Mike Magaro - Vice President, Investor Relations Aneel Bhusri - Co-Founder and Chief Executive Officer Robynne Sisco - Chief Financial Officer Chano Fernandez - Executive Vice President, Global Field Operations

Mark Murphy - JPMorgan Richard Davis - Canaccord Genuity Justin Furby - William Blair & Company Keith Weiss - Morgan Stanley Kash Rangan - Bank of America Merrill Lynch Karl Keirstead - Deutsche Bank Michael Baresich - Wells Fargo Securities LLC Adam Holt - MoffettNathanson Ross MacMillan - RBC Capital Markets John Di Fucci - Jefferies Brad Reback - Stifel Nicolaus Alex Zukin - Piper Jaffray Pat Walravens - JMP Securities Steve Koenig - Wedbush Securities

Welcome to Workday’s Third Quarter Fiscal Year 2018 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 call. And with that, I will hand it over to Mike Magaro, Vice President of Investor Relations.

Welcome to Workday’s third quarter fiscal 2018 earnings conference call. On the call, we have Aneel Bhusri, our CEO; Robynne Sisco, our CFO; and Chano Fernandez, our EVP of Global Field Operations. Following Aneel and Robynne’s prepared remarks, we’ll take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Statements made on this call include forward-looking statements, 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 in documents we file with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q for 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’ll 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 on the Investor Relations page of our website. The webcast replay of this call will be available for next 90 days on our company website under the Investor Relations link. Also, the customer’s page of our website includes a list of selected customers and is updated monthly. Our fourth quarter quiet period begins at the close of business on January 15, 2018. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2017. With that, let me hand it over to Aneel.

Thank you, Mike, and good afternoon, everyone. Thank you for joining our third quarter earnings call. I’m pleased to report that Workday had another strong quarter. As we highlighted at our Analyst Day in October, we believe we are still in the early stages of the transition to the cloud for HCM and Financial Management applications. And as a company, our focus continues to be on driving innovation and customer satisfaction as we continue to broaden our portfolio of offerings. In Q3, we saw healthy demand across all product areas and geographies. On the HCM front, we added great new customers, including Lowe’s Corporation, M&T Bank Corporation, Lloyds Bank plc, Software AG and Oshkosh Corporation. Consistent with past quarters, more than 70% of our customers are in production. A few of the notable go-lives included Dell USA, Coca-Cola Company and Cerner Corporation. We also continue to see strong traction for our Financial Management suite of applications. In Q3, we added 37 new Financial Management customers, up over 60% from last year. Some of the new financial customers include Sanford Health, University of Louisiana and Melco Resort Services. In addition to the strength of our core financials offering, we also added another 34 planning customers, bringing our total number of planning customers to over 200. And as importantly, we continue to deliver on our commitment of getting customers live and successful. Some of the key go-lives for the quarter include, Unum Group, Accuride Corporation, and University of Miami. Our momentum and customer success was most recently seen at our Annual User Conference Workday Rising, which took place last month in Chicago. We had more than 8,500 attendees, including almost 5,500 customers, representing over 1,200 organizations. Additionally, we had over 650 prospective customers, representing 270 organizations, our largest prospective customer participation at Workday Rising in the history of the company. At the conference, we also revealed our annual customer satisfaction rating, which came in at 98%. And just two weeks ago, we had a similarly positive User Conference in Barcelona for our European customers and prospects. We continue to believe that our relentless focus on customer success is a unique differentiator in our marketplace and is a major reason for the continued growth of our customer base across the globe. One of the keys to our high customer satisfaction is our continuous innovation cycle, which brings new capabilities to our customers on a frequent basis. During the quarter, we were pleased to introduce Workday 29, highlighted by the general availability of Workday Prism Analytics and Workday Data-as-a-Service. Workday Prism Analytics brings together all of the data and business analytics needed to make critical financial people and business decisions and enables customers incorporate non-Workday data as part of the Workday reports, dashboards and scorecards. I’m excited to share that Hitachi, Shelter Insurance and United Technologies Corporation are some early adopters of this leading edge solution. On the Data-as-a-Service front, we introduced our first offering, Workday Benchmarking, which provides key metrics to our customers to help them better understand their company’s relative performance in comparison to peers and achieve optimal performance in their respective markets. This solution is offered on an opt-in basis and has the potential to leverage the data across 1,900 global organizations and over 26 million workers. Switching to the people front, a key part of our success continues to be our company culture, which enables us to have very high employee satisfaction scores and greatly helps us to attract new talent across all levels of the company. In the past 12 months, we’ve had particular focus on bringing in senior talent into a worldwide field operations organization that is led by Chano. I’m pleased to report on our newest addition to the senior management team of the company, John Schweitzer. John joined us a few weeks ago as Senior Vice President of Sales and is responsible for sales and field operations for the North America region. John brings strong senior executive sales experience and a reputation for building great teams to Workday and has a strong track record of success at both emerging and large enterprise applications companies. As we look forward to Q4 next year and beyond, we are confident that we are well-positioned for continued growth in all of our markets. As a pure cloud vendor, our technology advantages such as in-memory computing and true multi-tenancy continue to serve us well and enable us to build differentiated solutions for our customers. As a result, we have firmly established ourselves in a leadership position for HCM, where we continue to have an unparalleled combination of product capabilities, technology scalability and customer referenceability and expect to continue to grow our business and market share in this category in the years to come. On the Financial Management front, we are increasingly being viewed by analysts as one of two leaders in the space, as the market begins to transition from on-premise to cloud solutions. The market shift is well underway in the Medium Enterprise segment of the market and is beginning to emerge in the Large Enterprise segment as well. And lastly, in 2017, we have laid the foundation for future growth for many years to come. While our HCM and Financial Management suites will continue to be the primary drivers of growth in the near-term, the introduction of Workday Prism Analytics and Workday Cloud Platform sets the stage for Workday to expand our total addressable market and become a more strategic supplier to our customers, with both initiatives representing billion dollar plus revenue opportunities. With that, I will now turn it over to Robynne.

Thanks, Aneel, and good afternoon, everyone. As Aneel mentioned, our third quarter is an exciting time of the year as we host our U.S. Workday Rising Event. It’s always great to meet our amazing innovative customers and to be able to speak with new prospects looking to transform their business with Workday. Rising is also when we hosted our Analyst Day and it was great to see so many of our analysts and investors in attendance. We appreciate all the support and interest in our company. Let me start with our results from the third quarter fiscal 2018. We delivered another strong quarter with total revenue of $555 million, reflecting year-over-year growth of 34%. Our Q3 subscription revenue was $464 million, up 37%. Our subscription revenue outperformance was driven by net new customer growth, solid add-on sales and high renewal rates with existing customers and a continuation of the improved in-quarter linearity we’ve seen this year. Our Q3 professional services revenue grew 21% to $92 million. As we highlighted at our recent Analyst Day, we’re continuing to invest in global expansion, as we believe international markets provide significant future growth opportunities for Workday. In our third quarter, total revenue outside the U.S. was up 48% to $116 million, representing a record 21% of total revenue. Non-GAAP gross margins for the third quarter rose to 74.1%, primarily as a result of the continued mix shift towards subscription revenue. Our non-GAAP operating profit for the third quarter was $50 million and operating margin of 9%. We did not see any material impact from FX changes within the quarter. Our relentless focus on customer success continues to drive our business forward. High customer satisfaction drives strong renewal rates, customer referenceability and add-on sales, which support both long-term growth and profitability. We believe we’re unique in our customer-centric approach and have a differentiated long-term model as a result. Total unearned revenue at the end of Q3 grew 21% year-over-year to over $1.2 billion. Current unearned revenue, which will be recognized over the next 12 months was over $1.1 billion, representing annual growth of 27%. Consistent with our communication last quarter, non-current unearned revenue was down 18% year-over-year due to fewer customers paying more than one year of subscription fees upfront. The amount of the decline in the quarter was less than we had anticipated as we saw cash upfront trend up a little in Q3. When looking at trends in unearned revenue, both short and long-term, please keep in mind that balances in any given quarter are impacted by increasing seasonality, as well as variability in the timing of renewals, net new opportunities and contractual billing terms. Our subscription revenue backlog, which represents all future revenue from existing customer subscription contracts, both on and off-balance sheet was $4.5 billion, up 3% sequentially and 37% year-over-year. Approximately, two-thirds of the backlog is expected to be recognized within the next two years, with the remaining balance to be recognized thereafter. As I have mentioned before, one of the factors impacting this number is the duration of contracts signed in the quarter. During Q3, we saw a marginal decrease in duration from previous quarters. Duration is generally a product of deal size and customer preference and may vary quarter-to-quarter. In Q3, $421 million of our $464 million of subscription revenue, or 91% came from the balance sheet. This is consistent with Q3 of last year, where 91% also came from the balance sheet. Our biggest investment continues to be in our people and in attracting top talent to Workday. During Q3, we successfully added and integrated 500 net new employees, bringing our total workforce at the end of the quarter to almost 7,900. Cash flow from operations was $144 million in Q3, and our trailing 12-month operating cash flow was $449 million, up 32% year-over-year. Our trailing 12-month free cash flow was $311 million, up 49% year-over-year. During the quarter, we also issued $1.1 billion of 25 basis point coupon convertible senior notes due in 2022, resulting in our ending the quarter with over $3.2 billion in cash, cash equivalents and marketable securities. This positions us well to settle our convertible notes previously issued in 2013, continue to invest in long-term growth and maintain financial flexibility for strategic investments and opportunistic M&A. Operationally, we continue to execute exceptionally well as we head into the fourth quarter, our seasonally strongest. The continued strength in our business is allowing us to raise our fiscal 2018 outlook as follows. For subscription revenue, we’re raising our full-year estimate to be in the range of $1.78 billion to $1.782 billion, or growth of 38%. We expect our Q4 subscription revenue to be $482 million to $484 million, or 31% to 32% growth. As we’ve mentioned previously, the year-over-year growth in Q4 reflects tough comparisons, as we lap the subscription revenue growth acceleration we experienced in Q4 of last year. We expect professional services revenue to be approximately $352 million in fiscal 2018 and $89 million in Q4. We therefore estimate that total revenue for fiscal 2018 will be $2.132 billion to $2.134 billion, or growth of 35% to 36%, with Q4 total revenue in the range of $571 million to $573 million, or growth of 30%. For non-GAAP operating margins, we’re expecting approximately 9.5% for the full-year and 7% to 8% for Q4. The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 23 to 24 percentage points in Q4 and for the entire fiscal year. We are maintaining our operating cash flow guidance of $420 million, but anticipate there might be some upside to that number depending on Q4 linearity, timing of collections and invoicing terms on new contracts. In terms of our fiscal 2018 capital expense for our owned real estate projects, we are forecasting $130 million for the year, down from our previous guidance of $150 million. For all other CapEx, we are maintaining our previous forecast of $160 million. As we discussed at our Analyst Day in October, we remain committed to measured incremental non-GAAP margin improvement with an intermediate term target of 20%, while establishing a new long-term target of 25%. While we are early in our fiscal 2019 planning cycle and still have an important Q4 to close, we’d like to provide a preliminary and high-level view of fiscal 2019. We remain confident in our ability to sustain strong long-term revenue growth, given the secular market trends towards cloud adoption and our established leadership position. The strength we have seen in our top line growth today in fiscal 2018 has been driven by three primary factors: first, acceleration of cloud adoption, especially in the large enterprise market; second, continued high customer satisfaction, resulting in strong renewals and up-sell opportunities; and third, improved linearity resulting in more revenue recognized on deals signed with in the year and the quarter. As we plan for next year, we expect to maintain similar linearity to FY eighteen. With that as context, we are currently planning for FY 2019 subscription revenue of approximately $2.25 billion. We continue to expect pronounced seasonality towards Q4 with our Q1 being the seasonally slowest in terms of net new bookings. We’d expect subscription revenue in Q1 of FY 2019 to grow approximately 5% sequential from Q4. We continue to prioritize growth and have made and will continue to make significant investments in product this year and beyond that will limit the pace of margin expansion in FY 2019. With that investment context, we are currently planning for FY 2019 non-GAAP operating margins of 10%. In addition, as we communicated at our Analyst Day, we expect operating cash flow margin to return to historical highs. I’ll close by again thanking our amazing customers, partners and employees for their continued support and hard work. We will continue to focus on our customer success, driving continuous innovation and look towards closing out the year with strong momentum. Operator, let’s begin the Q&A process.

[Operator Instructions] Our first question comes from Mark Murphy of JPMorgan.

Yes. Thank you very much and congratulations on a strong result. So you commented on the linearity, I wanted to ask you, has the linearity of bookings actually continued to improve versus what you saw in the first-half? And would you expect that to continue into Q4 just considering that you had that anomalous air pocket you encountered, I believe in the month of November last year?

Hi, Mark. Yes, we’ve actually experienced fairly consistent linearity this year significantly improved from last year, but fairly consistent within the first three quarters of this year. And so we do expect that to continue through Q4 of this year and that’s baked into our guidance.

Okay. And then as a quick follow-up, Aneel, we’ve noticed outstanding traction with financials in the mid-market and the upper mid-market, I think, a lot of organizations around 3,000 to 5,000 employees. It seems like we’ve also seen more activity at the 10,000 to 20,000 type of level. So when you look back on it, do you think the typical or median size of the financials customers you’re adding today have changed materially versus a year ago?

It’s definitely on average a bigger customer today than it was a year ago and much bigger than a couple years ago. And the ones that we highlighted in our opening remarks were all greater than 10,000 employees to your point. I’d say, the other good trend is, I think, we’ll have some good news for you when we report our next quarter with some wins that are above the 20,000 employee size that are more Fortune 500 type accounts. They are beginning to emerge in the pipeline and becoming more predictable, and it’s more a matter of getting from being selected to actually getting the deals closed.

Thank you.

Our next question comes from Richard Davis of Canaccord.

Hey, thanks. So one question, maybe everyone’s talking about artificial intelligence and machine learning. I’m just trying to figure out to what extent do you believe, this is an evolution from kind of in line business intelligence such as Prism and things like that, or is it kind of discontinuous? Thanks.

I think, if you have a true multi-tenant cloud architecture like Workday, where every customer is on exactly the same version and the data model is harmonized across every customer, you can then take advantage of all the machine learning and artificial intelligence that’s being built, both open source and what we’re doing and apply those algorithms against the data. So for us, I think, it’s a natural evolution into this era of intelligent applications. I think, if you’re a legacy company, that’s different than Workday and you’ve got on-premise and cloud and single tenant and multi-tenant, I don’t know how you harmonize that data and actually leverage the machine learning and artificial intelligence capabilities across your customer base. I think, that’s – it’s much harder for those players.

Got it. That’s super helpful. Thank you.

And our next question comes from Justin Furby of William Blair & Co.

Thanks, guys, and congrats. Maybe I wanted to follow-up on Mark’s question, Aneel. You mentioned some – it seems like a lot of confidence in some big wins in Q4. I’m just curious what drives that confidence . Are those deals that have already closed here through November or they extremely late in the cycle? And then I guess, taking a step back, can you give us a broader sense of what the growth in that business is? It sounds like customers grew 60%, deal sizes are even higher than that. So maybe bookings growth is more than 60%. Just give us a sense for what’s going on with that business and what pipeline looks like? Lots of different components of a question, sorry.

Sure. So I’ll start with the last one first. I think, if we look across the year, and of course the Q4 is our biggest quarter, I’m going to guess that you’ll see net new ACV in Financials grow faster than 50%, that’s a good guess Robynne, which is considerably faster than what we’re seeing in HCM, which is still at a very healthy rate. So I think that’s a pretty – probably a pretty valuable data point, and we’re now beginning to get a critical mass of customers and revenue from that base, so that growth rate compounds at – compounds into bigger and bigger numbers. Where the optimism comes from, number one, was a great Q3 in terms of closing 37 new financial customers. Equally positive are all these big companies like Unum and Aon and others going live. Aon is now two-thirds of the way through their implementation and very happy. As these companies go-live, there are additional proof points for bigger and bigger companies to go with Workday, and we’re seeing that basically being manifested into where we are with several large financial transactions, where we’ve been selected haven’t yet closed, but pretty confident that, at least, a few of them will close in this quarter.

Got it. That’s helpful. Thanks.

And our next question comes from Keith Weiss of Morgan Stanley.

Thank you guys for taking the question. A question for Robynne. In thinking about the invoicing terms , we’ve been going through a sort of a multi-year trend of you guys invoicing less and less of the deal upfront. To what degree is that still impacting the deferred revenue number, particularly the current deferred revenue number? And should we see that reverse as we head into FY 2019, that sort of headwind to what we calculated as billing starts to sort of turn the other way?

Yes. I mean, as we said for a while, Keith, we continue to structure deals in the best long-term interest of our customers and of Workday. And our business, of course, isn’t linear and contractual terms vary, and that makes both billings and unearned revenue challenging metrics to predict and rely on. In addition, our success with add-on sales often results in customers early renewing their existing contracts, which often changes the timing of the billing cycle for those contracts as well. And then uniquely to the unearned revenue side, unearned revenue has actually been negatively impacted this year by our strong linearity, because as we recognize more in-quarter revenue on a contract, we actually exit that contract in the quarter with a lower unearned revenue balance. So as a result of all these dynamics, we continue to expect inconsistency and variability in billings and unearned, short-term and long-term, and that’s why we don’t really believe either a good indicators of our performance in any given quarter, and they become very, very hard to predict particularly a year out. So we continue to believe that, if we keep focusing on structuring deals that are really long-term focus that the business will naturally continue to grow and be successful and either billings or unearned are metrics that we manage to internally.

Got it, got it. And then on the appointment of John Schweitzer, the SVP of Sales, is that a new role for him, or is he replacing someone? Can you talk a little bit more about sort of what was changing in terms of this management?

We had an open as we transition to a large enterprise and medium enterprise, national organizations in the U.S., one led by Ed LaPerche, the other led by Doug Robinson, Chano and I felt like we needed someone that ran all of North America operations. And just to bring more experience and strength as we continue to scale the business and that’s where we brought in John. So it was not a position that had existed before.

Got it. So it’s a new level of sales management on top of both the enterprise and then the commercial?

Yes.

Got it. Excellent. Thank you very much, guys.

[Operator Instructions] Our next question comes from Kash Rangan of Bank of America Merrill Lynch.

Hey, guys, let me add my congratulations and happy holidays in advance. Two things I want to get your perspective on. One is, Aneel, you’ve talked about net new ACVinFinancials. But can you talk about how net new ACV growth rate trended for the entire company this quarter, especially because you’ve been telling us not to look at billings growth rate of deferred revenue growth rate as a true indicator of the growth side of the business? And secondly, when you look at Workday today rather two to three years back when some of these larger companies signing multi-year contracts. You have a lot more to go back and renew up-sell just planning analytics, et cetera. So how should we think about the growth curve for the next 12 months? I know, generally software companies grow slower as they get bigger. But you’re in a very unique position in that you’ve got a lot more new product to sell. I might have left out a couple other new products. So how should we think about that in the context of your ability to continue to grow at 30%-plus, if that’s still a goal? Thank you so much.

I’m going to defer to Robynne on the ACV question. On the long-term growth, I think, we’re really well poised for long-term growth. Financials is kicking in. HR continues to be healthy. International operations have really kicked in, as you heard in the opening remarks. These two new drivers of Workday Prism and Workday Cloud Platform, they’re definitely big opportunities for us, but it’s too early for us to tell. I think, we’ll give you a clearer picture of where we see things both headed into next year after Q4 and then along the way as we begin to get more experience selling in particular Workday Prism Analytics, which is ready to go now. But very new and very different than what we’ve sold in the past and it’s still early days for the Cloud Platform. So I continue to see high growth in front us. And – but it’s hard to be more specific until we get through the end of this year and we get some data points on some of the newer offerings.

And cash on the net new ACVs, we don’t disclose net new ACV growth. But if you look back at year Q3 of last year is when we started experiencing acceleration of subscription revenue growth. So we’ve now lapped that quarter and so we’re in a period of difficult comparisons. We’re very pleased with the net new ACV achievement that we had in Q3. And I think that that really shows up in our revenue beat, as well as our increased guidance for Q4.

Wonderful. Thank you very much. Happy holidays.

Our next question comes from a Karl Keirstead of Deutsche Bank.

Hi, thank you. This one is for Robynne. Robynne, on the Q1 fiscal 2019 guide for 5% sequential growth in subscription revs, that’s a little slower than the 7% to 9% you’ve put up in the last couple of Q1s. And I think off your 4Q guide equates to about $508 million, so up about 27%. So I suppose sort of before we conclude that you’re just being conservative in that guidance two quarters out, I just wanted to ask you what maybe are the seasonal factors weighing into that guidance that we should keep in mind? Thank you.

Yes. Thanks, Karl. One of the dynamics that we’re seeing this coming Q1 that we have not had in the past is that the improved linearity that we’ve built into and expect for our Q4 business actually increases the revenue recognized on contracts that are signed within Q4. What that means is that, you’ve got less incremental revenue on those same contracts in Q1, and therefore, it impacts the sequential growth trend. So we don’t think it’s a negative, it’s just really the shift in linearity that’s causing the shift in the sequential change from Q4 to Q1.

Got it. So it sounds like the strength you’re seeing in 4Q is just pulling stuff forward a little bit and skewing that sequential growth?

That’s correct, pulling forward within the quarter. Yes.

Yes. Thank you, Robynne.

Our next question comes from Philip Winslow of Wells Fargo.

Hi, guys, this is actually Michael Baresich on for Phil. Thanks for taking our question. You mentioned you’ve seen increased movement to the cloud in large enterprise ERP in Financials. Are you seeing any differences in the competitive environment there versus the medium enterprise segment? And what sorts of deals are things like Prism and the Cloud Platform potentially opening up that you may not have seen in the past? Thanks.

On the second part, it’s still too early. I do think Prism is probably the one we’ll get more feedback on sooner, and that definitely strengthens the story around Financials. It’s not just a transactional platform, but it becomes both the planning platform with Workday Planning and analytics platform now with Prism Analytics and that’s what the office of the CFO was looking for today. So I feel like we’re going into the market with a complete solution. In the higher end of the market in cloud, if you look at the reports, it’s pretty much a two-horse race, the other being Oracle. Gartner has the two of us in the Magic Quadrant. The other main competitor is not – doesn’t really have a cloud offering yet, so they’re not really even considered. At the – in the medium enterprise or I would say actually probably the low-end of the enterprise, we’ll see NetSuite. So it’s really just those two. We don’t really come across others and the market is plenty big for all of us.

Thanks.

And our next question comes from Adam Holt of MoffettNathanson.

Hi, guys, thank you so much for taking my question. I guess, this is for Aneel, and thank you and good to talk to you again on a call. If we look at the bookings number, it looks like it’s a little different than we expected. And durations are moving around with you all. But if you look at the business that you’re doing, do you feel Aneel that even with durations maybe moving around a little bit, you’re actually getting better business with better long-term potential either in terms of the duration or the up-sell potential? And if you were us looking at the business, what do you think at this point is the best thing to look at to measure the strength of the momentum from a customer perspective?

I’ll answer the first part, I’ll defer to Robynne on the second. In terms of the kind of business we’re doing, Chano runs a very tight ship. We’re doing very clean healthy business. The big difference is that, we’re not optimizing for cash upfront and that – and it’s – it might be surprising, but there are a lot of very big companies that are very concerned about the cash outlays for these projects as opposed to the expense. And frankly, these are AAA credit rating companies focused on cash. I don’t really care if we get it a year today, or a year later, or even two years later, given interest rates there’s not much we’re losing for it. If I can get a longer-term contract at better pricing out, we’ll do that every day of the week. I don’t know, Chano, if you want to add anything to that in terms of what you see in the marketplace for without the focus on cash.

No, I think it’s a continuation we’ve been seeing. And I think definitely we lag the customer referenceability and satisfaction that we’ve been commenting and that’s really helping us out significantly in the market opportunity out there and no particular changes of trends on any of the other dynamics. I think, we’re more focused on getting healthier discount rates and healthier business. On the long-term, that is good for our customers.

In terms of what’s best to the best guide for how we’re doing, I still think it’s subscription revenue growth. There might be some delay in what you see, but that’s what we run the business off of. And that’s how we project we’re going to invest in next year. I don’t know any other things you want to add, Robynne.

Yes. I mean just Adam, I assume that when you talk about bookings, you’re talking about calculated bookings off of our backlog number. Keep in mind that the back – subscription backlog number is driven by three primary factors. There’s obviously the net new business that we do in the quarter. There’s also the renewals contracts that we inked in the quarter with the timing of which often varies as an – and can be impacted by early renewals, which is a pretty common occurrence and customers buy additional products from us. And then the third being duration, which I noted tick down slightly this quarter. We don’t actually worry about duration. We believe that if we continue to do the right thing by the customer, continue to focus on high-levels of customer satisfaction then we’ll continue to have very high renewal rates. And in the end, the duration of the original contract is not an important factor for us longer-term. I do believe that the backlog number is a meaningful metric. But I think, it’s more meaningful when you look at it as how it trends over time in any given quarter, given these three variables it can move around. So it’s not necessarily a direct tie to how we’ve done in a particular quarter, but it is good for measuring us over a longer period of time.

Great. Thank you.

[Operator Instructions] Our next question is from Ross MacMillan of RBC Capital Markets.

Yes, thanks a lot. Aneel, Oracle is obviously in the cloud financials market. SAP is moving in that direction with S4/Hana Cloud. I’m just curious, do you think the two incumbents sort of pushing this message is a positive or neutral or negative for Workday? And then Robynne, on cash flow from operations margin, next year you said you get back up to your sort of historic high levels. I think, that would get you back to, I believe, it was 22%, but I just wanted to double click on that and make sure that’s what you meant, or is it possible that we could actually move about that historic high watermark it on cash flow from operation margin? Thanks.

I think, it’s a big positive when all the vendors in a given marketplace are talking about a shift to the cloud. It creates demand. This is a huge market. Financials market is twice the size of the HR market. As it flips over, there’s the – there’s a ton of market opportunity for, I’d say, for more than one. And I think, we’re very well-positioned to get our fair share. The biggest thing that we’re all in this market looking for is the signs that this market is beginning to tip from on-premise to cloud. Yes, so anything that promotes, that is a good thing.

And Ross, on your cash flow question, you’re correct that our historical high has been 22%. As I said at the Analyst Day, we believe next year that we can get back to those levels and then over time go beyond. It’s still early days for us and looking at next year we’ve got a huge Q4 in front of us to execute against, which will impact our cash view of next year. So we’ll have better information for you on the next earnings call with regard to cash flow next year.

Great. Thank you.

And our next question comes from John Di Fucci of Jefferies.

Thank you. I think my question is for Robynne. And Robynne, the – all the commentary on the call from both you and Aneel has been positive on the business momentum in the quarter. And frankly, our field checks indicate at least decent momentum this quarter, a good business. But I didn’t really hear any answer to Adam’s question. Is there anything that you’d suggest that we consider to gauge the current momentum of the business on a quarterly basis? Like when we look at this, because there are numbers out there that are calculated billings, and we understand how some of the things can move around. But is there anything that we can look at? I mean, looking at backlog, I mean, that’s looking at revenue, those are things that we can look at over the long-term health of the business and obviously that’s very important, it’s very important for long-term shareholders. But to sort of gauge the momentum of this particular quarter, do you ever think about, I know, we talked about this, but I don’t know maybe you might want to reconsider giving your assessment of new subscription annual contract value. I know you said, it was good this quarter, but maybe, I know, is there any – is there anything you’d suggest we look at sorry?

Yes, John, I would just point back to Aneel’s earlier comment about subscription revenue growth. And I really do believe that that’s the best metric. And what you can use this quarter would be the overperformance that we had in Q3 on subscription revenue, as well as the increase in our guide, which – a lot of which is driven off of the net new business that we did in Q3, which will impact full quarter next year. That’s the metric we managed to, and I think it’s the best indicator on a quarterly basis to gauge how we did.

But you also said that over 90% of the subscription revenue in this quarter came in off the balance sheet. And you also said, you’re seeing more linearity, which means you’re seeing more revenue being recognized in the quarter. So that just doesn’t seem to me that it doesn’t necessarily seem to be a great gauge for this quarter. Again, we’ve heard things are good for you guys. So I’m just trying to reconcile that with the numbers, that’s all.

Yes, I think if you take that information and marry it with some of the commentary that Aneel had in his prepared remarks around your customer growth, around some of new customer logo wins, I think that all of those paint a picture of a highly successful quarter.

Okay. Okay, thank you.

And our next question comes from Brad Reback of Stifel.

Great. Thanks so much. Just a quick question as it relates to 4Q. Do you have any really significant renewals up for signing?

Every Q4, we’ve got a lot of renewals, because that’s our historically highest quarter. And so as the renewals stack up year-on-year, Q4 becomes our largest renewal quarter in general as well. As I mentioned before, we can have renewals move to different quarters if customers early renew. But Q4 is a big renewal quarter for us, and we have great renewal history and we expect to continue that solid renewal history in Q4 as well.

Great. Thanks.

And our next question comes from Alex Zukin of Piper Jaffray.

Hey, guys, thanks for taking my question. I apologize for the background noise. I wanted to ask just one clear – one on the subscription backlog number. Is there any way if you adjust for duration and normalize? Is there anyway to maybe just talk about the growth rate at a high-level? And then one for Aneel. If you think about the financials customers that you’re talking about timing for the fourth quarter, were any of them – those customers initially starting off as planning, or they net new obviously maybe existing HCM customers as well?

Yes, look, on the backlog, obviously, the three factors that I talked about before; renewals, bookings, net new bookings and duration all play a factor in that number and interplay. We’re not going to be disclosing the – those three components. So I do think that it’s a meaningful metric to gauge how we’re doing longer-term. But it’s going to be difficult for you to actually pull that apart into those three pieces. But the reason that I mentioned the down tick in duration was just to give you guys some color around why the increase in the backlog number maybe was not as high as it had been in Q3 last year.

In terms of the large finance opportunities in Q4, the ones that I’m aware of, they’re actually full platform opportunities and – but Financials is actually the driver in both cases. And Chano, anything else to add? And I don’t think, it’s a broad enough set to say that that’s a leading indicator for what they’re going to look like over the next 12 months. It’s just happens to be the two in front of us right now are full platform across HCM and Financials.

You’re right on that one. I mean, I would say the main difference you have, the medium enterprises more becoming ERP adoption as a whole starting point and potentially large customer when they’re really large they either take first teens or HR, one of the other because of the complexity of the project is just larger right, but there are some taking I think at the same time as well.

Got it. And then Robynne, maybe just one quick follow-up on the duration question and I apologize if this has been asked. But can you talk about maybe why that ticks down, this quarter was – is there anything you guys are doing to drive that, or is that just anymore clarity would be helpful?

Yes. So that’s not something that we actively manage or focus on. We believe the duration of the original contract if we can continue to achieve strong renewals isn’t an important measure of the business. Duration of a contract is usually driven by the customer, it’s almost always driven by the customer and what contract term they’re comfortable with. Often the larger deals have longer-term contracts and Q3 historically is a quarter with fewer large deals than other quarters. And that’s been true for many, many years, but it also just comes down to customer preference. And then as we have success in add-on business, a lot of customers when they add a new product or new products to their contract, they co-term that with the original contracts. The duration of that new business is actually can be fairly short. So that’s a factor as well. So lots of things that impact it and not something that we focus on or think is important in the long-term, although it will impact the backlog number.

At this time we will now take two more questions. Our next question comes from Pat Walravens of JMP Securities.

Oh, great. Thank you. I’m going to change directions a little bit, if that’s okay. Aneel, one for you to start, which was, I saw you speak like a month ago and you talked about this idea of being a multigenerational company, which I thought was new and interesting. What did you mean by that and how do you do it? And then I’ll just put the second out now. Robynne, I’d love to know any impact you can share with us in terms of impact on Workday as tax reform passes?

Well, so the – I think that was at the event down in Half Moon Bay. It’s really about two things. One, transcending technology trends and being multi-general across technology trends and not being a vendor that only exists because of one particular trend. And then the second piece is our view on succession at Workday and the longevity of both the opportunity in the company that we can build over time. And so, when Dave and I looked back at our previous company and think about what we want to do differently at Workday, one of the things we set out to do was to build a management team that would that we could pass on from generation to generation and we’ve done some of that. If you look at the management team currently running big parts of our business, they were not running it five years ago, Chano or Robynne is two examples. And so setting up a pattern of doing that on a consistent basis sets us up for the long-term and for multiple generations of management for this company over time.

And Pat, on your tax reform question, we don’t expect tax reform to have an impact on us for quite sometime. We have over $1 billion worth of net operating losses that we can burn going forward. We continue to generate taxable losses based on our GAAP income statement. So we will have a – some slight balance sheet adjustments as we revalue our tax assets and tax liabilities, but it won’t – we continue to be in a position where we won’t be a cash tax payer for many years to come.

Okay, great. Thank you.

And our last question comes from Steve Koenig of Wedbush Securities.

Thank you very much to squeeze me in, I appreciate it. So just one question here and by the way, congrats on a good quarter. Maybe a little bit of historical perspective from the recent past that might help us think a little bit about the future here. As we compare last year to this year, we did see in our text a fair bit of hesitance in the first three quarters of last year, maybe in North America and the U.S, maybe related somewhat to the election. It seems like enterprise buyers start to open up a little bit more in December. You had commented in November about some weakness there around the time of the election. And then it seems like in December and January, it is really off to the races for Workday and for other companies as well. And it’s been a good year in the enterprise market and certainly for Workday, no question about that, it looks like a much better year. So you spoke, Robynne, about cloud adoption. Is that the only factor? Are there other factors driving Workday this year versus last year? And then as you think about next year and you’ve given us some initial forecast, and that’s helpful. Is there any chance that buyers might catch up with kind of pent-up demand that they weren’t doing projects as much last year and they’ve now caught up, or do you see just a reservoir of projects that are going to continue to support the kind of demand environment you’ve been seeing this year?

So I would say that what a difference a year makes. This has been a very strong year. We did definitely have softness in the first three quarters of last year and we’ve not seen that this year. We’ve seen, I mean, going into Q4 of this year, it’s the best position we’ve been going into Q4 for several years actually not just compared to last year. It’s a pretty consistent demand environment. The pipeline continues to grow at a healthy clip, so it’s well positioned, it positions us well for next year. I’d say the two things that are in our sales execution, I think, actually has improved in the last 12-months. Our win rates are consistently high. I’d say, if there’s anything that really is continuing to drive, the success is becoming clearer and clearer over time, it’s our customer satisfaction. When you get to the – especially when you get to the large companies, in many cases, we’re the only proven solution at – if you have 50,000 or 100,000 employees, there’s – you look at all the proof points of successful customers, they’re almost always Workday customers. And it’s creating somewhat of a network effect, where customers are talking to other customers, hey, if you’re going to go down this path and you want to have a successful project and no one wants to have a unsuccessful project, Workday is the safe choice. And I think that’s bearing out more this year than it did last year and kudos to the product organization and the services organization, our QA organization, our support organization for keeping these customers happy and for having products that truly scale. But this last quarter, Coca-Cola, just another example of a very large company who’s going – who went into production and very happy and happy customers get you more happy customers.

All right. Very good. Well, thank you, Aneel. I appreciate it. Congrats, again.

Thank you, everybody.

We, thank you for your participation in today’s earnings call. You may now disconnect, and have a great day.