Workday Inc

NASDAQ:WDAY

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to Workday's Third Quarter Fiscal Year 2021 Earnings Conference 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 would now hand it over to Justin Furby, Vice President of Investor Relations. Please go ahead sir.

[Justin Furby, Senior Director, IR]

Thank you operator. Welcome to Workday's third quarter fiscal 2021 earnings conference call. On the call, we have Aneel Bhusri and Chano Fernandez, our Co-CEO; Robynne Sisco, our President and CFO; Tom Bogan, our Vice Chairman; 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 website 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 impacts of the ongoing COVID-19 pandemic on our business and global economic conditions.

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 website.

The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Also, the customers' page of our website includes a list of selected customers and is updated monthly.

Our fourth quarter quiet period begins on January 16th, 2020. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2020.

With that, let me hand it over to Aneel.

[Aneel Bhusri, Co-Founder, CEO]

Thank you, Justin and welcome to Workday's third quarter fiscal ‘21 earnings conference call. I hope all of you joining us today are in good health and your families are doing well. We at Workday are encouraged by the recent news regarding vaccines coming to market early next year. We also know we can't lose sight of the fact that we find ourselves in a particularly difficult phase of this pandemic and the health and safety of all people is most important as we navigate these uncertain times.

I'm very proud of our team who continue to support our customers, despite the challenges that persist and remain very optimistic about Workday's post-pandemic future.

As we know, business leaders are facing a myriad of different challenges right now. Indeed, we're experiencing a health, economic, and social crisis simultaneously. There's a lot of uncertainty in the world that requires conversation and collaboration.

That's why in October, we gathered global change-makers together with our customer community for a virtual event we called Conversations for a Changing World. We heard inspiring talks for the likes of Serena Williams, Reese Witherspoon, David Cameron and Trevor Noah.

And I was personally excited to have my friends and fellow CEOs, including Adena Friedman of NASDAQ, Chuck Robbins of Cisco, and Satya Nadella of Microsoft joining our event to share their thoughts on leadership and how they are dealing with the challenges of today. We received excellent feedback on the event from our customers and prospects, many of whom mentioned some important takeaways.

First, we heard the call that business leaders simply cannot opt out of this moment. Companies have to lean in and be part of the solutions that address the most pressing issues that our society is facing today.

Many of the conversations also touched on diversity and inclusion and a growing commitment to reskilling the global workforce. At Workday, we need to continue to be a driving force for the creation of opportunities in this digital economy for everyone, not just a few.

And from a technology perspective, there was a common theme underpinning the conversations at our event, a view that a must-have ingredient for organizations going forward is to have a strong digital foundation and now it’s the time to accelerate that transition.

With this increased focus on digital acceleration we believe that the flexible foundation and solutions that Workday offer are uniquely suited to the needs of businesses in these times built natively for the cloud and with people at the center of all of our solutions. With that view as a backdrop, let’s jump into our Q3 results.

I’m pleased to report that Workday delivered a solid Q3 as organizations increasingly look to the cloud to drive change during these dynamic times. Indeed, our customers are using Workday solutions to digitally accelerate and move their businesses forward, while also serving as our biggest advocates to new customers helping others realize the power of Workday to navigate their organizations through any environment.

To that end, we had another strong quarter for Workday HCM with notable customer additions in the quarter, including Novartis, DraftKings, CTBC Bank, a Fortune 500 telecommunications company, and Tecnologias Rappi, our first notable win in Mexico since entering that market earlier this year.

We also celebrated several notable HCM go-lives this quarter including Walmart, who is now live across its 1.7 million employees globally and what we believe is the largest multi-tenant worldwide cloud HCM deployment.

Also our strategic partner Accenture went live with Workday HCM and is now serving its more than 0.5 million global employees. Other notable Q3 go-lives include UPS and General Electric.

Turning to Workday Financial Management, we saw continued momentum across our applications portfolio and I’m pleased to say we’ve reached 1,000 customers that have chosen Workday for core finance.

Q3 financial management wins include the State of Washington, University of Central Florida, Fifth Third Bank, The New York Times and Extendicare. Amongst the many core financials go-lives in the quarter, I would like to highlight Bon Secours Mercy Health and Progressive Insurance. We once again saw a solid demand for our expanding suite of products that support the office of the CFO and Chief Procurement Officer, including Workday Adaptive Planning, Prism Analytics and Spend Management.

I’m also happy to share that we now have fully integrated Scout RFP into the Workday organization and have re-branded as Workday Strategic Sourcing, which is part of our spend management pillar that is being led by Scout Co-Founder and CEO, Alex Yakubovich.

The team had a record quarter with several big wins at Fortune 500 accounts that included a biopharmaceutical company, a food distributor, and a large grocery store chain with over 100,000 employees.

Turning to product, we delivered our latest major update in September which included availability of Workday Talent Marketplace enabling employers with skills-based talent matching to connect people with relevant work and growth opportunities.

We also announced availability of Workday Accounting Center and more intelligent planning capabilities, both milestones in our continued investments for the Office of the CFO.

And lastly, with our focus on value, inclusion, belonging and equity or VIBE, we announced VIBE Central and VIBE Index; two solutions providing organizations with critical insights to drive positive change in building a workforce that’s as diverse as the world.

In closing, I would like to thank our employees, customers, and partners who continue to push us forward despite these extremely challenging times. As I look ahead to the other side of this pandemic, my optimism for Workday and our ecosystem couldn’t be higher.

With that, I’ll turn it over to my friend and Co-CEO, Chano Fernandez. Over to you, Chano.

[Chano Fernandez, Co-CEO]

Thank you, Aneel. Before providing my update, I would like to once again thank our field and broader services teams for another solid performance in Q3. I’m pleased with the continued progress that we have made this year, especially in the context of the ongoing uncertainty.

I know our workmates are anxious to get back in front of our customers and prospects when it is safe to do so in person. But in the meantime, we are focused on building a maturing pipeline, closing deals, and successfully implementing and supporting customers, all in a fully virtual way.

For the second quarter in a row, we saw conversion rates exceed our expectations as organizations continued to push forward with their HCM and financials, digital transformations. We had several strategic wins in the third quarter, including multiple global 2000 HCM win, a Fortune 500 core fins win, and Fifth Third Bank, with Accounting Center once again playing an important role, and notable HR fins platform wins in our education and government teams. The medium enterprise also had another strong quarter. And from a geographical perspective, the U.S. and the DACH regions were standouts.

We are now a few years into our focused go-to-market push within our installed base. I am very pleased with the success it has driven. For the fourth quarter in a row, our installed base team generated 50% plus growth in new ACV bookings, driven by strength across products, including core fins, financials and workforce planning, Prism Analytics, learning and Workday strategic sourcing.

Newer products including Accounting Center, Workday Extend, and People Analytics contributed to the performance. And although early, we are excited about their long-term prospects.

Our comparisons get tougher starting in Q4 and we don’t expect a 50%-plus growth to persist going forward. But we still see significant opportunity to drive meaningful growth from a winning installed-based sales team for many years to come.

As we head into Q4, we remain cautiously optimistic. We continue to face near-term impacts to the net new business, particularly in certain industries. So, we have seen a strength in the store-base team help partially offset this and we are encouraged by improvements in our pipeline.

As we prepare for next year, we are increasing the pace of our sales and marketing investment. We believe now is the time to do so because we see a meaningful opportunity on the other side of COVID and we are investing now to capitalize on that opportunity.

With that, I would turn it over to our President and CFO, Robynne Sisco. Over to you, Robynne.

[Robynne Sisco, Co-President and CFO]

Thanks Chano. As Aneel and Chano both noted, we executed well in the third quarter driving strong results as many companies continued to pursue strategic HR and finance transformations despite the uncertain environment.

Subscription revenue in the third quarter was $969 million, up 21% year-over-year, with the outperformance driven by favorable linearity and strong retention which remained over 95% on a gross basis and over 100% on a net basis.

Professional services revenue was $137 million and total revenue was $1.106 billion. Revenue outside the U.S. was $272 million, 25% of the total. Subscription revenue backlog was $8.87 billion at the end of the third quarter, growth of 23% year-over-year. The outperformance was driven by better than expected bookings as strength in our installed-base team helped partially offset net new business headwinds.

In addition, backlog benefited from a year-over-year increase in contract duration, which we do not expect to persist in Q4. Subscription revenue backlog that will be recognized within the next 24 months was $5.94 billion, growth of 21%.

Our non-GAAP operating income for the third quarter was $268 million resulting in a non-GAAP operating margin of 24%. The margin outperformance was driven by a combination of topline overachievement; continued COVID-related operating expense savings, and more back-end loaded hiring versus expectations.

Q3 operating cash flow was $294 million, growth of 14%. As a reminder, we continue to work with our hardest hit customers that require more flexible payment terms, which remains a near-term headwind to cash flow and unearned revenue though it has no impact on our subscription revenue, subscription revenue backlog, or long-term customer economics. We exited the third quarter with $2.9 billion of cash and marketable securities and have access to an additional $750 million through our unused revolving line of credit.

Our total workforce at the end of the quarter was approximately 12,400 employees. We expect our hiring to pick up in the fourth quarter and into FY 2022 across all areas, but primarily in sales and marketing and R&D as we invest for future growth.

We’re extremely pleased with our results and execution in Q3, particularly given the challenging environment and we see significant longer term opportunity ahead to support our growth aspirations.

Now, turning to guidance, which despite our outperformance in Q3 continues to incorporate the near-term uncertainty we see in the market. Our updated FY 2021 guidance is as follows.

We are raising our FY 2021 subscription revenue estimate to be in the range of $3.773 billion to $3.775 billion or a 22% growth. We expect our Q4 subscription revenue to be $991 million to $993 million, 18% growth. We continue to expect professional services revenue to be $525 million in fiscal 2021 and $121 million in Q4.

For Q4, we expect subscription revenue backlog growth of 14% to 16% as we face a very difficult comparison from a strong Q4 last year. We estimate Q4 non-GAAP operating margin to be approximately 15% as we expect to increase both our pace of hiring and our marketing and brand investments.

For the full year we now expect a non-GAAP operating margin of 19%. The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 26 percentage points in both the fourth quarter and the full year.

Our FY 2021 capital investments guidance remains unchanged at $280 million. We are still in our planning process for FY 2022 and because the near-term uncertainty remains higher than normal, we plan to provide guidance after we get through our very important Q4.

Keep in mind, however, that while we have seen some recent stability in the underlying environment, headwinds due to COVID remains particularly to net new bookings. And given our subscription model, these headwinds that have impacted us all year will be more fully evident in next year’s subscription revenue weighing on our growth in the near-term.

From a margin standpoint, this year we have demonstrated the long-term scalability inherent in our model. Investing for growth remains priority number one, however, and in FY 2022, we expect to increase our pace of hiring across all areas, but with a focus on sales, marketing and product investments that are specifically targeted at accelerating pipeline growth.

In closing, I am incredibly proud of all our workmates who have remained focused on helping our customers allowing us to deliver strong results during these turbulent times.

With that, I’ll turn it over to the operator to begin the Q&A. Operator?

[Operator]

At this time, we'll be conducting a question-and-answer session. [Operator Instructions]

Our first question comes from the line of Kirk Materne with Evercore ISI. You may proceed with your question.

[Kirk Materne, Evercore ISI]

Thanks very much and congratulations on the quarter. Aneel and Chano I was kind of curious, you guys mentioned sort of, the bookings outlook is getting better, you feel good about pipeline build, your conversations started to get a little bit more upbeat, just about the long-term, meaning things are definitely still not normal today. But when people are making investments on your technology, they're making decade-long investments.

So, I was just kind of curious about how you feel about the confidence in sort of the pipeline build maybe versus three months ago? And what do you think needs to happen so that on the net new side that starts to pick up, meaning what are people talking to you about, like, hey, we just need to know is it another quarter, another six months, just kind of curious what you think needs to happen to kind of, get back to full guns blazing on that front? Thanks.

[Aneel Bhusri, Co-Founder, CEO]

So, the first comment I make is it really depends on which industry you're talking to. There are a number of companies that can weather the storm retailers, tech companies, and as much as possible, they're trying to get back to some level of normal even though we know we're in frankly probably in the worst part of the pandemic, it just seems like, we figured out how to work in the pandemic.

And those conversations are indeed very similar to what they were pre-pandemic and people are very focused on digital acceleration and getting to that that future state on the platform side, but then we do have customers who are really being impacted by COVID whether they're in hospitality or transportation, and for them, they're still on the sidelines. And I think there'll be a few outliers here or there, but I think the best way to look at it is the world is trying to get back to normal, but there's a couple of sectors that are having a hard time getting back to normal.

[Kirk Materne, Evercore ISI]

And then maybe if I get a second one -- follow-on. Go ahead, Chano sorry.

[Aneel Bhusri, Co-Founder, CEO]

I was going to say Chano, you want to add anything?

[Chano Fernandez, Co-CEO]

No, I think that's summarized it well. I think from a pipeline perspective, we continue to see improvements relative to the start of the pandemic. And while it's early, we're starting to see some of the newer products having a positive impact. So, we're feeling good about what we have in Q4 pipeline and the maturity of this pipeline.

And it's also quite balanced across products and geographies. But, of course, we will remain positively optimistic looking at well, what's going to happen in terms of -- with the second wave of COVID and how things are moving forward.

[Aneel Bhusri, Co-Founder, CEO]

If I could add one comment, though, Kirk. There just been some other companies that have talked about how there's been slowdown in the back office; I don't share that point of view. I think if you're a legacy provider, where most of your revenue is coming, I think people of anything are saying, like, I really got to get off those legacy platforms and so for us, there are definitely companies and their product lines for us that I think are actually being accelerated by the pandemic, where people just want to get off even faster than what they were planning on getting off before.

[Kirk Materne, Evercore ISI]

That's helpful. And if I could ask just one quick follow-up for Chano, just around the sales and hiring comments, are there any particular product areas and/or geographies that you see could -- that there's a big opportunity where it's more of a function of just not having enough surf sales bandwidth, I was just wondering if any, maybe one or two either geographies and/or your product lines come up, I realize you're going to expand everywhere, but anything that stands out to you on that front?

[Chano Fernandez, Co-CEO]

We're making investments, Kirk, in a number of areas within sales and marketing is more to help our growth efforts around the store base versus rest of the world markets, including our ME push in other countries, medium enterprise, some of the vertical markets as well, we’re moving forward with financials and then some of the newer areas like federal government.

So, it's a bit across the board, right, but clearly from the go-to-market perspective. And we think, as I said in my script that now is the time to do so. So, we kind of strengthen our pipeline for next year and maybe the year after, basically capitalize on those investments.

[Kirk Materne, Evercore ISI]

Okay, great. Thank you all.

[Operator]

Our next question comes from the line of Mark Murphy with JPMorgan. You may proceed with your question.

[Mark Murphy, JPMorgan]

Yes, thank you and I'll add my congrats. Aneel, just on that last comment you made, I'm curious in a year or two, when we look back on the response to the pandemic, do you think it will have been a larger tailwind for the HCM side of the business because companies have to adjust to remote workforces and all the reskilling? Or do you see it more on the financial side because of a greater need to compress planning cycles and close the books remotely? In other words, where do you think the pain has been more acute, is it more on the HR side or more on the finance side?

[Aneel Bhusri, Co-Founder, CEO]

I think it's going to play out differently for the different product areas. So, for HR, everybody is worried about employee engagement and remote workforces right now. And so we continue to see very strong continued momentum in HR.

And finance, we had an excellent quarter selling finance, but I do believe there are some bigger projects that are being held off until post-pandemic and so the idea of starting a big project at a Fortune 500 company, we're getting those but probably not as much as I think we'll get post-pandemic. And I think I think when people come out of pandemic, they'll say I want to get rid of every legacy piece of technology I've got and I've got to move into the -- into this world of agile, flexible systems that, that support all different kinds of work environments and with our financial system, we've been able to close books remotely.

I would say the one area that continues to be very strong on the finance side is planning because people are under a lot of pressure to come up with new plans on a regular basis. I don't know how many times we've gone through a new planning cycle, since the pandemic started, but it's such a fluid, challenging environment that it's putting a lot of pressure on planning and I think that is driving that need for financials.

And then another area that we're seeing strong acceptance is actually in the area of scout and procurement because people are trying to get a handle on their supply chains and their costs during this environment, so. But I think core accounting is going to have a pop post-pandemic.

[Mark Murphy, JPMorgan]

Okay, great. And Robynne, if I can sneak in just a very quick one with the understanding that you're holding off on the guidance. Is this 14% to 16% subscription backlog growth guidance for Q4, arithmetically, I feel like perhaps that's a reasonable starting point on how we maybe could think about subscription revenue growth in fiscal year 2022 just given that'd be the glide path of exiting the year into pretty big bookings number, right, that that kind of waterfalls into the out year. I mean is there anything you would say to kind of dissuade us from at a high level thinking about it along those lines?

[Robynne Sisco, Co-President and CFO]

Well, Mark, I would just say that, obviously, we'll be in a better position to talk about FY ‘22 subscription revenue after we get through Q4, particularly given how uncertain the environment is. The backlog guidance, as I mentioned before, considers a tough compare from Q4 of last year where we accelerated both net new bookings, growth and backlog growth. And we face that tough compare environment where we still see net new business headwinds. So, right now we're focused on continuing to execute well through Q4, we'll really have a better view in FY 2021 on our next earning call and we'll share that with you then.

[Mark Murphy, JPMorgan]

Great. Thank you.

[Operator]

Our next question comes from the line of David Hynes with Canaccord. You may proceed with your question.

[David Hynes, Canaccord]

Yes. Hey, thanks, guys. So, Aneel, I think you hit on this a little bit last question, right, but the challenge that we're hearing from execs today is around, kind of employee engagement and preserving culture during the pandemic and look, I think a lot of that falls in the C suite, but some of it also to HR. So, I'm curious if there are opportunities, or considerations that kind of influence how you think about your HCM product roadmap, as you know, work from home or work from anywhere kind of becomes more permanent?

[Aneel Bhusri, Co-Founder, CEO]

Well, I've said this in the past, if there are trends that are beginning to take hold before an economic downturn, in many cases, they tend to get accelerated. And I talked about, like telemedicine, being one of those were telemedicine, they've been around for a long time, the pandemic hits and all of a sudden, it's exploding.

This idea of a talent marketplace, first internal and then external is one of those areas for us where if you're in a low hire mode, as a company, you're trying to get work done you really trying to understand the skills you have amongst employees, what skills do they need to add with reskilling and learning? And how can you source that work that needs to get done from your existing employee base. So, this idea of a talent marketplace has definitely gains traction and the idea of this gig worker project-based work, I think, is getting traction faster because of the environment we're in, I throw reskilling into that as well.

The other the other piece is much deeper understanding of trying to get a sense of how employees are feeling about their work environment, we all have heard mental health as an issue in the workforce today, given the remote work and so within Prism and within our People Analytics, we can do sentiment analysis and get a sense of with the polling questions that we do out of our HR system, get a sense of how people are doing.

I think you'll see more investment from us in a fairly significant way in employee engagement to really understand how we're doing as -- company-by-company, how we're doing -- or how they're doing relative to engaging their employees in a positive way.

And I probably one last thing is the big investment we're making in our -- in sharing our Vibe, our Vibe work, value, inclusion, belonging, and equity, creating an index, helping companies get a handle on their diversity and how they can be better. And that definitely has been accelerated by the environment we live in. So, actually quite a few changes as a result of this environment.

[David Hynes, Canaccord]

Yes, yes. No, that makes sense. And if I could ask maybe one quick follow-up for Chano, any way to frame kind of what percent of new customer relationships land outside of core HR today and maybe you know how that compares to say two years ago or something when the product portfolio was narrower?

[Chano Fernandez, Co-CEO]

I mean, clearly there is a -- David, there is a higher percentage slanting out there today and thus trend if anything is accelerating, both within net new customers as well within our installed base customers for some of those that were initially ASEAN customers are moving more to their financial.

And that is purely around core accounting systems or core financials where we announced we had hit 1,000 customers. But I think even most important as well that many of those are life unhappy and definitely, we have now many more levers to penetrate the office of the CFO with planning and procurement.

And those are really helping customers to navigate change these times. So, we've been talking about how many more planners, science, and experimental ourselves customer-ship doing today. So, clearly, those products are giving us a bigger and there are more landing in the area on the office of the CFO than there were before because our portfolio is broader. And certainly the interest is as well on the customers are moving off their legacy systems to then do simple things like closing their books remotely and having flexible and agile cloud systems that help them navigate these times has significantly increase.

And as we said before and what I see on the pipeline, we remain cautiously optimistic that there is going to be [Indiscernible] post-COVID on to that trend that we're seeing right now.

[David Hynes, Canaccord]

Yes. Okay, great. Thanks for taking my questions.

[Operator]

Our next question comes from the line of Alex Zukin with RBC. You may proceed with your question.

[Alex Zukin, RBC]

Hey, guys thanks for taking the question. Maybe just the first one for you Aneel and Chano. If clearly the install base selling is inflecting this year 50% growth is quite an achievement, I guess where are we in that journey in terms of the -- as we look to Q4 and beyond how much room left is there in terms of install base monetization?

And if we think longer term, maybe Aneel, like when does that new ACV headwind start to turn? I know -- I'm not asking you to predict the course the pandemic, obviously, but just when you -- is it as easy as when you start pumping some of the COVID impacted quarters next year or do you see something changing before then?

[Aneel Bhusri, Co-Founder, CEO]

I'll address the product component. I hope the idea of install base selling just continues to get stronger and stronger because we're adding more and more SKUs to the portfolio that we can go back to our customers, they're happy. They made a bet on Workday, there are more things we can do for them.

And so you see it in the additional SKUs we're bringing to market most recent one being the talent marketplace, but also the Workday Accounting Center. So, we're constantly coming with SKUS to offer to our installed base.

In terms of the sales motion and how that works, I'll leave that to Chano. But you shouldn’t think of the product line is static, you should think of the product line is as ever growing, because there still is a lot of opportunity in HR for new modules and there's tons of opportunity in finance for new modules.

[Chano Fernandez, Co-CEO]

Yes, I completely agree with Aneel, Alex, and hope you're doing well. I mean there are many, many new solutions that we've brought to market lately. I mean even -- of course, we've been talking Workday Strategic Sourcing, but if you think even products like learning or Prism Analytics or Workforce Planning, they're still far away in terms of the penetration ratios that we see a lot of areas like clearly payroll or cruising, or some of our more penetrated products these days. And we're adding new products like Health, People Analytics or Workday Extend. So, we had a great opportunity going forward there.

In terms of how do we see it in on the net new side? I mean, clearly, of course, next year, and especially H1, we have certainly better comps and easier comp the way has happened this year. Certainly, we'd see that some of the lockdowns, hopefully going away, will help us out, especially Rest of the World. And obviously, some of these new products even to penetrate new customers with some of the -- basically different levers that we do have today for HR or finance sales.

Definitely last but not least, if we -- some of the distress or more mostly heat verticals today, that hopefully will have a better -- there will be a better place clearly as we get into a world where there is a little bit more of the outside of the [Indiscernible]. So, those verticals will be opening up.

And then obviously some of the new markets that we're opening, right like federal, and so will be contributing. So, there are there are a number of levers I would say in rest of the world, that's what we found definitely more and more SKUs. Some of the new industries or let's say industries in terms being new -- in terms of that they not be much at play during the pandemic, but we'll be opening again, hopefully within the course of next year.

[Alex Zukin, RBC]

Make sense. And then maybe just a quick one for Robynne, you talk about the kind of investing for growth strategy, which makes a lot of sense, given all the things that Chano just mentioned, but I guess from a -- I know we're not guiding, but if you look at the margin expansion this year, clearly, I don't think anybody is expecting anything close to that for next year. But is the guidance or the color that you're providing, is it fair to assume kind of a flat margins trajectory, dip in margins, or just a much smaller expansion?

[Robynne Sisco, Co-President and CFO]

Yes, so Alex, investing for growth remains our top priority and we have a lot of opportunities ahead that we're excited about and we've been talking about how we're going to pick up the pace of investments in Q4 and through next year. And when you think about our 19% non-GAAP margin guidance for this year, it does almost 600 basis point improvement over FY 2020 and under normal circumstances that would take two to three years for us to have that kind of margin expansion. But obviously, this has been a very unique year.

So, we still need to get through Q4 and finalize our plan for next year, before we have a better view. But certainly, you can expect our pace of hiring to pick up in FY 2022. Some of the COVID benefits that we saw this year likely to subside, particularly in areas like travel and events.

And given all that it'd be reasonable to see our margins next year coming off of this year's level. You can see that investment starting to have an impact when you consider our Q4 margin guidance.

And then the last thing to keep in mind is that as we increase the pace of investment, you'll see an immediate impact on our expenses, while the resulting impact to revenue from those investments are going to take a little longer.

[Alex Zukin, RBC]

Understood. Thank you so much and hope you guys are all staying safe and well.

[Operator]

Our next question comes from the line of Mark Moerdler with Bernstein Research. You may proceed with your question.

[Mark Moerdler, Bernstein Research]

Thank you and congratulations on a good quarter. I know it’s a lot of hard work went into it. So, two questions, if you don't mind. Chano with a worldwide lockdown continuing, how do you think about driving new deal generation? Do we need to see a return to traveling conferences to fill the top of the funnel? What do you replace the in-person meeting and conferences? Or is it just hiring more bodies and more advertising? I mean how's the business model from a sales point of view changing? And then a follow-up.

[Chano Fernandez, Co-CEO]

Yes, no, it's a great question. I don't -- if I look at the pipeline, and again, remaining cautiously optimistic, we had not only a good Q3 in terms of execution, we had a very good Q3 in terms of pipeline creation, right?

We're kind of, again, shooting for kind of same dynamics into Q4, especially the focus around the pipeline and we're putting -- or we're doing these investments around sales and marketing, that they're not only the more and more feet on the street, clearly there is more feet on the street that we're planning on centers, and we see opportunity for growth. But obviously, it's also as well around marketing, investments, branding, and so on and so forth to support us in terms of our pipeline and demand generation efforts especially next year and year after, right?

Again, if I look at that strength, when I look pipeline creation, of course, you have net new customers, they are contributing and you have a course net new products or SKUs on to the installed base, right?

If I look at the trend I would say that the team has done a great job on managing it virtually up to this point and we got a lot of learnings. And clearly, if you would ask me the team will be anxious, and I would be anxious to get in front of customers, because I think that that plays better to what we do.

But I think we were fighting very nicely in that model and we're certainly learning on doing better and more efficiently. So, again, better to be in a pre-COVID world. If you ask me, I don't think we're going to be able to go back to similar levels of travel is going to be potentially more 30% to 50% less that people traveled before. But still that would be better than doing also remotely, but pipeline creation is being -- it has had a good performance on this environment Mark.

[Mark Moerdler, Bernstein Research]

Perfect, really helpful. Question, we focused more on deals often, but wanted to ask about the process of driving customers to go live. How is the lockdown change the complexity or the time it takes to drive customers to a live condition?

[Chano Fernandez, Co-CEO]

Well, I would like to give a big shout out to Emily McEvilly and the team within Services because they've done a fantastic job with over 190 customers going live this quarter, but I thinks some of those are significantly relevant, right? When you think Walmart with 1.7 million employees going live during this period, or Accenture, with over 500,000 employees, or you think of UBS or GE, or you think Progressive Insurance, or financials -- core financials, all going live during this period.

Those have no minor accomplishment, right. So, I think that is a testament to the good work of the Services team of bringing them live fully remotely and we were doing pre-pandemic 80% and secondly, is a testament to our technology and the possibility to doing really flexible performance and scalability technology. So, and all those are happy to be honest, so that's a great place to be.

[Mark Moerdler, Bernstein Research]

Good. Perfect. Thank you.

[Operator]

Our next question comes from the line of Keith Weiss with Morgan Stanley. You may proceed with your question.

[Josh Baer, Morgan Stanley]

Hi. This is Josh Baer on for Keith. With all of the conversation around pipeline and building pipeline and optimism there, I guess I’m wondering with the strength in results how should we think about the current pipeline today versus how it -- how compared to pre-COVID?

[Chano Fernandez, Co-CEO]

Well, I think -- thank you, Josh for your question. This is Chano speaking. If the question is are we already at pre-COVID levels? We are not. We’d love to be there, but we are not yet at the pre-COVID levels. Of course, we -- let’s say that we are getting closer, but I think what you should think is we are cautiously optimism from our point of view in terms of what we’re seeing on demand generation and pipeline creation to help us deliver our growth or resources starting in Q4 and looking forward.

But then, obviously there is the second wave that’s well in front of us that is creating more near-term uncertainty for which we don’t know yet what is going to be the impact or how long it is going to take basically for all of us to get on the other side, right.

So, I guess there is this situation where we would like to know more as well in terms of how is the environment going to be evolving recognizing that we’re seeing gradual improvement, at least for our business and where we deliver and the stabilization and certainly we are in a much better place right now than we were at the beginning of the pandemic back in March, April timeframe.

[Josh Baer, Morgan Stanley]

Great. And I’m just curious if you have any insights into what you’re seeing internationally as there is different COVID waves and lockdown government responses in different countries. Is there any difference in buying behavior that you’re seeing in different geographic locations? Thanks.

[Chano Fernandez, Co-CEO]

Thank you, Josh. No, we still see a big opportunity ahead of us in the rest of the world market and we’re certainly optimistic around the opportunity. And that’s why we are making a big part of our investments that we’re making right now and planning to make because we -- as the contribution of the international revenue mix continues to grow higher and we see it continuing to growing higher over a medium and long-term, right.

Clearly, there are countries that have been going and suffering a lockdown and that has had some impact and some headwinds in terms of the net new business and maybe of course our installed base is not yet as large as it is in the U.S.

And I think we’re amazingly prepared to have a fantastic year in international ahead of the pandemic. The leadership is still there and it’s really driving in terms of this pipeline creation [Indiscernible] and we are really excited again as we are getting onto the other end. And some of those markets are opening in terms of being a significant growth contributor to our journey forward.

[Operator]

Okay. Our next question comes from the line of Karl Keirstead with UBS. You may proceed with your question.

[Karl Keirstead, UBS]

Thank you. I’ve got two for Robynne. Robynne if you don’t mind can we go back to the 4Q subscription backlog guidance of 14% to 16%? So, that’s a seven to nine point decel from 3Q. But it’s actually only a one point tougher compare. So maybe you could elaborate on the compare comment you made. Maybe you meant on the net new ACV front.

And then also, is there any duration compression that might be impacting that 4Q number and if not just generally whether this reflects a demand backdrop that feels just incrementally tougher perhaps than what Workday saw in 2Q and 3Q? Thanks.

[Robynne Sisco, Co-President and CFO]

Yes. So, the backlog while certainly an important forward-looking metric is not a precise gauge as you know. It’s impacted by things like duration, which -- and maybe I’ll go to your second question now, we did see increased duration in Q3 that we do not expect to repeat in Q4. So, that’s part of it. Also the timing of renewals have an impact, which can move around. And so, those are things that just to keep into account when you’re looking at our guide.

We have seen some stability in the environment over the past couple of quarters, which along with the strong execution has helped drive some of the backlog results in the past few quarters. But the guide does consider this tough compare. And when we look at last Q4, we did accelerate net new bookings and reaccelerate the backlog growth.

And so that’s the tough compare that we’re facing in an environment that remains very, very uncertain. And so we’ve taken all that into account in our guide and we’ll obviously be able to tell you more next quarter. But Q4 is a big quarter for us and we’re right now focused on executing against that quarter.

[Karl Keirstead, UBS]

Okay. That’s helpful, Robynne. Thanks for unpacking that a little bit. And then my second question is just on the go-lives that Aneel commented on earlier, kind of an amazing go-live quarter for Workday. Actually, if I cut them all, Walmart, Accenture, UPS, GE, that’s a lot of very large go-lives. Did any of those or collectively did they trigger any milestones that might have impacted the 3Q numbers in anyway? Thank you.

[Aneel Bhusri, Co-Founder, CEO]

I don’t know if they triggered any milestones in terms of the number. I leave that to you Robynne. Again as Chano mentioned just very appreciative and proud of Emily and our team and our -- and I’d say our business partners as well who figured out how to get these large customers live during this pandemic.

And one of those going live in the quarter would be terrific having four of them go live in the same time frame. That’s really remarkable from a services perspective and as far as I know they’re all so very happy.

[Robynne Sisco, Co-President and CFO]

And maybe I’ll just add that as you know, most of our implementations are run by our partners and don’t result in professional services revenue to Workday. So, we do prime about 20% of them. And while we do have some revenues that can get driven by milestone on fixed fee contracts, there really wasn’t anything to call out in the quarter in terms of big milestones net driving revenue.

[Karl Keirstead, UBS]

Got it. Okay. Thanks very much.

[Operator]

Our next question comes from the line of Brad Zelnick with Credit Suisse. You may proceed with your question.

[Brad Zelnick, Credit Suisse]

Excellent. Thank you so much for taking my questions. Firstly, you mentioned Workday Accounting Center a few times which we’ve been hearing about more recently from the field. Can you help us understand what exactly is it, how do you see it impacting your competitive positioning and perhaps what is it replacing and why?

[Aneel Bhusri, Co-Founder, CEO]

Chano, do you want to take that one on?

[Chano Fernandez, Co-CEO]

Why don't you take that one?

[Aneel Bhusri, Co-Founder, CEO]

Pete, why don’t you take that one? Yeah, Pete take it on and then maybe Chano just talk about where we’re competing.

[Pete Schlampp, EVP of Product Development]

Yes. So, Accounting Center has been really important for us in being able to open up certain verticals, especially like the financial services vertical for Financials and you did hear us earlier talk about how it helped us in the Fifth Third Bank win this quarter and a few of the previous bank wins that we’ve had in previous quarters.

So, to answer your question what is it. Accounting Center is a way for our customers to bring in all of their operational data and bring it into Workday and secure it then do accounting on it and have that accounting roll up into their GL.

So, if you were, for instance, in the insurance industry and you wanted to take a look at something that is happening at the GL level, but you want to go all the way back and go back to the individual policies and claims, for instance, you’d be able to do that right inside of Workday.

This is replacing a lot of data management infrastructure that would otherwise have to be managed by the CFO and the CIO and our customers are finding its value of having it in a single system and being able to do all the analysis and get their answers right there in front of them.

[Brad Zelnick, Credit Suisse]

Cool. Thank you very much for that. Maybe if I could just ask a follow-up of Chano, another pipeline question. And I appreciate your comments which sound very encouraging. But maybe just to dig a little bit deeper as you analyze and scrub the pipeline and you look at opportunities that are pushing out versus maybe shrinking in size but still closing versus competitive losses, sorry to bring those up.

But if you break it down into various stages and consider things like time to close and forecast accuracy and how that’s all changing, what are some of the more detailed takeaways that you can share that tell the story of what’s actually happening in the field and in the environment right now and ultimately support your confidence?

[Chano Fernandez, Co-CEO]

On this environment -- thank you for the question, Brad. On this environment the most sticky, let’s say, impact that we can see is kind of push opportunities more than any other thing a few quarters ahead. And that, of course, comes because of the uncertainty of the environment and basically some customers maybe net new customers in some industries especially with the hardest hit industries there is, yes, more uncertainty and they are more basically balancing out which are the projects that they should be starting if any at all and which ones that are not, right. So, I would say that the highest impact there potentially is as you know potential push opportunities going farther into a few quarters, more than any other change, right.

We haven’t seen any changes in terms of competitive and kind of momentum over there. Thank you for bringing it up. But that’s the one that, of course, is more depending on these uncertainties of environment than any other lines.

So, we remain very focused on the -- clearly on the pipeline creation efforts and maturing and we have had great conversion of rates and ratios on these last two quarters, Q2 and Q3. But when we look forward, and again, we are looking optimistically to Q4, we’ve got to be respectful in terms of how is the growth, this uncertainty and this second wave is going to be evolving.

[Brad Zelnick, Credit Suisse]

Thank you so much for the color and for taking the questions.

[Operator]

[Operator Instructions] Our next question comes from the line of Brent Thill with Jefferies. You may proceed with your question.

[Brent Thill, Jefferies]

Robynne, not to dwell on the Q4 backlog guide, but I don’t think you’ve ever seen a 800 point decel at midpoint. So, I think I was just asking did something happen in Q3 where some of these deals got pulled into the backlog from Q4 or we realize obviously environment, but I think I was just trying to reconcile this? And I think we haven’t seen it in the model in the past.

[Robynne Sisco, Co-President and CFO]

Yes. So, no, nothing happened to the backlog -- I’m sorry, the pipeline in Q4 still looks good where we continue to execute well. When you look at the combination of duration which helped us in Q3 and Q2, very, very tough compare from last year in pre-COVID days and all the uncertainty that we’re seeing and the law of large numbers. This is just our best view right now, Brent.

And so it’s obviously our biggest quarter of the year. A lot of uncertainties still out there, even though we have seen things stabilize. And so we’re just focused on execution. This is the best that we have so far in terms of our view in the backlog and we will obviously update you next quarter.

[Brent Thill, Jefferies]

Thank you.

[Operator]

Our next question comes from the line of Daniel Jester with Citi. You may proceed with your question.

[Daniel Jester, Citi]

Great. Good afternoon. Thanks for squeezing me in. Just maybe a bigger picture question on M&A. Scout has obviously done well; Adaptive has done well over time. Now that you’ve incorporated those businesses, how does that change how you think about inorganic activity, especially given the comments in the call today about sort of ramping investments into next year? Thanks.

[Aneel Bhusri, Co-Founder, CEO]

I don’t know if it changes our view. I think it just gives us confidence that if we find the right kind of company that is a good fit culturally, that is an innovative growth company and that’s complementary from a technology perspective not overlapping that that is something that we now feel very comfortable.

Tom Bogan has really led that effort that. We feel comfortable we can integrate those companies into Workday, but also with the commitment that over time we will harmonize the technologies so we don’t become a Frankenstein like some of our legacy competitors have become. It’s really important that we can maintain that unified view across our applications and so that’s -- and that’s key to driving it.

So, I think you’ll see more from us for sure coming down the pipe, but I also think they’re going to fit the -- they are going to fit the Adaptive and Scout models. It’s not going to be a -- I don’t see us doing a big acquisition that is overlapping technology wise. I think that’s just -- that actually slows us down.

[Daniel Jester, Citi]

Great. Appreciate the color and best of luck in the fourth quarter.

[Operator]

Ladies and gentlemen, thank you for your participation on today's conference. This will conclude Workday's third quarter fiscal year 2021 earnings conference call. Thank you again for joining us.