Welcome to Workday's Third Quarter Fiscal Year 2020 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. [Operator Instructions] And with that, I will hand it over to Justin Furby, Senior Director of Investor Relations. Please go ahead, sir.

Welcome to Workday's third quarter fiscal '20 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 Executive Vice President of the Business Planning Unit. Following Aneel and Robynne's prepared remarks, we will take questions. Our press release was issued after close of the market and is posted on our Web site, 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 and 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 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 Website includes a list of selected customers and is updated monthly. Our third quarter quiet period begins on January 15, 2020. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2019. With that, let me hand it over to Aneel.

Thank you, Justin. Good afternoon everyone, and thank you for joining our third quarter earnings call. As we highlighted at our Rising User Conference, in October, we are firmly established as a leader in cloud HCM applications, and increasingly strengthening our leadership position in the broader cloud finance management market. We're very proud of the company we've built with now over 3,000 customers globally, over 70% of which are live and in production. These customers have deployed Workday to help transform both the way they engage their employees and operate their business. We're excited by these success stories as well as the thousands of other companies we have the opportunity to help along their transformation journeys. With that, let's quickly review our third quarter results. Starting with HCM, we continue to gain market share with an industry-leading true cloud platform, which believe has the deepest product capabilities and unparalleled user experience, and the highest levels of customer success. In Q3, we added six more Fortune 500 customers, and 11 in the Global 2000. A few of the new HCM customers include Anheuser-Busch InBev, Magna International, Royal Bank of Canada, and Sutter Health. Some notable go-lives in the quarter included Glencore National AG, the Dow Chemical Company, and Telstra Corporation. Turning to Workday Financial Management, we saw continued momentum for our suite of applications in Q3, with new customers including Consumer Direct Care, P.F. Chang's, the State of Iowa, and WPP Group USA. We also had a natural and organics grocery store chain with over 85,000 employees, add Financial Management to its existing use of HCM. We now have approximately 800 total Financial Management customers, which include notable go-lives in Q3 of Rivera, and American Family Insurance. In addition to core Financial Management, Adaptive Insights, Business Planning Cloud, and Workday Prism Analytics continue to be a strong up-sell and add-ons to our core applications. In Q3 alone, Adaptive Insights added approximately 200 new planning first customers, and approximately 50 new platform and up-sell deals to new and existing Workday customers. Our momentum in customer success was best captured at our annual user conference, Workday Rising. Between our U.S. conference in Orlando, in October, and our European conference, in Milan, last month, we welcomed more than 15,000 attendees, including more than 9,700 customer participants representing 2,250 organizations. At Workday Rising, we once again revealed our Annual Customer Satisfaction Rating, which was 97%. We are very proud of our customer success and the confidence they have in Workday as they embark on their digital transformations for finance and HR globally. Innovation has always been at the forefront at Workday, and it continues to be a key to our success. As I highlighted at Rising, Spend Management is one of the areas where we are putting more focus and investment. We have designed Workday Procurement and Workday Inventory as part of our single system to streamline the procure-to-pay process and improve operational efficiency, driving down costs while enhancing supplier collaboration and engagement. We expect to accelerate our efforts in this area with the proposed acquisition of Scout RFP, a leading cloud based platform for strategic sourcing and supplier engagement. With Scout, which has been a Workday Ventures portfolio company since 2018, Workday provide organizations a comprehensive source-to-pay solutions with best-in-class strategic sourcing to help transform the procurement organization and deliver better business outcomes, including reduction in spend, greater policy compliance, and maximized engagement across key stakeholders. We're also thrilled to welcome Scout's employees, who share our passion for customer service and fun to Workday. We looked forward to expanding our efforts in this area and will share more information as the deal closes, which we expect to occur in our fourth quarter. As we continue to focus on long-term growth there are a few leadership changes I'd like to highlight; first the appointment of Rich Sauer as our New Executive Vice President, General Counsel, and Corporate Secretary. Rich brings with him over 20 years of experience at Microsoft, and we're excited to have him on board. I'm also pleased to share that Leighanne Levensaler has taken on a new role as our Chief Marketing Officer and Executive Vice President of Corporate Strategy. Leighanne is a 10-year Workday veteran and one of our strongest voices of our products, values, and vision. Moving forward to ensure our corporate strategy is in lockstep with our go-to-market strategy. And I'm also excited to share the appointment of Emily McEvilly into the role of our first Chief Customer Officer, overseeing the newly created customer experience organization. We are bringing together professional services, education services, customer success, and customer support under one leader to continue our relentless focus on the customer and to drive new innovations that will deliver even more value to our existing and future customer base. We are in a great position heading into Q4 and we look to finish the year strong. And now over to you, Robynne.

Thanks, Aneel, and good afternoon everyone. On today's call, I'll provide highlights of our third quarter results, update our guidance for the fourth quarter, and then provide a preliminary and high level view of fiscal '21. We delivered another solid quarter in Q3 with total revenue of $938 million, reflecting year-over-year growth of 26%. Our subscription revenue was $799 million, up 28%, and professional services revenue came in at $140 million, up 18%. Revenue outside the U.S. increased 38% year-over-year to $234 million, representing 25% of total revenue. Subscription revenue backlog was $7.19 billion at the end of the third quarter, growth of 22% year-over-year. Backlog growth was driven by solid results across net new bookings, add-on business, and net retention, which was once again over 100%. Subscription revenue backlog that will be recognized within the next 24 months also grew 22% to $4.91 billion. Current unearned revenue was $1.8 billion in Q3, up 23% year-over-year, while total unearned revenue grew 20% to $1.88 billion. As a reminder, the Adaptive Insights acquisition closed and the comparison period a year ago, adding $140 million to the subscription backlog, $90 million of which was recorded on the balance sheet as unearned revenue. This one-time benefit created a very tough comp for Q3 for both backlog and unearned revenue. Our non-GAAP operating income for the third quarter was $143 million resulting in a non-GAAP operating margin of 15.2%. Margin overachievement was driven by a combination of top line overperformance and favorable expense variants. Strong sales execution and a significant improvement in linearity within the quarter resulted in our strong top line beat. Additionally, we saw some marketing spend and hiring originally anticipated in Q3 move into the fourth quarter. Operating cash flow in Q3 was $258 million, more than double our operating cash flow from Q3 FY '19. We continue to invest in our people and then attracting top talent to Workday. During Q3, we successfully added an integrated over 400 net new employees, bringing our total workforce at the end of the quarter to more than 11,800. We are focused on maintaining operational efficiencies that will allow us to drive long-term enduring growth. Q3 was a solid quarter that positions as well as we head into our seasonally strongest and most important quarter of the year. Before providing updated guidance, I want to briefly touch on the Scout RFP acquisition, which we expect to close later this quarter. We're excited about the opportunity we see ahead in the broader spend management category, and believe Scout's best of breed technology will accelerate our positioning in the market. It is important to note; however, that Scout's revenue base is still relatively small and when combined with the timing of the transaction, and the required purchase accounting adjustments, it has a negligible impact on our fourth quarter revenue outlook. With that, I'll now turn to guidance. Our focus remains centered on investing to support our long-term growth opportunity. Based on our overperformance in Q3, but keeping in mind we face another very difficult comparison in the fourth quarter, we are providing guidance as follows. The subscription revenue we're raising our FY '20 estimate to be in the range of $3.085 billion to $3.087 billion, or 29% growth. We expect our Q4 subscription revenue to be $828 million to $830 million, representing 23% growth. We are raising our professional services revenue guidance to $529 million for fiscal '20 as we continue to focus on driving the highest levels of customer success. For Q4, we expect professional services revenue of $134 million. We now expect FY '20 non-GAAP operating margins of approximately 13%, up from our prior guidance of 12.3%. This guidance incorporates estimated expenses related to the pending Scout RFP acquisition. The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 27 percentage points in Q4, and for the full-year. We still expect subscription revenue backlog growth in the low 20s in the fourth quarter, and there is no change to our FY '20 operating cash flow guidance of $790 million. We have slightly lowered our FY '20 capital expense forecast for both owned real estate and all other capital expenditures, driven largely by the push-outs of certain projects into FY '21. We now expect the FY '20 capital outlay for owned real estate projects to the $110 million, and our outlay for all other capital expenditures to be $250 million. While we are early in our FY '21 planning cycle and still have an important Q4 to close, we'd like to provide a preliminary and high level view of FY '21. As a reminder, and as we discussed in detail at our recent Analysts Day, we have a lot of new products coming to market in FY '21, including Workday Cloud Platform, People Analytics, and our Employee Experience Solution. Given the timing of these launches, and the time it takes the new product to impact subscription revenue growth at our scale, these emerging products won't start to have any notable impact on our revenue growth until fiscal '22, and beyond. In addition, while we are very excited by the pending Scout RFP acquisition and the long-term opportunity that we see ahead of us in the spend management category, Scout is expected to contribute less than 1% to our subscription revenue growth in FY '21. With that context, we are currently planning for FY '21 subscription revenue of approximately $3.73 billion, gross of approximately 21% year-over-year. We continue to expect pronounced and compounding seasonality towards Q4 with our Q1 being the seasonally slowest in terms of net new bookings. We currently expect subscription revenue in Q1 of FY '21 to grow approximately 4% sequentially from Q4 FY '20. We remain focused on investing to drive long-term durable growth, while progressing towards our 25% plus non-GAAP operating margin goal. While we are still in our FY '21 planning process or early view of FY '21, non-GAAP operating margin is approximately 14%, which includes roughly 1.5 points of expected dilution from the Scout RFP acquisition. But in other way, without the Scout acquisition, we would have expected a non-GAAP operating margin of approximately 15.5%. I'll close by thanking our amazing customers, partners, and employees for their continued support and hard work, which allowed us to deliver great results in the third quarter and have set us up for a strong finish to the year. With that, I'll turn it over to the operator to begin Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Yes, thank you very much, and congrats on the results. Aneel, I am curious of you're seeing any material difference in the volume of HCM projects that are presenting themselves if you were to look within the Fortune 500 are the Global 2000 today versus, say, 12 or 18 months ago, whether there's a natural cycle there that kind of ebbs and flows over time? Also, looking way out into the future is there a timeframe where you think that that volume would converge in financials, perhaps five to 10 years down the road?

So, I think our growth in the pipeline, and I'll ask Chano to weigh in, in a second, for HR it's actually been fairly steady over the last, not just 12 to 18 months, but last three or four years. This was another strong quarter in terms of Fortune 500 wins and Fortune 2000 wins. As we get to -- as we begin to close in on over 50% of the Fortune 500 running Workday, we're on that path to get there. We do look at the broader Fortune 2000 marketplace for HR, and we look at more of the international opportunities in front of us, still a lot of healthy growth in front of us. For finance, and I'll just bucket everything else because in many ways the rest, finance, planning, now procurement and Prism are really about the office of the CFO. That business continues to grow at a rate north of 50% as we see it's 20% of the business, and I think there's durable growth in that business for many years to come. I would hope in five years that that business is on par -- within five years that business is on par or bigger than the HR business; it just takes time. And I would point you to the transition that Salesforce went through. They're six years older than us, one of our best partners. They went from being a sales company to and services company, to a sales and service and marketing company adding Platform, now they've got Analytics. We're going through that same journey and growth rates kind of ebb and flow as the different pillars take off. So, very optimistic on what we continue to see as continuing growth in HR, but healthy growth rates in the office of the CFO. Anything you want to add, Chano?

Mark, and to give you an idea, a data point, this Q3 we closed six Fortune 500 HCM [ph] financial customers, a year ago it was four. To give another data point, the pipeline on the Fortune 500 or large customers, more than Fortune 500, large HCM customers for the next 12 months is better or stronger than it was 12 months ago. That's another data point. So it's not a direct correlation that some of those pending customers, 175, give or take, Fortune 500 customers are still coming to market, and it's not exactly basically directly linear every single quarter as they come.

Thank you very much.

Your next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Yes, thanks very much. I was wondering if you could follow-up on Chano's comment around the pipeline, and just sort of what's the expectations I guess -- I realize this is a preliminary there for '21, but is there anything I guess do you expect that the financials demand will remain kind of the way we've seen it or is there opportunities for that to sort of tick up. I'm just trying to get a sense on, I guess, what's embedded in that number, especially around sort of the financials business, because I think we understand the HR business is -- where that's trending these days. Thanks.

So, we've got another quarter to get through, but I think as we think about fiscal year '21, cautiously optimistic that all the pieces are coming into place. Planning, and by the way I should mention, we're actually hosting the meeting from Adapter's headquarters, in Palo Alto, today, which is a nice thing and a fun thing, but planning and analytics, and now with procurement, all the pieces are coming together to I think drive a really exiting story. And so nothing else -- I don't expect the momentum to slow down. And maybe there's a chance it ticks up, time will tell. It's a good question to ask us in a quarter.

Okay. And maybe if I could just ask a quick follow-up on that point then, coming away from Rising it seemed like the combination obviously of having analytics and planning and financials together makes that entire decision more strategic for CFOs. And I was wondering if you could just add some color, Aneel, on whether or not that actually is what you're seeing in your conversations, meaning it's getting beyond just sort of moving your financial system to the cloud is becoming much more of a strategic imperative. And is that kind of why you feel still very confident about where this is going? Thanks.

Absolutely, I would say before planning and analytics really took off for Workday we had a very competitive financial offering, and I think two things were at play. One, the CFO market in general wasn't ready to move into the cloud. And number two, just having a next generation accounting platform or financial platform was necessary, but insufficient. The areas of planning and analytics, that's really what drives CFO decisions today, but they also realize that they do need to modernize their accounting systems from a financial transformation perspective. So all of a sudden now it is not just, hey we have to modernize it from a technology platform perspective, but look at all the benefits we get from a planning perspective, from an analytics perspective, and yes, even from a core accounting perspective what we can do in terms of machine learning, what we can do in terms of tagging so that you can create richer analytics. All those come to play. The story is just much stronger going into this year than it ever has been. And I think the last piece that has come more and more recently have been a area of procurement and the chief procurement officer, and with the acquisition, or the pending acquisition of Scout, we're filling that one hole where we can be best in class in that pillar which is increasingly important to the office of finance.

Thank you.

Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Please proceed with your question.

Hi, thank you very much. Aneel, it looks like the trends in the quarter were certainly very encouraging. Linearity improved, your backlog growth was pretty solid, and the market certainly seems to be wide open for financials and whatnot. So I'm just curious what are the factors that could cause you to take up an even more positive view of the company's growth expectation in fiscal '21, say certain things happen in Q4 that materialize, what could cause you to take an even more positive view, as positive as it is? And secondly, as the company becomes multi-product company, how is the go-to-market strategy of the company going to change? Thank you so much.

I'll take the first part and ask Chano to weigh in on the second part. What could we see in Q4 and going into next year? I'd say an increasing percent of Fortune 500 accounts coming to market for financials. We've, after waiting for a long time; they're now coming at a steady pace. What we saw in HR, there was a period of time where it accelerated. If that happened with Finance then I could see us being more optimistic. When I look at our win rates they're very high, and when I look at the pipeline growth it's very healthy. The ones that move the needles and are unpredictable are the large Fortune 500 transactions. And those started coming in in bigger numbers that would improve our opportunity for upside. Is there anything you want to add Chano on go-to-market and any other comments on that?

Hey, Kash. And on go-to-market, I think we highlighted data at our financial analyst day. I think you should expect kind of three big focus; one around more dedicated vertical focus in the coming years, and second one; continue to global expansion and the opportunities we highlighted there with only around 11% penetration on the Global 2000, and the third one, an increased focus on we're selling to back to the customer base especially with the broader portfolio of solutions that we have today.

And if I could add one more piece of potential upside, when we acquired Adaptive a little over a year ago, we were focused on financial planning. But as they move into workforce planning, sales planning, operational planning there's upside there in terms of providing a broader planning footprint, which we frankly hadn't really thought about a year ago.

Thank you, so much.

Your next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Yes, one question just on Prism, and then one on the macro. In regards to Prism, can you provide an update at all in terms of the cadence that the business is starting to experience, the new use cases around Prism, Analytics, and then maybe any feedback you can share with us in terms of the growth rate or maybe the shape of that overall size of the business today. And then the macro question I wanted to give you, Aneel, just kind of when you're thinking about the puts and takes of all of next year's guidance that Robynne guided to in the commentary. Do you think that the overall environment, are you expecting the environment to be stronger, to be weaker, or similar to what the business experienced this year? Thanks.

So, that's a lot of questions in there. On the first one, Prism stated out as a very powerful analytic platform that came pre-populated with effectively the Workday data model and the Workday data, and then we'd bring in other types of data, and customers would write their queries and analytics against that. What we saw were a series of trends that pointed us in terms of building out use cases, and the first one was People Analytics. And People Analytics is being received extraordinarily well by our customers. They view us as, "Hey, that's a great platform in terms of Prism analytics, but you're an applications company, give us some applications capability." And with People Analytics we're delivered on that. You can expect the same over time on Financial Analytics, Spend Analytics, additional prepackaged set of analytics that are being informed by watching our customers and working with our customer to see what use cases they deliver. Robynne, do you want to comment on the growth on Prism, that was another part of the question? And then I'll come back to the macro.

Yes, we're still seeing healthy growth on Prism. The numbers are still fairly small relative to core fins [ph] and HCM. So it's not hugely moving the needle on our growth, but we expect that with the high growth rates in Prism it'll start contributing more to the overall growth next year.

On your macro question, we're just looking at each other here. I think we're kind of expecting it to be the way it is. There has been for a period of time, there's just been uncertainty in the air. It's hard to say it's going to get worse or going to get better. It's not easy to predict, we have the election next year, but I think what we see in the pipeline, even with the uncertainty, our ability to close business. Q3 was a really important data point. We had some concerns there might be some slowdown, but we had a really good quarter and the business that we wanted to close closed. So I'd go into Q4 optimistic. And to next year, I would say next year cautiously optimistic that it's going to be the same. And I think that's probably -- I think the world I just getting immune to uncertainty, and people are just going about their business as if it's going to continue in the right direction and ignore the headlines in the press that would generally get us scared five or six years ago.

Thank you for answering all those questions. Thank you.

Your next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed with your question.

Thank you and congratulations on the quarter also. Can I give us some more color on the types of companies that are selecting Workday Financials at this point, the markets, whether they're single country versus global financial implementations, and how that is changing? And also a quick follow-up, can you give us a sense of how the backend technology integration of Adaptive is going? Thanks.

So, Chano will take the first one on, and then maybe Tom Bogan can take on the second part.

On the company selecting financials are mostly global companies, mainly on the sectors we are more focused on, and those are financial services, healthcare, professional and business services, among others. Clearly it's U.S. and Western Europe or most advanced in terms of financials cloud customers are the ones what you see more predominantly. But I would say it's mainly with a global focus in, I don't know, I would say 80% of the deals that we do are basically with a global footprint, taking advantage as well of our localizations on the strength of the solution as a whole.

Yes, on the technology integration we're making very good progress. At the time of the acquisition we indicated that it would be a journey that would take us roughly 24 months to complete the full integration. Our design focus is to have an experience where customers have a seamless experience whether they're starting inside the core Workday applications or they're starting inside the planning experience. We have a design group of a set of customers who have worked very closely with us, helping to guide our development efforts and initiatives. We still have some work to do, but we're really pleased with the progress thus far.

Excellent, thank you.

Your next question comes from line of Ari Terjanian with Cleveland Research Company. Please proceed with your question.

Yes. Can you guys hear me?

Yes, we can.

Great. Thanks for taking the call, and great to see the permit here exiting the quarter. Can you talk a little bit more about the strategy with professional services into FY '21, and should we expect a change in the mix of the business contribution over time there? Thank you.

No, I think our strategy has been the same for the last four or five years once the large integrators embraced Workday. We tended to take a backseat to them running the projects. That's the Accentures, KPMGs, PwCs, Floyds, IBMs of the world, elites of the world, we have -- those are probably the big six. Is there anybody I missed, it can trouble now. Those are the big six. They have become very good partners over the period of time. And so, our professional services is very focused on being the product experts that basically supplement those large firms on the large scale projects and a handful of cases there'll be a customer that just wants to deal with one vendor and work they will do the do the prime work on the implementation side as well, but that is not our core strategy. Our core strategy is to leverage the great partnerships we have. There is just a huge demand for Workday skills right now in particular as financials and planning and prison have taken off. We had to supplement the market as they're ramping up their skills in those areas. But no change the strategy or the model?

Got it. Thank you.

Your next question comes from line of Scott Berg with Needham and Company. Please proceed with your question.

Hi, everyone. Thanks for taking my questions, and I jumped on late, so I apologize if my questions been asked. But first of all, for either Aneel or Chano, with the Scout acquisition, can you help us understand maybe is this a product that helps you maybe change the trajectory or the adoption of financials ultimately, or is this just another way to get a footprint like Adaptive was within these customers, so when they're ready to make these changes to cloud based ERP that you're in a prime position to potentially win that business?

So I think actually Adaptive was slightly differently than that. I think in some cases Adaptive is there before us. And a lot of other cases, Adaptive was the reason why we were chosen for the broader financial footprint. As the Office of the CFO or the opposite finance has really turned their attention to moving into the cloud, it's become clear that part of the way they see the financial solution definitely includes best-in-class procurement. And it's why we've seen companies like Cooper continue to do very well have a lot of respect for them. So for us, in order to -- I think it does two things, it creates a new revenue opportunity and down the road, it could even be a standalone revenue opportunity for spend management. But in the short-term, it makes our financial products that much more competitive. And there's new revenue specifically for the Scout product that we believe it's an amazing product and amazing team. And now we get to leverage our sales force in our customer base to see how much more Scout we can sell. So I think there're multiple dimensions to it. One of which is included increasing our competitiveness and core financials, but to also adding some new revenue opportunity for us.

Very helpful, thank you. And then from a follow-up perspective, Robynne, you've made a couple of at least for Workday larger acquisitions over the last 18 months between Adaptive and Scout now going forward, but as you look at these acquisitions is, I guess help us get a sense of maybe what the gross margin or operating margin contribution of these acquired assets is longer time, will they be dilutive to the core Workday financial profile, or is there a way that maybe they're additive in terms of raising your margin profile longer term? Thank you.

Yes, so I think longer term they're definitely additive because we can operate at a larger scale and so get better economies of scale as we run the larger combined entity that we are, in the shorter term, obviously, they are dilutive, Adaptive was dilutive, Scout will be diluted as I discussed next year, but the goal is that they would actually be additive to our margins longer term.

We just had -- there was nothing in their gross margin profiles where that was that different from Workday. It's much more about where they were in their stage of stage of growth, and then we have the ability to leverage our sales channel, but from a gross margin perspective that was not entitled.

That's correct.

Your next question comes from line of Keith Weiss with Morgan Stanley. Please proceed with your question.

Excellent, thank you guys for taking the question. I wanted to drill down a little bit into the progress you guys are making in sort of improving and expanding the capability to do upselling into the existing customer base, particularly around ATM. I am just looking for an update on kind of how that's progressing, number one. And number two, for Robynne, really sort of nice upside on margin this quarter. Sounds like a decent part of it was from sort of the pull forward for sort of the push out of marketing expenses, I just want to sort of double check just to make sure, is there any kind of fundamental change in how you guys are thinking about the margin profile and sort of the speed with which you get to that 25%, or is this just really sort of timing impacts in terms of margins?

So I'll start with the margin question, really no change in how we think about margin expansion going forward, we certainly expect to continue to march towards the 25% goal that we've set forth. This is really about a couple things this quarter one, the top line over performance, which was driven largely by better linearity, frankly in month one, and we have seen in over five years as a company, so we certainly don't expect that that's going to keep repeating itself, but it was a big win for us this quarter. And then the push out of expenses like I said, in Q4 really is just a timing issue. So we will continue to get margin expansion and see efficiency gains across all areas of the organization going forward including R&D.

Excellent.

Your next question comes from the line of Mark Marcon with Baird. Please proceed with your question.

Good afternoon, thanks for taking my question. I was wondering, Aneel, with regards to the financials pipeline, it sounds like, it's growing steadily. I'm wondering what you think it would -- what would need to occur in order for the trajectory, the slope of the growth in terms of that pipeline to really increase. What sort of feedback would we need to get from existing clients in order to get an even higher level of interest? That's the first part of the question. And then the second part of the question is, you made a comment with regards to maybe within five years financials could get to the same level of revenue as HCM. Would that require a slope change or how are you thinking about that? Thank you.

Well on the second part, just say we're talking about finances, I am talking about the broader offices of finance solutions. So that does include analytics and that does include planning and prism. And that's the way we think about it internally, not just the core accounting products. It is that full suite is really what is enticing these CFOs to move their plants applications into the cloud, and they're moving all of those collectively into the cloud. In terms of what would change the slope, I mean, I think we see the pipeline is being very, very healthy. And I come back to what I said earlier, it would be a growing percentage of the deals coming from fortune 500 accounts, and that's what propelled Workday on the HCM side where we really went through for the hyper growth era was when the fortune 500 market almost a mass decided to go to the cloud. It's happening now, but it's not happening at the pace that we saw in HR that the market came at once. So, that would be one thing. I don't know if Chano you want to add anything else?

I think Mark, where we share them on a couple of our financial analyst days, where with these local declare between adoption and financial adoption and until now core financials or general ledger was very similar. The difference is that HCM was started more with large customers and the financials adoption has started more with medium enterprise customers. We're seeing more lately maybe because of the maturity of the solution and maturity of the market and confidence into that this brings a good value proposition to the office of the CFO is the some more large customers are starting to move right we mentioned to the customer for WBP or an Asian customers 80,000 grocery customer that just became general ledger customer as well for us on some of the last ones right. So we are expecting from what the pipeline is reflecting that clearly this moving up care, right? What we're seeing as we're when we evaluate that we're selling value in terms of customers in financials is that is increasing nicely representing of course larger customers adopting financials, and that's what we see represented on the pipeline, then we know we will remain a little bit variance quarter per quarter.

And I'd add, one area that we're not necessarily counting on for growth, but we're seeing signs of interest and excitement is the state and local market. We've experienced great traction of our financial products and HR products in higher education. The state local market has been much slower for both areas, and with the state of Iowa turning to our products for financial management, that is a nice data point. The states are a huge market. It was a hugely successful market for us at PeopleSoft, and we've been waiting for that market to start moving to the cloud, and hopefully the couple data points we have suggested that might be happening, and that's not something we're really planning on right now.

That's great to hear. Thank you.

Ladies and gentlemen, we have time for two more questions. The first question comes from the line of Siti Panigrahi with Mizuho.

Thanks for taking my question. I just want to drill little bit into Internet phone market. Could you give us some color, the progress on the Internet outside -- channel, you talked about 40% sales growth outside North America, so just wondering in your fiscal '21 guidance, what are backed into the growth outside of North America? A – Aneel Bhusri: Yes, I think that was more Robynne providing basically the growth of the international market, right. We're pretty pleased with the opportunity in the rest of the world. We're pretty pleased how those markets are growing. I mean, I don't want to set up proxy for every single quarter, but at least usually twice the speed at which we're seeing the growth in our North American markets, which is natural due to the lower penetration. They are that we commented on that 11% of the global 2,000 companies in those markets. We had great performance contributions in Q3 in places like that. That's Germany, Austria, Switzerland, in places like Canada, some good growth in some of the Continental markets in Europe. So, we're pretty pleased how internationally is basically performing these days. We did a couple of leadership changes that will require -- we are much more excited for the potential opportunity and growth that we also see representing on the pipeline going forward.

Thank you.

We will take our final question from Brad Reback with Stiefel. Please proceed with your question.

Great, thanks very much. Robynne, if I look at the 20% organic guide for fiscal '21, it would seem to imply a mid-teens HCM growth rate. So, I'm trying to figure out how much of that natural be selling the business versus conservatism? Thank you.

Yes. So, a couple things there, as I talked about during Analyst Day, right, our exit rate for the HCM growth is 20%. That certainly will fluctuate throughout next year, given the large deal activities as Aneel talked about. So, that's one thing. Also, we have a really big Q4 ahead of us to close, and that Q4 business will have an impact on next year, so it's still very early days. So, we look forward to getting back to you with an update on next year and next earnings call.

Perfect. Thank you very much.

Ladies and gentlemen, that concludes Workday's Q3 earnings call. Thank you for joining us today.