Welcome to Workday's Fourth Quarter and Fiscal Year 2021 Earnings Call [Operator Instructions]. And with that, I will now hand it over to Mr. Justin Furby, Vice President of Investor Relations. Please go ahead.

Welcome to Workday's fourth quarter fiscal 2021 earnings conference call. On the call, we have Aneel Bhusri and Chano Fernandez, our Co-CEOs; Robynne Sisco, our President and CFO; and Pete Schlampp, our Executive Vice President of Product Development. Following 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. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions, including those related to the impact of the ongoing COVID-19 pandemic on our business and global economic condition. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for additional information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth 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 Web site. The webcast replay of this call will be available for the next 90 days on our company Web site under the Investor Relations link. Also, the customers’ page of our Web site includes a list of selected customers and is updated monthly. Our first quarter quiet period begins on April 16, 2021. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2020. With that, I will turn it over to Chano to share go-to-market highlights in the quarter. He will then turn it over to Aneel, who will provide updates on the strategy and innovation front, and then Robynne will close with our financials and guiding. We will then open the line up for your questions. Over to you, Chano.

Thank you, Justin. I hope all of you joining us today are in good health and that your families are doing well. It has been a challenging few months of the pandemic, but there is significant cause for optimism. We had a very strong growth through the year as companies increasingly realize that HR and finance are the true backbone of their digital transformation. This realization is leading to significant pipeline improvement. And as we enter FY22, we are well positioned to drive accelerated new bookings growth. Our solid results were driven by another quarter of strong execution of high conversion rates. We once again drove strength in North America, with vertical standouts in education and government, healthcare and the professional services market. Both the large and medium enterprise teams outperformed, driven by continued momentum in our installed base efforts, as well as improving performance in our net new business. The strength in our HCM solutions was a critical contributor to our Q4 performance with notable customer additions in the quarter, including Nike, ABB, Anthem, Cognizant Worldwide, Cox Enterprises, Ferrovial Corporacion, First Rank Bank, Laboratory Corporation of America and Peakon paid retailers. We also saw significant uptake across our newer solutions that support the office of the CHRO, including People Analytics, Alpine Journeys and Talent Marketplace. By leveraging these applications, organizations are addressing and fundamentally rethinking important questions like how to end institutional bias, how to reshape the workforce to meet today's demands and how to spot the engagement risk and execution line response. The FINS plus solutions also had a strong quarter and continues to represent an increasing percentage of our new business mix. We have several strategic core FINS wins in Q4, including a Fortune 500 win of Franklin Tempesto, which included Accounting Center, Minnesota State Colleges and…

Thanks, Chano, and thanks, everyone, for joining today's call. Last August, we shared the exciting news of Chano's promotion to Co-CEO. In six months in, I couldn't be happier with the positive impact of this change. Chano has always been at the center of our go to market and customer-facing activities, while allowing me more time to focus on our product strategy and innovation. This increased focus could not have come at a more important time. Our innovation cadence has accelerated and we're excited to continue to bring out market leading innovation to support our customers. Chano touched upon our successes in expanding our presence within our customer base. A big part of the success was driven by the introduction of new products. Indeed, in the last three years, we have delivered 50% more in terms of monetizable solutions as compared to the prior three years. As the trends around digital transformation and acceleration continue unabated and with the increasing gap of what traditional legacy ERP can deliver and what our customers need, Workday finds itself in a unique position to not only help companies close this gap through a new class of enterprise management cloud but also to truly serve as the backbone of their digital transformation. We are enabling digital transformation journeys for more than 8,000 customers, including over 3,500 core HR and finance customers and we're excited to go further with them on this journey, and to embark on a new journey with our next wave of customers. This concept of accelerated business change has been a core design principle since we founded the company. Workday enables organizations to turn transactional silos into a complete unified picture, hardwired processes into responsive automation and periodic into real time and continuous planning, execution and analysis. And our solutions aren't…

Thanks, Aneel, and good afternoon, everyone. As Chano and Aneel mentioned, we executed incredibly well in the fourth quarter, demonstrating the strategic and mission critical nature of our solutions and the resiliency in our business during these unprecedented times. Subscription revenue was $1.01 billion in Q4, our first ever quarter over the $1 billion mark, representing growth of 20%. For the full year, subscription revenue was $3.79 billion, growth of 22%. Professional services revenue was $125 million for Q4 and $530 million for the full year. Fourth quarter revenue outside the US was $283 million, representing 25% of total revenue. Subscription revenue backlog was $10.09 billion, growth of 22% and our first ever quarter above $10 billion in backlog. The outperformance was driven by better than expected new bookings against a very difficult comparison in addition to strong renewals, with gross and net retention rates over 95% and 100% respectively. Backlog also benefited from a notable lengthening of average contract duration for both new customers and renewals. Subscription revenue backlog that will be recognized within the next 24 months was $6.53 billion, growth of 19%. Our non-GAAP operating income for the fourth quarter was $211 million, resulting in a non-GAAP operating margin of 19%. For the year, non-GAAP operating income was a record $867 million or 20% of total revenue, up more than 650 basis points from FY20. This expansion was driven by a continued scale in efficiencies, a reduced pace of hiring and other COVID related moderation of expenses, including reduced spend for travel and events. Operating cash flow for Q4 was $554 million, growth of 86%, bringing our full year operating cash flow to $1.27 billion, 47% growth. Record cash flow results were driven by strong cash collections as well as the substantial operating margin expansion. Our total…

[Operator Instructions] Our first question comes from the line of Kash Rangan with Goldman Sachs.

I'm trying to reconcile the strength in the quarter. Congratulations, that's a fantastic quarter. You've seen accelerating backlog growth for the past four quarters, and you're talking about accelerating pipeline growth going forward. Yet, I can really understand the new business bookings were somewhat challenged. But I'm also trying to reconcile all the positives against the outlook of fiscal '22 subscription revenue growth here. Maybe if you could just shed a little bit finer light on how we should expect the shape of fiscal '22 to unfold? And obviously, the point is well taken that getting out of fiscal '22 into '23, we could see even better trends. So can you just paint the shape of the recovery? And where do we bottom out in terms of subscription revenue growth, when are we likely to see the acceleration based on all the good things we're hearing from you guys? Thank you so much, and congrats again.

I'll take the first pass, which is the metric that we run the business on at Workday is growth in bookings. And we're really excited about what we see over the next 12 months. Subscription growth bookings is a derivative of that number. And as you know, subscription accounting is based on multiple years factoring into that. So I wouldn't look too much at subscription gross bookings. And I would try to figure out what we're actually doing in this next year, which is a reacceleration on the fiscal front. And then maybe I'll ask Chano and Robynne to add a few comments to that.

So as you know, our subscription revenue this year is really a direct result of the headwinds to that new business that we experienced last year, and we've been previewing this the last couple of quarters. So that's an important point. I'd also point out that we've been saying for a while now that our goal has been to flatten the declining growth curve and then ultimately reaccelerate. And as you can tell by the fact that our Q1 revenue guide growth is the same as our full year, this is the year we expect to flatten that curve, which is a really positive thing. And then to Aneel's point, if we can reaccelerate the bookings growth, which we absolutely believe we can then that will ultimately lead potentially to subscription revenue acceleration. But there's a lag there, so it's going to take some time.

Our next question comes from the line of Mark Murphy with JP Morgan.

Great to hear all the positive news. I'm wondering if you can provide any insight into the internals of the financials business the last two to three quarters. Is it safe to assume that, that bookings mix of the core general ledger softened up a bit just because of macro uncertainty, and maybe that pivoted more toward planning and scout and those other areas? Just trying to understand the magnitude of any shift there. And then moving forward, what do you think is the main catalyst that a finance team is focused on to say, now we're looking at the right conditions to modernize the general ledger and maybe bite off a bigger chunk that would give you a tailwind?

Let me just cite some Gartner data that we got a few months ago, and I think it's instructive for how the market is working today. So they let us know that core accounting or core finance inquiries were down 14%. Core planning inquiries were up, I think, close to 30%. And as the pandemic eases, what they also said was that while many of the core accounting projects were going to be delayed, the ones that were in '23 and '24 and '25 were getting suck forward, because people realized that they needed to start on that digital transformation journey for financials. And so while it's been a tough time for financials during the pandemic, I actually think from here on now it's going to get accelerated. But I really want to let Chano comment on this.

FINS is certainly a key part of the reacceleration story, Mark, and we are seeing more of these opportunities coming to market. And not only did we see improvements in our FINS business in Q4, several strategic wins that we mentioned, but we also have solid FINS pipeline growth as well. But it is broader than core FINS, as you’ve highlighted. It is a broader solution set and we're selling into the office of the CFO, which also includes spend management, analytics and our planning solutions, as Aneel was highlighting. So we're really meeting our customers where they are in the journey. And there are emerging opportunities to our entire enterprise finance solution, which leverages Prism and Accounting Center, where we're now better positioned to go after product based industries like retail and manufacturing, and that opportunity we did to have before. So we're widening our addressable market.

If I could just add one more thing that we had a business plan going into the year pre-COVID. And without going into the details -- I can't go into the details of how close we were, but we were in shouting distance of our original plan around our overall business. And if you would told me that in April of last year, I would not believed that. And so it's a great testament to our team. But also the fact that digital transformation is accelerating and the folks that were not on cloud platforms realize they needed to be. And so it's one of the drivers of our optimism going forward. Thank you.

Our next question comes from the line of Keith Weiss with Morgan Stanley.

It's good to hear the momentum is going back into the business. Chano, I guess this would probably be a question for you. This quarter you guys saw good durability in that upsell, brought that new ACV up over 40% on a year-on-year basis. And if I'm not mistaken, this is the first quarter that you're anniversary-ing a really tough comp. I think you guys told us it was like up 50% in the quarter ago. So how does that -- can you talk to us about sort of whether that type of strength is possible, or it could be durable into the year ahead? Can you continue to see that type of growth coming from the upsell motion? And any sense you could give us in terms of what percentage of the overall kind of new businesses that represent today?

As we highlighted, we had another fantastic quarter with 40% plus growth in add-on sales, and that makes kind of 50% for the whole year. That it was really driven across a lot of different products, including core FINS, Financials, Workforce Planning, Prism Analytics, Learning and Workday Strategic Sourcing. But some of them were products as well as contributing, like Accounting Center, People Analytics, Extend and heath also contributed especially in the last quarter at those products were earlier in the year, meaning in the beginning of the year. So we see nice strength in pipeline build from our store based teams. And there is a lot of momentum on this effort as we enter into FY22. And definitely, this is a certain area where we are strengthening our investments as well that Robynne is commenting in terms of our investments on what are carriers. So in terms of the mix, it is definitely becoming a much more significant contributor of our new business in FY21, the business that is coming from the upsell and the cross sell. And we expect that over the medium term, our growth will become increasingly more balanced between the new and installed base sales. But we have a lot of emerging opportunities believe that will accelerate this year, and we're seeing signs of that in the pipeline as well, Keith.

And then maybe one for Robynne, just on the margin side of the equation. Definitely understand that there's some -- I mean, there's some inorganic pressures that you have on the operating margins going into the year ahead. And then there's also just a reacceleration in spend against a subscription revenue line that amortizes off the balance sheet versus kind of marks what's going on in real time. And then there's also some sort of T&E spending and the like that didn't take place in FY21 that take place in FY22. Can you help us -- on those last two, can you help us kind of foot like how much comes from the first versus the second or more pointedly, what's the overhang that you guys experienced from sort of T&E coming back?

T&E, we don't expect it to really come back until near the end of the year, Keith. And even though we're not quite sure exactly, we don't believe it's going to come back 100%. So we expect that pace to continue to be slower. So we really are focusing more when you look at increases in the spending around headcount. We were relatively flat in hiring last year. We did some strategic hiring, we're relatively flat. We're going to be hiring now across all areas of the company with, as I mentioned, specific focus on investments and sales as well as in product to take advantage of the great opportunity that we see in front of us. We're going to spend more nonheadcount wise in marketing, which we think now is the time. We've seen great momentum in the pipeline generation. We think we can help that out by turning up the dial on operating spend. And then investments in infrastructure, technology, data centers, really just across the board that you see just amazing growth opportunity ahead of us, and now it's the time for us to invest towards that.

So this is subscription model, right? The subscription line reflects what happened last year in terms of billings and deferred revenue buildup, but you need to invest this year for a better demand environment. And that mismatch, that's what's pressuring your margins in the year ahead?

That's exactly right. Your investment always have to take place before you're going to see the impact in your subscription revenue line. And if you take out the impact of Peakon of 100 basis points, we're largely back on that trajectory we were before last year. And so we're just getting back to business and back to normal, and we feel really good that now is the time to make those investments.

Our next question comes from the line of Kirk Materne with Evercore ISI.

Congrats on the result and that's great to hear about the pipeline builds going into this year. Along this line, Chano, I was wondering if you could just talk a little bit about the international market opportunity. What you've seen in that theater or in those theaters, maybe also where you think core FINS is internationally? Obviously, the US saw HCM take off first and then since it’s been sort of trailing. I'm kind of curious whether or not core FINS can maybe land at more of -- at the same time, maybe not the same accounts, but at the same time or proportionally in some of these international markets that are a little bit smaller? Thanks.

As you know, as you said, we are much earlier days in penetrating international markets relative to where we are in the US, but we see a big opportunity in the rest of the world. And we are very optimistic around this opportunity and what it means for us. I think we also saw a bit more impact from COVID in the rest of the world market that we have seen here in the US. And I think it's really when we get to the other side of COVID, we should see accelerated momentum that is fully reflected on the numbers. And why I believe so is because the good news is that the pipeline is certainly improving in the rest of the world markets, and I expect that there would be a key contributor to the acceleration this year too. In terms of financials, I would say that I don't think the gap is as big in terms of lagging behind what we saw in HCM, Kirk. We're seeing good wins in international in similar verticals, mainly in financial services and professional services and some hospitality. And now with Enterprise Finance, we are expecting as well and with Accounting Center that we can see into broader industries and some product industries. But initially, we're more focused on the services industry and clearly some of the most mature countries like the UK, I would say, France and Germany, we're seeing and we have already a nice customer base of core FINS customers that are becoming basically happy and referenceable.

Our next question comes from the line of Brad Sills with Bank of America Securities.

I wanted to ask about the vertical pipeline. Obviously, you're seeing some real success in some of these key verticals for FINS. And as you know, financials is not a one size fits all, and you've done a tremendous job of adding more vertical functionality, and I think, seeing some of the traction in some of these verticals that you're citing with some of these wins here. I guess my question is, if you look across the verticals where you made investment for FINS, where do you feel best? Is there one that is ramping perhaps faster than others where perhaps the vertical functionality is ahead of the others, others that we should expect more in the future? Any commentary on just the vertical pipeline across the different key verticals for FINS.

Brad, I think there are three I would highlight. One would be clearly financial services. The other one would be healthcare, and those are very significant deals for us. And the other one would be state and local and government not sad at all. And on those three where we made investments, we're seeing very good traction in terms of the maturity of the solution but in terms of our customer wins and our conversion ratios.

Our next question comes from the line of Brent Bracelin with Piper Sandler.

For me, obviously, the success you're having upselling add-ons in the installed base is very encouraging here, which leads to my question on Peakon. I know it's still very early. But as you think about this employee experience market, it is moving fast. Microsoft made a big splash last month. SAP did a partial spin of Qualtrics. You're seeing new VC funding into Culture Amp, Lattice, next thing. What's been the early feedback so far on Peakon? How is it different? And how quickly could you scale the attach rate in the installed base? Thanks.

I'll take the first two parts and let Chano address the third. This is a hot space. There's no question about it. We actually had good offerings in the space. And then COVID hit and the demand for more insight into how employees were feeling during this period of time just exploded. And Peakon, if you look at all the magic quadrants and analyst reports, they're the leader. They're the best. And we looked at what we were doing and said, we can get there, but not at a time that matters because the market is happening now, and these guys were the market leader. So we couldn't be more thrilled to have them as part of Workday. And it's become a super high priority item for every CEO, CHRO to understand employee sentiment. In terms of -- the other thing I'd add is, they were a very cool machine learning first application. They countered on that machine learning to drive them to better insights. And that's the way that we want to go as well. So we're super excited about that synergy on that front. And in terms of upsell opportunity, I'll turn it over to Chano.

Brent, clearly it has not closed yet, right? So I just wanted to mention that. But we are really excited when the deal closes and we are cautiously optimistic that it's going to be a fantastic one. We have some great learnings out of Adaptive and Scout that certainly are going very well. But as Aneel is saying, this is such a hot space. They had a great solution. The majority of their presence is in Europe, but they already have some nice flagship logo in the US. And clearly, with our distribution channel in the US and again, cautiously optimistic that this is going to be fantastic, what we can do to better.

Great. Well, sounds good and we’ll be watching this one closely. Thanks.

And I would just like to add that, again, even though it has not closed, the initial customers' feedback is very good.

Our next question comes from the line of Mark Moerdler with Bernstein Research.

Robynne, I think you mentioned this a bit, but could you give a little additional color. Last quarter, you discussed the expectation of contract duration decreasing for billings both on the new contract side and on the renewal side. Can you give us a little more color on how big an impact did this really have and how do you see that in terms of the pipeline in terms of what you think those contracts are going to be? Are they going to be shorter? Are they going to be a return to what we've seen in the past? Thank you.

Mark, when we were forecasting total backlog, it's really hard for us to forecast the duration and you saw that this past quarter in Q4. And the best way to really measure that impact is if you look at the 24 month backlog growth, it was 19% in Q4. The total backlog growth was 22%. So that differential in growth rate is due to increase in duration, which we had not been able to foresee when we first entered into the quarter and had our earnings call. So that's, frankly, one of the big reasons we decided to move forward guiding 24 month backlog is because that really takes a lot of that guess work around duration coming out. We did see a lengthening on durations in Q4 across both net new contracts as well as renewals, which was a really interesting dynamic. Overall, we let our customers drive the length of contracts that they want but we see longer contracts as a positive for us as you don't have renewal risk as often. So if customers are entering the longer contracts and then renewing under longer contracts, then that takes away some of the risk to your revenue for nonrenewal. So we like that dynamic. We just are going to let our customers continue to drive that. So it's difficult to predict. And I don't know, Chano, if you want to add anything to what you're seeing?

I would just say that -- as we said, we have to expand our guardrails in place for contracts, but we really don't incentivize our sales teams on total contract value. So it's really driven more by customers than any other thing. So I think that the fact that customers are signing longer and longer contracts, which sometimes can be five to seven years longer, I think it's rare in the enterprise software and really speaks to the strategic nature of Workday and the trust that customers place on us.

Our next question comes from the line of Brian Schwartz with Oppenheimer.

Chano, I have one question for you. It's just around the increase in the sales and hiring comments this fiscal year. I was just wondering if there's any particular product area or geography where you see that there's a big opportunity where it's more a function of just not having enough of the sales bandwidth. Does anything stand out to you as you increase your growth investments in this year's fiscal plan? Thanks.

I mean, we're making investments in a number of areas within sales and marketing, helping support our growth efforts, because we see the opportunity is clearly there. And it is in the areas like installed base team, the rest of the world markets, our ongoing efforts in mid market to push in new countries, some of the vertical markets and then some new areas like the federal government. So it's clearly across the organization. So there will be marketing and presales, current securities and certain marketing and brand investments as well. So really, this is about driving the pipeline and bookings growth and basically chase the opportunity that we've been creating, and we have ahead of us to invest in capitalizing on our -- a bit across the board.

Our next question comes from the line of Brad Reback with Stifel.

As you guys think about the acceleration of the potential for acceleration in billings in fiscal '23 and beyond. Does that the underlying sort of foundation of that, the split between HCM and financials look different going forward or do you expect it to be similar to where we are today? Thanks.

Well, I would just say, the HR world was already pre pandemic full into the mode of cloud first and almost every function in HR was moving to the cloud as clear as they could. Finance was not at that same place. And so during the pandemic, we saw companies that were moving to finance to the cloud, we saw other people saying, hey, let's just wait until we get out of the pandemic and then we want to move forward. The most optimistic thing that I learned over the last 12 months around finances, the ones that the customers that were using legacy finance systems were challenged to run their business and said, we need to move to a modern finance system. And if you look at all the Gartner data, that means that finance is going to be a pretty hot area over the next two to three years. Is there anything you want to add, Chano?

Not much. I think we saw improvement on new ACV in Q4 across both of the areas. But even it's more encouraging, the pipeline signs across both HCM and FINS plus, both for new opportunities as well as the solid traction on the installed base. So I guess we see opportunities in both.

And if I could add just one thing that we actually saw companies that were struggling with their legacy finance systems during the pandemic, just actually accelerate their requirements to go to a cloud based solution and it's a very lowly penetrated market right now. So we just have a lot of upside. I know I've been in the pied piper. I'm talking about finance for probably a decade at this point. But I really think that finance transformation is upon us.

We will now take two more questions. Our next question comes from the line of Brent Thill with Jefferies.

Robynne, you mentioned you're going to be leaning back into sales hiring this year. I'm just curious if you could just maybe give us the shape of the curve of hiring, specifically in sales this year versus kind of last year? I just want to clarify that I think you said hiring was pretty flat. Can you just give us any color around what you anticipate doing into this fiscal year? Thanks.

So when you look back over our headcount growth in FY21, it was pretty flat. I think incremental hires were maybe a few hundred across the whole year. We'll do significantly more this year across all areas. And those are weighted heavily towards sales and product more so than any other organization. So we do expect to invest a lot there. And I'll hand it over to Chano to talk about where some of those investments will incur, but it will be a significant acceleration of hiring in FY22.

I think we were mostly flat as you commented and is the area, as I said before. So installed base is rest of the world to support the new enterprise market efforts, some new areas like the federal government. And clearly, we are putting plans in place for accelerating there and bringing the people on board as soon as possible. And of course, there will be some growth compared to what we had last year. It's not like we're going to go into high double digit growth, but I guess some nice single digit growth and then hopefully continue that trend, with that acceleration investments in sales as we are leveraging that opportunity ahead and the pipeline that we've been creating.

Your next question comes from the line of DJ Hynes with Canaccord.

Aneel, in your prepared remarks, you quantified the increase in the number of SKUs you guys have made over the last three years. So I think you said it was up 50%. Do you have any data that says our average customers using this many modules and maybe how that might compare to your best customers? And I'm wondering if there's any way to kind of put that comparison with spend per employee? It would just be helpful to help think about the capacity for the cross sell opportunity.

DJ, I don't have that exact data. What I do have is data, and I'll turn over to Chano about what percent of our new bookings in Q4 came from new products. Because I think that's a more telling data point on how are these new products doing within our customer base. So Chano, what do you think?

Yes, that's the main data we track in terms of the growth. So a significant part of the growth that we've been commenting, 50% plus last year on installed base, is coming from that 50% of the new solutions that we've been delivering over the last three years to the market. So those are contributing significantly. When you look at the pipeline, it's kind of pretty similar. The conversion rates are also higher there. Clearly, we're knowing every customer, the wider space we do have. Clearly, usually we know that meeting enterprise customers tend to acquire a number higher SKUs, six or seven to start with through the launch deployment that we have for medium enterprise. But with the increased efforts in terms of both product innovation and the sales capacity that we’d be adding into installed base, those penetration ratios in terms of how the new SKUs are progressing, moving towards the best performance peers, is starting very nicely, and I hope can provide some much more detailed information on this on our upcoming financial Analyst Day.

And I would add, Keith, that we have a lot of upside with Peakon. This area of employee engagement is one of the hottest areas in the market right now. We were already in that market with our own pulse surveys, but clearly the market wanted more. And this company during the pandemic grew far more rapidly than Workday did, and I'm excited to bring this great capability to our customers.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. This will conclude Workday's Fourth quarter Fiscal Year 2021 Earnings Call. Thank you again for joining us.