, I think we've also seen a lot of interest in our sourcing products. Because in periods like this, companies are extremely focused on ways that we can save money. As Chano mentioned in the script, we had the -- we saw the largest deal ever in Scout's history this quarter. So I think there's a lot of resonance with customers, and we're seeing that uptake. Chano?

Just listening to you, Tom, it sounds like maybe this is the case, and maybe this is not the case. The shift to cloud-based financials could accelerate post COVID. Is that right or too optimistic?

Well, I think generally -- and there's been a lot written about this period of time accelerating trends that were already in place. And certainly, the trend towards cloud-based applications and the need to -- and how effective it is during a period of time like this where people have to work remotely. As Chano and others have stated, there's uncertainty in the short term in terms of what the uptick in terms of adoption of enterprise applications will be in the short term. But there's no question in the intermediate and longer terms that there'll be tailwinds towards the adoption of cloud-based planning and cloud-based applications more generally. Chano?

Thank you, Tom. Kash, we've seen the 50% plus new ACV growth in the back-to-base motion in Q4 and in Q1. That's the data we've disclosed so far. And I think this is an outcome of, a, we having a happy customer base and certainly the investments we've done on the go-to-market motion to cover our customer base and as well, of course, the increase on -- broader solutions set and deeper on the -- solution offering that we have today at Workday.

Our next questions come from the line of Brent Bracelin of Piper Sandler.

I wanted to follow up on kind of the Microsoft relationship. I know you guys first announced the global partnership back in the summer of 2016. So my question here what -- how has the Microsoft relationship evolved over the last 3-plus years and maybe the new scope of what you're working with them on today?

So we've had a great partnership with Microsoft for a long time, really around Office 365 and more recently around Teams, and this just builds on that, adding Azure into the mix right now just for Adaptive. But that's -- it's also the first time that Microsoft has become a Workday customer, although LinkedIn has been a Workday customer for quite some time. So it's just adding -- it's just the natural progression of a partnership. I think Microsoft is a great company. Satya is a great CEO. We'd like to do more with them.

Awesome. And then just a quick follow-up relative to the concessions that you're giving some of the most heavily impacted customers. I know, Robynne, you talked about the base minimum not really being up for negotiation every 3 to 5 years. But I'm just wondering, are you proactively looking to kind of work with these customers that are impacted? Or is it something where it's nonnegotiable, and you really don't really see a change there until that is up for renewal?

Yes, Brent. I mean we've -- we're taking all of our customer requests on a one-by-one basis, case-by-case. But really, the vast majority of requests we're getting are along payment deferrals, not renegotiating contracts but just deferring payments. So we have not really run into an issue with customers trying to renegotiate base levels at this time, although certainly that could be the case for some that are most impacted by this.

Our next questions come from the line of David Hynes of Canaccord.

Congrats on the results. Maybe I'll take the other partnership question. Aneel, can you talk a little bit more about Work.com, what you're doing with Salesforce, what it could mean for Workday's business and maybe how you see that opportunity evolving over time? Can you guys hear me?

Sorry. Mark has been driving the contact management piece for some time around contact tracing. And we actually had started that thinking and that work all the way back to SARS. So -- and the Salesforce application at the end of the day is a content management -- sorry, contact management application. So it's really well suited to that. Mark has the same goal, and Salesforce has the same goal that we do. We want to enable our customers to get their people back to work safely. And so what we're doing is we have all the data about employees, locations, what they're learning in terms of the learning content. And Salesforce has a whole set of things with Work.com around contact tracing, tracking skills, shifts. And we're just making sure that the two technologies are completely synced so customers don't have to reconcile between the two. And if you -- and so if you're a joint customer, hopefully, this solution is really going to help you manage your way back into the office. And I think as all of you know on the phone, I mean, Salesforce has been one of our best partners, if not our best partner, almost since the day we started Workday.

Sure. Okay. That's helpful. And then maybe a follow-up for Robynne. So a few folks have hit on back-to-the-base strength in the Q&A, and I just want to tie that into net revenue retention. Gross retention has always been really strong, right, at 95%. But on the net side, is the consistent commentary about north of 100% just out of practice? Or are you actually seeing improvement there? And I guess could you get any more granular on a number for net revenue retention?

Yes. The way we actually measure net revenue is we only count add-on sales at the renewal point. And so now that we're really focused more on selling back into the base -- and that's happening during renewal cycles, but it's happening a lot more than ever outside of renewal cycles. And that's not captured in the net retention rate. So I think it's -- we're actually looking at a better way to measure it now that we're doing so many add-ons outside of renewals, and we'll probably make a change there over the coming quarters. But for now, I would just think of it as, as long as the way we are calculating it remains over 100%, that's great news. And then on top of that, we're selling a lot more into the base outside of those renewal cycles.

Right. Okay. That makes a lot more sense.

DJ, I'm going to ask Pete Schlampp, our Head of Applications, to weigh in on the Salesforce partnership, too. He's closer to what we're actually doing from a product perspective.

Peter? That would be great.

Yes. Thanks, Aneel. And good question, David. As I think about Salesforce and Workday, Salesforce has all this rich information about the workplace, and Workday as...

Pete, I think your volume is on Zoom and not on...

Better?

Yes. But you need to mute Zoom.

I see. Got it. So as I think of the two, Salesforce has the data about the workplace, and Workday has the data about the workforce. And some of the most rich data that we have is data about skills. And so as companies are going through these big transformations that are happening with workers, with, all of a sudden, some demands in certain areas that they didn't have before and vice versa, being able to make those transitions quickly and use that skill data is so essential. So when we think about getting companies back to the workplace safely, securely, and their people back safely and securely, it's about the data and bringing these 2 data sets together, whether that's in Salesforce's, in their command center, in the Work.com command center or whether it's within the Workday application set itself. And that's how we're going to really start things off, is with the data integration and then develop more applications as we go forward.

The next question comes from the line of Scott Berg of Needham Company.

I only have one here in essence of time. Aneel or maybe Chano, probably Aneel. Just wanted to see if you had some additional comments on Workday Extend now that it's finally available in GA. Trying to understand the revenue model of it going forward, kind of how has it evolved today versus the initial announcement 2 years ago? And do you envision customers or other companies building commercial apps that they could actually sell off of it, like what happens on Force.com?

Well, I'll take a quick crack, then I'm going to send it over to Pete. And hopefully, Pete gets his technology right this time. Excuse me, Pete. So Workday Extend is really focused on extensibility for our customers. And we're not looking to open up an ISV community to build commercial applications. Our customers are getting great value from Extend. I mean we've had Extend in limited general availability for several quarters, and so we really got a good handle on the use cases. And now what we're seeing customers doing is building, I call it, more mini apps and extensions. They've done a lot of it around COVID-19, whether it's to track essential workers, to track -- one of our customers is tracking cases of COVID around the globe for manufacturing plants. So it's really whatever our customers want to do and extend our business model, but definitely not ISVs. And Pete, what else should we add to that?

Thanks, Aneel. You'd think I'd have the mute thing figured out here after working from home for the last two months. The -- really, I think the success that we've had so far, I'd like to highlight, 50 -- over 50 customers using it, over 90 different solutions built on the platform already. So we're going into this GA period with a lot of existing momentum. As we think about the products, we think about really extending the entire use -- the entire surface of the Workday platform, all the applications that we have in Workday, and then enabling our customers to extend those. And so we continue to open up new surface areas, and I think that gives the different possibilities that customers can develop on top of the funnel.

And I guess just to come back to the revenue question or the bookings question, I still wouldn't expect much for fiscal year '21. But I do think it can be a decent contributor in fiscal year '22 and beyond and a high-growth contributor.

Our next questions come from the line of Brian Schwartz of Oppenheimer.

Chano, I had a follow-up question. I think it was to Heather's about the marketing funnel and the lead generation. You commented on what the timing could be for these sales cycles, but can you shed light on what you are seeing in terms of the values? Are the deal values holding up at a similar rate as you've seen in the past as they are progressing through the funnel towards closing?

Thank you for your question, Brian. I would say it's very early days, and we've seen no shift of significance to comment on. Certainly, when I monitor the pipeline coming in for either, I know, later on to this year or new pipeline coming in from FY '22, at this point in time, we have been -- and we've managed as well to qualify some significant or large deals in terms of value, even on the environment we are into. Of course, then we need to be able to progress those deals and finally close them. But nothing to highlight in terms of change on those deals. Are they being considered that they are shrinking, or are they having less duration or any kind of things like those? Not really. We need more -- definitely a bigger trend and more data points during the rest of Q2 and Q3. But right now, that's what I can share, Brian.

Ladies and gentlemen, thank you for your participation on today's conference. This will conclude Workday's First Quarter Fiscal Year 2021 Call. Thank you again for joining us, and have a great evening.