Workday Incorporated (NYSE:WDAY)
Financial Investor Day
September 10, 2013 01:30 PM ET
Mark Peek - CFO
Mike Stankey - President and COO
Jim Bozzini - SVP, Services
Stan Swete - CTO
Aneel Bhusri - Chairman & Co-CEO
Steve O'Brien - Jefferies & Company
Jen Lowe - Morgan Stanley
Steve Koenig - Wedbush Securities
Heather Bellini - Goldman Sachs
Walter Pritchard - Citi
John DiFucci - JPMorgan
Kirk Materne - Evercore Partners
Raimo Lenschow - Barclays Capital
Justin Furby - William Blair
Jason Maynard - Wells Fargo
O’Neills Frankfield - UBS
Steve Ashley - Robert W. Baird & Co.
Akash Ranganath - Merrill Lynch
Karl Keirstead - BMO Capital Markets
Richard Davis - Canaccord Genuity
Hello and welcome ladies and gentlemen and please welcome to the stage Workday Chief Financial Officer, Mr. Mark Peek.
Well, good morning everyone and I want to welcome everyone just on the webcast as well. I hope that you enjoyed the keynote session and this is our first -- our non-hero Analyst Day. A lot happened at the keynote. We talked about the GA of Big Data, we gave you an update on recruiting, we gave you an update on financials, we introduced student systems, and we previewed the new user interface and so really an exciting day.
Today’s agenda is relatively simple and straight forward. You’re going to be hearing from five of our executives; first, Mike Stankey; our President and Chief Operating Officer. Jim Bozzini; the SVP of Services. I’ll have Mike and Jim come up and we’ll do a Q&A with the two of them. Then, Stan Swete, our CTO, we’ll do a Q&A with Stan. I’ll come back, talk a little bit more about the opportunity for Workday, and then we’ll have Aneel come up, and Aneel and I will do Q&A for the reminder of the session. We want to leave a lot of time for Q&A and so the presentations will be brief. We’re also making the slides available after the session is over, they’ll be up on the website for 45 days.
So the theme that you’ll here for today is about growth. Today, we have 500 customers. You’ll get a look at our market opportunity, but most of what you’re going to hear about is growth. And we honestly believe that we can become 5,000 customers in a relativity short period of time.
If you step back August 30th of last year, so just a little over a year ago, we made our first public filing that we were going to go public. We went public on October 12th. At the time a year ago, our cash position was $123 million. Today, we have approximately $1.3 billion of cash.
Our unearned revenue a year ago was $247 million, since then unearned revenue has increased 32% to $326 million and this was in light of a model shift that moving away from collecting multiple years of cash from our customers upfront to a single year of cash.
We increased revenues 77%. We increased subscription revenues, our software product by 97% over the trailing 12 months. We had 1,450 employees. Today, we have over 2,200 employees. Importantly, we have 500 plus customers and we’ll talk to you more and more about why the customer count is important. And we were voted the Bay area’s best place to work in 2013, the second consecutive year. I know many of you cover other companies in Silicon Valley and in the Bay area and you realize that there is an unprecedented war for talent going on today, much like we had in the late 90s and the early 2000s. So this is a really important factor and our turnover and employee attrition is at lows that I’ve never seen in any of the businesses that I’ve worked in.
And finally and importantly, we have 97% customer satisfaction, Dave touched upon that, and you’ll hear from Jim Bozzini, our Head of Services and from Mike Stankey a little bit about how we maintain that customer satisfaction.
So with that, I would like to turn the stage over to our President and Chief Operating Officer, Mike Stankey.
Thank you, Mark. Good morning everyone and thank you for joining us. I have probably one of the two or three best jobs in enterprise software. In that I get to lead the teams that take the products that you’ve seen this morning and sell them into an enthusiastic customer base. The teams implement those customers and bring them to life and of course ensure their ongoing satisfaction overtime. In my particular portion of this presentation however I will focus on the sales aspect of the responsibility. In doing so, I’ll provide color and context on sales deployment, how we array ourselves against the global opportunity that's in front of us, how we manage that sales force and of course we’re building that sales force to create the growth. I’ll then move in and give you little color on the competition and how we see the market today and then close with a couple of customer statistics that we have not shared in the past that I thought you might find useful.
So, as we talk about deploying ourselves against this opportunity that really is described in two ways; the analysts will estimate that the opportunity is in excess of $50 billion on a global basis. As we take a look at that opportunity we respect that number, but tend to deploy against it by the number of companies that have employ accounts of more than 1,000 employees and are free standing independent buying entities, so on a global basis that gives us an addressable set of accounts of about 23,000 organizations. As you take a look at those organizations on a global basis, about 80% of them are addressable within eight countries across the globe.
Now obviously we spread ourselves more broadly than those eight countries, but I think it's important to know when you see how we’ve deployed our sales force, about 50% of all of the accounts across the globe are in Canada and the United States. As you move on to Europe you will see roughly another 30% of the opportunities spread across 12 countries in which we have sales presence. And then of course as you move into Asia Pacific and pickup the other 20% you see that we pick it up in Australia, New Zealand, Hong Kong and Greater China and then Singapore and as Dave announced this morning are opening up our presence in Japan.
With these 20 countries with direct sales presence, we pick up about 85% all of the accounts within our target market on a global basis. When we deploy resources rather than spread 10 people across 10 countries we choose to go deep and establish a meaningful presence in respect to sales, marketing, customer support and implementations support, so that we can create the levels of customer satisfaction that you saw displayed this morning.
Now as you take a look at how we manage the team and how we provide focus. We really break the world up into these pieces. On the left hand side of this slide starting out with large enterprise North America, it is a team led by Rob Stoker, focuses on our total North American business for commercial enterprises. Rob has a management team that focuses on large enterprise accounts. He has a medium enterprise team that focuses on companies that are in the 1,000 to 3,000 employee segment. Interestingly about 45% of all of the organizations in our target market in North America reside in this 1,000 to 3,000 employee segment and outside of North America it's actually over 50%. So it's an important segment, it's one that's been growing very rapidly. And just this past quarter it represents the segment that was bigger last quarter than the entirety of Workday about 3.5 years ago, so while we're doing extremely well in medium enterprise and that's a area that's growing very rapidly.
Additionally financials, you’ve heard about the focus on that market this morning. We’ve broken out dedicated sales force, it's a newer product, requires more expertise to sell successfully, competitively against the incumbents and Steve Hansen leads that effort for us in North America.
As you move into the education and government space here Dave and Mike Duffield will talk about that. This morning Kevin Francis that leads that effort for us across North America in EMEA, Andy Leaver leads that team in the UK and across the continent. And then in Japan you heard about Norrie Tocosu [ph] and Mike Haase leads the team in Hong Kong and China. So, we have a fairly good coverage on a global basis.
Now, as we have deployed our quarter carriers, the account executives against the opportunity. You’ll see that right now we’re over weighted in North America, it’s where we started, it’s where we’ve enjoyed most of our success, but certainly we’ve been making significant investments in the United Kingdom and across the continent of Europe. You see that we just stated in Asia-Pac about 18 months ago, but with Nissan and several other key customers across that region, we’re enjoying great success. And we certainly see our business in Asia-Pac growing as that economy expands rapidly over the course of the next decade. So that is how we’ve deployed our account executives on a global basis.
Now, as we build our teams obviously we are recruiting account executives from our direct competitors and from other companies. And as you take a look, we’re about 40% composition from legacy ERP players and about 60% outside of those players. The enterprise software space today faces a demographic problem. You take a look at the source of sales hirers over the course of the last 20 years, the main body of that sales force has come from the sales academies created by IBM, Xerox, Hewlett-Packard. The companies that recruited great talent out of the universities, put them in through intensive classroom and field training programs that lasted a year and then put them out in the field and gave them great professional selling experience.
The software companies of course then swooped in, picked off the best of those and that was really the main body of the enterprise sales force for the last 20 years. But as you take a look at how that sales force has progressed through its career and do higher jobs and as of age they move out of the workforce, that pool simply doesn’t exist at the rate it did before, and we like the players into the enterprise software companies where we’ve pulled most of the people out that we want. Every time they make an acquisition, after the lock-up period expires we tend to pickup more people from the acquired companies, but we now find that we have to go outside of the traditional ERP companies to build our sales force.
So as we do that, I thought I’d give you an insight into how we’re doing that build and how we’re handling the recruitment. Certainly, we can no longer rely simply on experience as designated by names of companies on resumes. We now need to go in and find the core attributes that we seek. The four attributes in the blue in this outer ring represent those attributes that we cannot couch. It’s analogous to the basketball coach height, and cannot coach speed. So they either have it or they don’t. We try to go through and screen and evaluate the candidates along those four attributes.
Once they pass that screen though, we can then go in and more scientifically evaluate them for the key competencies associated with sales success. We are not attempting to bring people in who have never sold before. They must have sold generally technology at a software company or a technology infrastructure company. But once we’ve indentified those four key attributes, if they possess the other essential elements we’ve isolated nine competencies that we can select based on those competencies continuously evaluate them not only in the interview process but through a performance appraisal process throughout their lifecycle at Workday. And then of course as we spot weaknesses, we have a training course that we can put them through to develop the competencies overtime.
So this is very quickly moving to a sales force that is being grown within Workday. And I’m quite pleased to report that the time to first sale is decreasing and the percentage of these sales force that is achieving success is measured against third quarter is increasing overtime. So we believe that this model works. We believe this is a model against we’ll execute into the future.
Now, since we are growing the sales force very rapidly and we are spending more time building a sales force rather than transferring over from the ERP software players, we have made significant investments in management. And whereas traditional spans of control an enterprise software sales forces have been six to nine to one, we’ve compressed that to around five to one. We find that it frees up management capacity to do the recruiting due to the on-boarding and then of course to see people through their initial deals. And then as that portion of the new sales force achieves success and as we grow for the next year, we split the regions up, we promote some managers, we hire some others, preserve, tight spans of controls and we get better predictability in yield out of the sales force. So that’s the way that we’re addressing the rapid expansion of the sales force across the globe.
Now, I’m going to move on and just talk a little bit about competition and what we’re seeing in the market. And I’m going to characterize some numbers, I don’t think we’ve ever shared before and as you take a look at how opportunities resolve themselves over a three-year lifecycle. So when an opportunity is qualified into our pipeline the question becomes what happens to it, do we win it as we do in 27% of the cases, do we lose it to competition as we do 16% of the time over that three-year span or do we actually lose it to something much more in a furious and dangerous which is a loss to do nothing?
Now, I am going to be pretty tough on ourselves as we talk about what a loss is, because a win is obvious, we win and we replace the incumbent with the entire system of record, the talent modules and all the systems around it that is what we call a win. We don’t have an ability to sell talent only or some edge application, we are a core system of record player and that’s how we compete. When we lose to a competitor, therefore we do not lose, we may lose however to a single module, they may elect to buy compensation or performance appraisals from the incumbent or from another vendor, we count that as a loss. They may choose to upgrade their current system to the next version, we call that a loss, it is a lost opportunity for some period of time or of course it maybe that we lose and they replace the whole system of record which of course is how we measure a win. So that’s what we call a loss, a loss to do nothing is the customer simply decides that they cannot create enough value to make a business case for spending millions of dollars on Workday. That’s how we take a look at loss to do nothing and the loss to competition.
Now, as you break it down a little more and you take a look at our wins against competition which represents 27% of the opportunities on a three-year basis, we win against legacy ERP about 70% of the time and we win against other about 30% of the time. You take a look at the data as it’s trending most currently over the course of the last 12 months, our win rate against all of these players is going up, we’re north of 30% and our loss rate which is the next chart over which shows at 16% in the last 12 months is actually about 13%. So, we’re becoming more successful overtime as our product matures we gain better coverage on a global basis. But when we lose to a competitor, when they operate it and continue to paying maintenance, when they buy maybe a simple module or they buy a full system replacement, we lose to legacy ERP about 58% of the time and to other players about 42% of the time. So, we watch the stay, that we trend it overtime, it’s most useful to us to take a look on a three-year and one-year basis to get a better feel for how we’re doing on success rates in our business.
I am going to come down the home stretch here and share two additional points of customer statistics. And it’s really been remarkable as you take a look at one day of Workday rising, and no doubt you’ve had a chance to run with some of our customers but with these more than 500 customers, we now have over 6 million employees under contract with Workday. And so as Aneel and others talk about data as a service, this represents the base against which we are now gaining intelligence about the workforce across the globe. And you can see that the line is getting steeper overtime as our quarterly success rates improve.
The other thing that these employees and the people that rising represent is a force multiplier that we do not believe anyone else has amongst our competitors and that is a rapidly positive and successful group of customers who are willing to go out and tell our story and help us win additional business. That 97% customer satisfaction rate buys us a set of reference that I’ll put up against any single competitor in the world, both in terms of enthusiasm and sheer number and of course all of those references and happy customers are successfully implemented in the cloud. If you talk to the customers in the hallways, you’ll get a feel for it.
And finally I thought I’d give you a feel for where we’re selling Workday on an industry basis. Again, Aneel and my friends in this morning talked about our success in employee-based or employee intensive industries. But then you note manufacturing and distribution, which would seem to be anomalies in regard to that statement. But what we are finding in large manufacturing companies, companies like Hewlett-Packard, like Johnson Controls like DuPont, who’ve selected Workday for large global implementations is that they’ve gone through over the course of the last two decades and invested 10s if not 100s of millions of dollars in optimizing their material supply chains. And the marginal rate of return and every additional dollar investment supply chain optimization simply doesn’t yield that much anymore, but as you take a look at the cost pie of most enterprises, even in materials intensive industries 40% to 60% to 90% of their spend is concentrated on people. And that spend on people has been less optimized than the spend on materials, and that represents Workday’s great opportunity in terms of helping companies run their companies better by optimizing their investment in people.
So I am going to save the questions for the Q&A in a moment. And I am going to introduce you to the man who is responsible for delivering that 97% customer satisfaction rate, Jim Bozzini, Workday’s Senior Vice President of Services; Jim?
Thanks, Mike. Good morning everyone. I am going to spend about 15 minutes giving you a glimpse of the way that we work with customers during the deployment and post-production cycles and then we’ll bring Mike and Mark back on stage and open it up to questions. For starters, and just as a backdrop for this discussion, I’ll introduce you to the way that we view the customer lifecycle. And that we see three distinct stages of that lifecycle; discover value, deliver value and increase value. And during the discover value stage, that’s really the sales cycle. That’s where the Workday’s sales organization presents our products and my organization will present services, and give customers an understanding of what a deployment is like, what life in production is like, try to understand more about the goals and objectives so that we can help to guide customers to various partners if they choose to go down a partner path for their deployment.
From a deliver value standpoint, it’s all about getting live on that initial deployment and then increase values after live, after they are in production. How do they continue to increase the value that they are getting from their Workday investments by implementing new features that we’re deploying in our updates?
And before we get into the specifics of deployment and post-production, just wanted to show you a snapshot of some of the most important things, I would say, that have changed in the software world. And there are many, many things that have changed in the software world from the legacy ERP on-premise applications to Workday and the cloud. And one is that the very first thing that customers have to deal with in an on-premise world is they have a technical infrastructure that has to be built. They have to install hardware and system software and database software and versions of a product. And then they have to update the versions of that product that they bought, because typically there are bugs that have to get fixed after they’ve done an installation. And of course in a Workday world all of our infrastructures in the cloud and Workday provides all of that as part of our service.
The legacy ERP applications were really built with the idea that you needed to customize the product in order to make it work for you and that customization typically required a great deal of coding. And coding meant that you ended up with something that was very much tailored for you, but also a one of a kind product. And of course contrasting that with the Workday product, our product is configured. Every customer is on the same product and so that configuration can be updated from release-to-release more seamlessly. And of course the end result is in a legacy world extensive testing because of all of these custom pieces, and in a Workday world, it’s a reduced testing effort.
So I wanted to point out some of the things that I think drive faster deployments for Workday and of course all sitting on our software-as-a-service platform. A few of the key elements, and again many, many differences I’ll highlight for; one is, configurable business processes. So particularly important to HCM customers, there are 100s of processes that they have to configure to make HCM work. But we deliver prepackaged processes and then they use our configuration tools to change the processes and make them work without writing code and without creating a one of a kind product.
We deliver integration and data loading tools because as you can imagine customers need to get data into Workday initially in order to start using their historical data. And then they frequently are moving data in and out of Workday to their other software products. And so we provide the tools to facilitate that. In Enterprise Reporting platform, which is particularly important to financial customers where we can embed analytics into the product and then finally a web familiar interface which takes some cues from the consumer Internet world and really accelerates the change management.
As you can imagine when you’re rolling a system out to 1000s, maybe 10s of 1000s, maybe 100s of 1000s of people that do employee self service and manager self service, their familiarity with the interface will accelerate the change management. And one of the things that I hear so much from our prospects as they’re moving over to Workday is that their legacy systems failed because the system wasn’t adopted well by their managers and their employees. And so with a consumer Internet look and feel and a web-friendly interface that it facilitates that adoption process.
So let’s talk a little bit about the deployment methodology for Workday and we talked a little bit about the discovery and subscribe, that’s the sales cycle already. But getting into the meat of the methodology, five different stages, plan, architect, configure, and prototype test and deploy. So, the most important take away from this slide in my opinion is that, we run an iterative process in the configuring prototype stages. We'll typically see a customer go through two to three prototypes before they're ready to deploying production and the mentality that we have is that we like to test the data conversion so we'll subsets of data come into our first prototype and we'll click our customer’s data with the first prototype, get the customer familiar with our product and what their data looks like in our product and they advice us to make changes to refine it. And so we’ll go through that process a couple of times, increasing the amount of data that we're converting, refining the configuration of the product until they have what they want, move into a testing mode and then we move into deployment.
And a couple of other things are taking place during this deployment timeframe; one is that the customer is learning about Workday and the products. Most customers have a goal to be self sufficient after they go live. They'll use consulting help during the deployment but they like to be self sufficient as they wrap-up, so whether it's the training opportunities or knowledge transfer during the deployment, customers need to learn during the process. Another key element is that Workday is involved in virtually every initial deployment effort, whether a partner is the prime contractor or not Workday is going to have resources that engage with that customer to ensure that things are moving along properly. And then finally we run a series that helps customers prepare for life in production so at the end of the initial deployment process when they're ready to go live, they're very knowledgeable, they know what to expect and they can hit the ground running.
So during the last earnings call Aneel talked a little about our medium enterprise methodology and Mike just talked about the successes that we’re having with the medium enterprise. And I wanted to highlight some of the changes from the large enterprise model to the medium enterprise model. So this is those same five stages, plan, architect, configure and prototype test and deploy and for medium enterprise companies over the last year we've invested in some tooling and a different approach from a methodology standpoint to really try to streamline the implementation process for that segment of the market. And it really starts in the sales cycle, we are able to learn from the customers during the sales cycle what their objectives are and what some of the configurations that we know they're going to want. We gather that information, and rather than going through what is a little bit more of a clean sheet of paper process in plan and architect we go through a process we call align and confirm, using our lifecycle tools, so that when we deliver the first tenant to the customer they're getting a Workday tenant that more closely aligns with what they’re looking for, based on what we learn during the sales process.
And then that way it streamlines the configuring and prototyping stage, we get through testing and deploy and they can go live faster. So we know our approach works, we measure the time it takes to go live as one of the metrics that we use to help gauge the health of our model and deployments. And so I'll just highlight where that the numbers we’ve seen over the last few quarters. So the medium enterprise customers I've just listed as under a billion in sales and large enterprise over a billion. The medium enterprise customers are averaging over the last few quarters between about five to seven months for their initial deployment and large enterprise customers about eight to 12 months for their deployment. And of course all customers are different, they have different objectives, they deploy different scope of functionality and so mileage will vary, but this is what we're seeing based on the numbers that we're tracking.
And of course we would contrast that to the legacy world where the numbers could be substantially higher than that and in fact in a survey that I recently read the average was about 18 months for a traditional ERP deployment. So we’ve invested tremendously in building an ecosystem of partners and today the ecosystem is over 2,000 individuals and of course that includes the Workday consultants, as well as partner consultants. We've invested in certification programs to ensure that the resources that we're putting out on customer deployments are very knowledgeable and that the quality remains high. And if you think about the number of updates that we're doing, previously three per year moving to two per year, consultants have to always maintain that level of certification because we're changing all the time. We need to make sure that they understand the new products, new features that are coming out.
But I think that there is a key, a fundamental aspect to our strategy overall, and you may have heard us talk about this before, the power of one. The power of one is rooted in with the idea that all customers are on the same version of the product. But it really extends to the services ecosystem as well, because by being on the same product and by implementing some of the strategies from the services organization, we're able to keep all of the partners on the same page with Workday, very important as we collaborate with our partners. And so today about 80% of the ecosystem is partners, we are all working with the same tools and the same methodology and really that enables us to all speak the same language. Couple of keys on this one; one is that it also enables us to subcontract from our partners when we need to bring certain resources to deployment at a certain point in time that maybe are not available from the Workday organization and allows partners to collaborate with each other. One of the things I want to point out is that we mentioned the 80, 20 breakdown. We think that going forward the Workday services organization will start spending less time on HCM deployments and will spend more time on some of the newer products like financials for large organizations and Big Data analytics and one of the missions of my organization will be to stay at the frontage, to ensure that the early adopter customers are successful, so that we can continue to learn and build new methodologies and then transfer that knowledge to the ecosystem so that we can all be successful.
So I’m going to switch gears. We just talked a lot about the deliver value stage, I want to spend a minute talking about increased values, so this is the stage where customer is live and where they have an opportunity to continue to drive value for their organization by implementing new features and we believe that’s such an important aspect of the Workday product, continue to stay in cadence with Workday, implement the features that we’re putting into the product. So, we’ve made a number of investments and really we think in terms of continuing to earn that satisfaction and earning renewals from customers, so five things I’ll highlight for you today.
One is our online community, a key to collaboration with customers, customers can use the community to collaborate with Workday and you saw in one of the Keynotes today that 40% of the features that we put into Workday 20 were a result of brainstorm. They were ideas that came through a brainstorm that is part of the Workday community. And there are various other ways where customers can collaborate. They can collaborate with each other, they can share reports that they’ve built. They can share integrations that they built via the community. We have invested in packaged services and to us packaged services are essentially fixed timeframe projects, little mini projects. They’re projects to help customers get introduced to new features and deliver new features so that they can continue to deliver value to their organization.
Office Hours is a new service that we’re announcing here at rising this week and it goes live this week. Office Hours is for those customers who want to drive more self sufficiency. They are actually quite good at what they do. They know Workday pretty well, but periodically they need some help and they don’t want to have to engage consultants for long periods of time, so essentially they can go online they can schedule appointments for an hour at a time with Workday knowledgeable consultants to get remote consulting answer their questions and continue to move forward on their initiatives to deploy new features.
We’re announcing this week a services marketplace that is going to be piloted for the next couple of months and we expect it to go live around the end of the year. And the marketplace is really designed to help customers and partners come together matching essentially buyers and sellers, Workday has no economic interest in that, but we want to facilitate the process. We know that we can make is easier for customers to get services for these little micro-projects that they do in order to build, to deploy new features of Workday.
And then finally annual reviews and the one of the things we noticed and I think that one of the customer speakers alluded to this, this morning, that the legacy ERP deployments are like climbing Mount Everest and unfortunately I think that the market has conditioned customers to climb the mountain, comedown from the mountain and basically start making it better for four, five, six years until they do an upgrade. And of course that’s not our model, our model is continuous improvement and we have found that, if we do annual reviews and for customers even more frequent reviews to help customers stay in cadence, help them understand what is coming out in the Workday updates and essentially to hold customers accountable and for customers to hold us accountable and continuing to move forward so that they continue to drive more value, derive more value from the Workday products and that’s what we do in annual reviews.
Now, we deliver those annual reviews from a regional services organization that we built and Mike talked about the way that we’ve regionalized the sales organization services, will mere the sales organization and we try to keep it too aligned as much as possible. So the regional services groups mere sales, we’ve brought management closer to customers and we know that that keeps customers moving and keeps the continuous improvement cycle working and keeps us aligned with customers. And of course the result of all of that is that we deliver great customer satisfaction results. We are very proud of the results and couple of times this morning we’ve talked about the 97% for this year’s survey over the course of last few years we were 99, 96 and 97 in the prior three years.
So very proud of the results and grateful to the customers that collaborate with us to not only help us to bring ideas to the table, but work with us in both deployment and increasing the value that they get from their Workday investments.
And with that, I’m going to ask Mark and Mike to join me back on stage and we’ll answer a few questions.
We have mic runners in the room. I remind you all that we’re on a webcast and so please wait until you have a microphone and until we get our first question, I think -- you guys want to have a chair. I always wanted to ask you guy’s questions. Just thinking about international expansion and the build out of a services ecosystem as well as our fueling sales force to support it, what is sort of the challenges that the two of you face in taking this great ecosystem we have in North America and trying to replicate it around the world?
I would say that we think about two things; one is ensuring that we’re bringing local knowledge and local customs and business practices to customers outside of the U.S., but at the same time recognizing that the majority of our customers are global. And it’s actually an interesting tradeoff when we see what customers prefer in the various markets. They certainly -- first and foremost thing they want experience and so the global organizations are able to essentially leverage the expertise that they’ve already build in the U.S. and essentially export that to other markets and build the staff that way. When we’re trying to bring up boutique firms, it really relies -- they relaying on Workday to help them bring the expertise along it’s a well primed business. In some cases in order to blend in some talent from local boutiques internationally and get them up to speed, so eventually they can stand on their own and prime their own work without Workday’s help.
Mike any culture, I mean just maintaining the culture of Workday international.
Yes, I think a big part of what we doing, and one of the ways we transfer knowledge is that as we move into new countries we tend to transfer knowledgeable people from other countries for a one, two, three year assignment. And that’s been a very successful way. Not only of making sure that we transfer confidence, but the Workday culture which is so distinct and powerful also moves along with the people.
Okay. Some questions from the audience.
Steve O'Brien - Jefferies & Company
Steve O'Brien with Jefferies. Just a question on the dedicated financial sales force, can you provide a little bit more color about the seasoning in that effort? And then in context with a number I just wanted to ask about the 50 financials customers we’ve talked about in the Keynote today I think that’s unchanged from year-end, is that the right number and how would you view kind of the momentum in that financials practice?
I think our practice in respect to customer announcements is that we’re only now announcing milestones. So the 50 number is something that we went with I believe at the close of last year and certainly it’s more now, but when we hit other milestones we’ll announce it. The dedicated financial sales force is in its first full year and as you incubate new business and look to penetrate new markets it’s a very effective way of bringing focus and we’re very pleased with what’s happening today.
Jen Lowe - Morgan Stanley
Jen Lowe, Morgan Stanley. In the Keynote David announced Workday student which is the first vertical offering, a vertical specific offering that you have rolled out. How do you think about vertical solutions as part of your strategy going forward and in particular as you look to go, the financials piece of the opportunity, how key are vertical solutions to getting deeper penetrations on the financial side?
We believe that the ERP market is changing in terms of its very architecture, gone are the days where companies look to one organization or one software company to buy every application. Instead we believe that people are taking a look at integrated best of REIT suites. With that said and with the power of the HR and financials product going together as Aneel said like peanut butter and jelly, there are opportunities where we can add significant value to markets that are underserved. And there has not been a meaningful innovation in the student market for about 20 years, the products are heavily modified, we believe the market is very underserved, and it represents a market where we can dominate. So, we will build a specialist sales force to go after that market and represents a great way of expanding our business and accelerating our growth.
Was the 57% number you put up on the screen around opportunities, loss to delays and decisions to do nothing et cetera to the extent that that might be based in part on the ROI case not being convincing for those prospects. What kind of work they do to get that 57% number down. Obviously you can be a little bit more flexible on price, but just trying to get some color on what else you might do, how focused are you on getting that number down?
Yes, that 57% number occupies a significant portion of my waking hours. And the good news about that 57% number is it recycles each year and typically comes back and many of those customers that were once in delayed or do nothing status have come back and now are customers of Workday. But there are two main areas of focus to tackle at 57%; one is to establish a more powerful value cases for our customers. Most customers in their early days of Workday were looking to replace a burning platform a set of transactions they required to run HR or to run accounting better. Certainly now we have reached the point we do transactions extremely confidently and now what our customers are looking to do are to take the data resident from those transactions and put it in the hands of mere modals, employees and managers who can use the data and the tools to run their business better. So that's a significant area of focus.
I think the other one is to decrease the time to realizing those benefits and as you take a look at that medium enterprise deployment method that Jim described, we’re continually shrinking the time for customers to get that benefit and it improves the overall return on investment profile.
Raimo Lenschow - Barclays Capital
Raimo Lenschow from Barclays. And thank you for the info on the competitive dynamic, maybe a follow-on question there. Can you talk a little bit of what you see in terms of the customers wins that you are having in terms of PeopleSoft oracle installed base mostly PeopleSoft pursues kind of other vendors like SAP. And how do you see that changing or do you see change in competitive dynamic there especially SAP success factor looks like it's going to -- falling apart a little bit. Just help us to understand the dynamic there? Thank you.
We largely see the replacements falling along market share lines over the course of the last two decades. Larger organizations and medium enterprises all face challenges with those legacy platforms. And sometimes real spike into a particular brand or flavor in a quarter. But overtime it bears market shares of the past two decades?
Steve Koenig - Wedbush Securities
Steve Koenig from Wedbush. The 57% is probably a good point of departure for my question as well, which is how much of that 57% comes from not having external consultants trained and certified in the right countries available at the right time? And then if you would take one more, I am curious if you can give us more color on the Big Data product, how much of that do you expect near-term is going to be BI, classic BI on Workday, HR data, how much of it will be different kinds of used cases?
Yes I think thanks to Jim's organization, we really do not face constrains in implementing our product. If there is demand for the product in the country, we find a way to fulfill it. So that has not been a factor in the 57%. I think on Big Data we're not providing product forecast at this point in time, but many analytics were already resident in Workday, so we view Big Data as a significant adder to our overall market size.
Heather Bellini - Goldman Sachs
Hi thanks. Heather Bellini with Goldman Sachs. I was wondering if you could just share with us after you make the initial sale, can you give us a sense of how long it takes for customers to start buying add-on modules and how that process may have changed over the course of the last year or so?
We don't have a lot of history interestingly enough, since we were a suite sale and we packaged everything at once, there weren't a lot of add-on modules to buy. But with the advent of time tracking we have seen a great attach rate than time tracking. Payroll and candid didn't exist before it's now come online to being attached to more opportunities. So typically customers need to get through their implementation cycle, take a deep breath, do the annual reviews that Jim's organization executes and then they begin attaching add-on products.
Akash Ranganath - Merrill Lynch
Akash Ranganath, Merrill Lynch. I was just trying to ask a question on the CRM market versus HCM, if you look at CRM the market leader there has got about 100,000 customers. Clearly it's gotten mainstream. Talk about HCM and the cloud and clearly your goals are to be at 5,000, 6,000 customers. Wondering if the incumbency factor is a little bit stronger in the HR market and probably was the case in the CRM markets several years back too. I wondered if you could comment on what that incumbency looks like and where are we going to be crusting in terms of making this a mainstream market? Thank you.
Yes, I am envious of sales force and I think Mark when we started the Company had a focus on small enterprises and I know a big part of this business got going in that segment. So the customer accounts came up very rapidly. There wasn't lot of data to migrate Jim referred to that, there weren't lot of integration points. So the task to implement was much smaller also. So I think they got a big initial lift from small enterprises and I don't have insights on their data in terms of how it compares in the 1,000 and above segment. But I would guess that it probably looks very much like our uptake does, the biggest part of our opportunity lies ahead.
And we probably have time for a couple of more questions for these guys, because I want to get them off to a customer session here soon.
Walter Pritchard - Citi
Hi, Walter Pritchard, Citi. Could you just talk about the stats you gave, you gave the implementation times overtime and showed sort of how that's trended down. Could you talk about that win rates and the win against stats and sort of what you’ve seen in terms of those evolving over the last couple of years there?
Win rates trend…
Yes, I think, the rates have gotten better overtime. I alluded to it and the best visibility we had them all last year, we’ve seen about three point improvement in win rate against the three year average, so I like the direction that we’re heading in.
John DiFucci - JPMorgan
Hi, John DiFucci from JPMorgan. Mike, in the slide you put up competitive dynamics most of the time you’re up against legacy ERP vendors. But that other category is actually pretty material also. Can you give us a little more detail about what that is, is that other SaaS vendors because I don’t really, can’t really pinpoint any that actually are in the large enterprise as far as SaaS vendors other than you unless you count the legacy ERP vendors that say they have SaaS solutions?
And then also if you could, when you do come up against the legacy ERP vendors, I’m sure both are important, whether it’s the economics or it’s the applications themselves but is there a determining factor because most enterprises are going look over 10 years. So the economics probably come into play with you versus perhaps somebody that’s in that suite or somebody who is selling more to a smaller customer?
So, as you take a look at the medium enterprise market that 1,000 to 3,000 segment, we tend to compete against 15 or 20 players, it’s a very fragmented market. Certainly ADP has the strong presence in that market, Ceridian is there, Microsoft Dynamics especially as we move into financials. We really don’t see that much of net suite in that space and with striking in Q1 it happen that our revenues were even, were dead even in Q1. And the difference was that Workday did those same revenues with 500 customers and that suite was 16,000. So, I don’t believe we have the same targets.
So a good set of competitors in medium enterprise, the customers who choose Workday tend to be organizations that are growing rapidly, are global in nature and need the sophistication that we offer in those spaces. As you take a look at customers across all segments, would it be medium enterprises or large enterprises there is always a business case. The business case is typically a five year horizon to start, but the investment is typically gauged over 10 years. There are two aspects to it; one of course is total cost of ownership, the Workday cost compared to the incumbent system. I think we’ve reported in the past that we are typically 25% to 60% of the incumbents.
And then the second important part is the effect of running their business better and the business cases tend to be much larger than the initial cost of ownership. If you take a look at the spend on HR and accounting systems, it tends to be 1.5% to 3% of total revenues of an enterprise and if we can cut that by 25% to 60% while meaningful, it doesn’t have the same impact, is take and look at the spend on work around people which maybe $5 billion to $50 billion depending on the size of enterprise. And if we can improve productivity by 0.5 point now we’re talking about a business case that carries the debt.
Jim and Mike, thank you very much.
And thanks all of you.
We’ve had box lunches brought in for you and without creating some form of chaos if you could, if you’re hungry grab a lunch and we’ll do it on an honor system. In the meantime, I’d like to introduce our Chief Technology Officer, Stan Swete.
Thank you, Mark. Happy to be here and talk to you while you get lunch. Okay, I wanted to talk to you about our products and our technology as Mark said and basically I want to break it into about three parts: first, I want to talk about Workday’s overall development approach and some of the differences in that approach that we’ve taken from classic ERP solutions. And I’ll do that on this slide and then drill down a bit on the technology architecture and then I’ll talk about our products, both in terms of the product journey, how we built the products up to to-date and some of the initiatives that we’re working on in 2013.
I expect many of you have seen this slide I too used to talk about, are the difference in the Workday development approach on a couple of different levels and starting at the bottom of the slide where it says adapted foundation. There is really I think a couple important differences in how we look at using technology to build our platform. Actually Jim Bozzini, I’ll actually spend a little bit of time on the second thing I want to talk about but I’ll start with the first the Workday’s technology foundation.
When we started Workday we wanted to take a different approach to building products and specifically we wanted to give ourselves a platform that would make us quicker to build products initially and make us able to build products that were more updatable or upgradable if you will over time. And so we implemented a lot of difference; one, the basic one was just embracing software-as-a-service delivery and building a multitenant architecture that was purpose built for SaaS and having SaaS be the exclusive delivery model. But there is other things that were of big differences as well. We broke away from the, what I’ll call relational client server model. I’ve got a slide that shows a little bit more detail on this. But we wanted to get away from databases that got very complex and I am using data bases is the way to describe applications. We didn’t want 1,000 table data bases that had to change every time and you change the functionality, we thought that was something in enterprise software that was really slowing upgrades. And so we embraced giving our developers an object paradigm to design applications, that description could be stored in metadata and not in a complex database structure.
The other change that I think is really important to highlight when it comes to Workday, is we’ve embraced being in memory application since day one. We believe that large memory models exist and could support applications and really enhance what you can do with reporting and so we’ve always had most of our customer’s data in memory.
Shift over to the right on the adaptive foundation and I’d like to highlight the second approach, we take a different approach to how we allow our customers to change the application, as opposed to delivering an open-ended customization toolkit the Workday solutions come with built-in configurable frameworks and these frameworks are build-in in various areas and there are some examples on the slide, configurable business processes is something Jim mentioned, we’ve recently added the ability to do custom fields, we have a custom report writer, configurable security is something that everyone uses to setup who can access what inside Workday.
The important differences here is that these configurations are made one, without coding, so the customers can make these configurations directly and they use the same UI as they use to run Workday. The other really important point is when these configurations are made the customer does not have to revisit the configuration on the update and think about how important that is, we’re currently carrying about 200,000 customer report definitions on behalf of all of our customers. All those customers write those reports once and when we deliver an update they don’t have to inspect the running of those reports, we’re doing a very good job of making sure that those reports are upgraded or if we break something we are on the phone with the customer to figure out how we’re going to resolve it when the update happens.
So a completely different model really than how upgrades happen in the on-premise world and I would say our record in terms of supporting at this level is excellent for business processes, for configurable security, for custom fields and for the custom reports. It’s gets a little trickier with integrations because we can’t control both sides of how you do integrations. So two differences at a technology level, the next level up, the area on the slide that says design for the way people work. The different approach that we have here is that if you look at the elements of this area, consumer based UI, mobile actual analytics in collaboration. You heard about most all of these at the Keynote today.
Workday’s belief is that these are features of modern applications and so we build them just that way. All of these features come included in Workday’s applications, they are not add-on products or platforms and for our competition they are add-on products and platforms. And being an add-on product in a platform increases the complexity of the implementation and the complexity of support, so with Workday you buy Workday human capital management, you get the browser UI that you would expect, self service is built-in as a part of that browser UI, it’s not a separate product, mobile comes to you directly and works inherently with a security that’s in the core product. Actual analytics are the reporting that we do over the transactional data all of that is built into Workday and available through report writer. And increasingly we’re focusing on building more collaboration into our applications.
At the top level on our products and I’ll have a lot more information about the products in the second. But I would say that the big difference here is what Aneel talked about in his Keynote and that is a unified approach and it’s unified on several levels, one more technical level is just the unified use of a single security system, configurable security is consistently used by all of our products and importantly by our report writer. And so there is just one source of how we secure our products that is respected by all the products that we deliver.
Another level of unification is also what Aneel talked about the sort of the -- having HR and financials be not integrated but just a piece of the whole. All of our products are built over the same core data about organizations and other hierarchies, so that one product doesn’t own for example the supervisor hierarchy, another product owns the cost sitter, there just is a central description of all of these hierarchies and our products can all utilize those. So we get unity between HR and financials and we get unity between HCM and talent for example that goes beyond any other enterprise application.
Okay as we look at next level down on the architecture and maybe this is a slide that will give a little bit more on the rationale for why do something different. This is -- I’ll build this out here in a hurry this is how I characterize relational client server architectures which are almost all the other applications that we compete against in the ERP space. These applications are build on three levels and they end up having, the business logic ends up being millions of lines of code, the application is described in the database that ends up being 1000s of tables, security for the application happens at the business logic layer.
These applications have added a lot of value and do certain things like transaction processing and detailed reporting quite well, but when we started work there we felt there is a couple of things these applications didn’t do. In particular integration was a challenge for these applications, these applications were not build with integration in mind and that integration needed to be added on. The same thing happened for business intelligence, these applications were build to eco back transactional detail, but not so much to do analysis that business line folks would care about, the data needed to be restaged and re-secured in another reporting source off in a cube in order to do that access.
So these bolt-ons were complex and costly to maintain. As we started we wanted and we felt that a lot of the reason these things had to be bolt-ons is the separation of the code from the database and having both of those layers be very complex. So, Workday took a different approach. With the Workday approach, we’ve really unified data and logic into the mid-tier layer. Again, we’re able to do this because of the way that we describe the applications as objects in metadata and also the way that we describe our application logic, our application logic. Our application logic is actually described as metadata as opposed to lines of code. So what you get with Workday, instead of millions of lines of code talking to 1000s of tables, is you get a graph of millions of little metadata objects that we are able to interpret and cross reference.
Now that doesn’t make our application simple, but it does make them easier to update as we move forward overtime. And it makes it easier for us to leverage different sorts of access. We can leverage access both from users and systems, because we have one security system, one way of authenticating access to this combined data and logic. So, I really think that thinking about the cost of integration and the complexities of doing business intelligence over enterprise data is what led us to take this different approach. That approach manifests in these servers running in our data centers. And I won’t spend too much time on this, but just to talk about sort of the function that each of these servers and maybe a bit of the difference of the different approach we take.
I’ll start with the UI server that generates the Workday user experience. We first of all do generate the user experience at Workday that means developers don’t use screen layup. And because we do that we get a lot of control over how we can change the underlying technology of the user experience Aneel mentioned a move to HTML5. This is our third UI technology and I think it really shows that we were correct about eight years ago when we thought, well UI technologies are going to change a lot faster than application logic has to. So let’s keep the UI separate so that we can change it without having to rewrite our apps and make it an upgrade event for our customers. So we have to just write the generation logic in the UI server to generate HTML5 and our customers can just sort of write upon that using the same applications.
So the UI server is responsible for generating the UI and going into the application server and all of the various parts of the UI that we generate. We do the same thing with a built-in integration server. This is another difference with Workday. We’ve always embedded technology to map our web services out to other systems in the outside world. We do this because other systems in the outside world don’t typically speak web services. And so the integration server for us is a mapping and transformation technology that lets us talk to a lot of systems that maybe, kind of old school and want their data in common delimited files as opposed to a fancy web service. It is responsible for the interaction of data between our application server and between external systems. And increasingly as we go forward in integration, we’re leveraging some of the tooling around this and exposing it to our customers so they can build their own integrations.
The next server that makes us the brains of the operation, the object management server, and really the way you should look at this is this is more a set of distributed object management services. It really has become a sort of a set of distributed services that conspire together to do all the validation and reporting logic in transactional update logic that you have. And this is where we keep the metadata and the data in main memory for our customers. And then finally we’ve taken the call in the data base, a persistent data store, because that’s really what we use it for. We don’t use the data base. It happens to be a relational database, but we don’t use it. It’s a scheme to describe the application. We really just use it to store any changes we get to our data and to our metadata.
So I had to move so quickly through it, I usually spend good half hour on that slide, but time to talk about products. So I wanted to take the approach of walking through how we built our products from the beginning and then talk a little bit about ongoing initiatives. When we started Workday, the idea was to start in human capital management which is always a good idea if you got Dave Duffield as a founder. But we wanted to start an HR, build through financial management and get into the supply chain, really but only focusing on the procurement and really procurement with an eye just towards provisioning what you need for the workforce.
That was sort of the day one vision at Workday, and we’re still largely executing on that vision. Although I think you can see from the Keynote how we’re both deepening it with capabilities like Big Data analytics and inserting other products that are sort of important add-ons. The way we progressed is we spent our first year building human resource management launched in November 2006. You can see from the slide we’ve been developing financials for a good long time and it really speaks to why, when Mike Frandsen was talking today. He says we have a really rich functional financials product, we do because we’ve been deepening the functionality overall these years. We’ve really had to just in more recent years, just make an investment decision on selling financials and also do the important work that Mike talked about in Big Fin.
So the early development was all about features and more and more recently it’s been about sort of integrating it to the right products and making sure it scales and then thinking about the industries where it fits. As we were building out financials and selling human resource management we introduced the option for our customers to buy expenses and procurements, which were part of what we built in financials and used those integrated to HR without buying core financials from Workday. This is still an option our customers have today. Lots of times customers who want to take advantage of the excellent workflow in Workday, and they’ll buy expenses and add it on, and use it even though they have oracle or financials for their core financials. Obviously we expect that to change in the future as we start to sell more of a platform for us.
Payroll is probably the first course correction that we had, and that was again an idea that came from our customers or our perspective customers. We saw in the out market as we got into employ populations of 7,000 to 10,000 people that these companies wanted HR and payroll for one provider and so we built out Payroll. So the next major shift in development is a dual shift, really investing in talent. Again Workday was pushed to get -- to do more about talent and integrating talent with human capital management by our customers. They love the workflow and thought we could do a good job in things like performance management and succession planning. And just we like the idea of having a single unified profile where you had both the talent aspect, as well as the HR record for the employee in one system, so that you can leverage that data without having to do an integration. So, we began a project in 2009 to build talent into core HR.
You can see we also stepped into mobile 2009. Following after that education and government first vertical that we’ve committed to with unique functionality for HR and payroll and financials developments continuous there. I highlight projects because it once was a separate product for Workday and now is a build-in feature of HR and financial management probably another good differentiator for human resource management as you’ve got a built-in way to track your initiatives. A lot of our HR customers I think don’t even know that they own this feature and it is -- if you’re really just trying to figure out what people are spending time on and what project, projects is a great way to do that.
Our mobile deployment then -- our mobile platform widens out as you can see over the subsequent years. Workday for iPad, followed Workday for iPhone. Workday for the mobile web is an HTML5 site that you can use for non-iOS smartphones that have a browser that supports HTM5 and then Workday for Android is a wrappered version of that that you can download through Google Play. It allows a better distribution through the Google Store, it also allows us to do some device specific stuff like take pictures of expense receipts that you can send into Workday. Someone said that students is our first vertical product, actually Grants was the first product that we rolled for a specific vertical late in 2012. That was written for the higher education effort to track Grants and Mike mentioned the success of time tracking a great add-on for a growing population of our payroll customers and the big news for this event it is that Big Data announced last year is now generally available.
So, continuing I want to talk a little bit about the strategic initiatives for 2013 and I’m going to have to make some space on this slide based on what Aneel and Dave talked about in the Keynote. But as you look, this is a slide that we put together towards the end of 2012. We like to just have a high level focus for the major projects that we’re already working on and I think a lot of these were talked about in the Keynote today. The Big Fin project does continue, we’re super excited about the results, I really think the last year has just been sort of a widening of the set of transactions that are under test over the 100 million adrenaline population that we’re seeking this time, so we’ve got long list to these transactions that we’re testing. In addition to the reports and the drill down on the reports, so we’re seeing really, we’re internally very excited about what we’re seeing for the Big Fin project.
Deliver Big Data analytics, we’ve talked about that a couple times, we did make the GA date and are sort of excited, as that’s kind of a departure product from Workday and that its part product, part platform for our customers and we think it’s going to add a huge amount of value to the reporting you get out of Workday. Continuing to expand self service experience on our mobile offerings, we’ve gotten very aggressive this year about going from a lot of the staff we’ve done on mobile so far has been about analysis and getting access to data. We have been able to take some action like doing workflow approvals across the platform, but recent updates have contained a lot more transactions that are just employee and manager self service that you can do directly from your mobile device, transfer an employee in your organization is something you can now do with Workday mobile devices and look for that trend to continue as we widen out the action you could take through mobile devices in the updates going forward.
We continue to work on education and government, you saw the demo on recruiting, and recruiting is definitely on-track and very interesting approach, the sort of the mobile first approach seems to be sparking a lot of interest in the customer base and we look forward to being here next year to talk about the general availability of that. There is a lot of work as we expand outside of the U.S. to develop increased localization and compliance for additional countries. There is a big difference in selling to multi-nationals that are based say in France then selling to multi-nationals that have just workers in France.
We’ve been doing the latter for eight years and we’re now doing the first part of it which is really engaging with local multinationals and the reporting requirements go up for that and the pressure to do payrolls go up for that. So, Aneel talked about UK and France payroll so there is a big investor in Workday to do more development around local compliance for the countries where we’re going to do business and for the countries where we’re going to get local multi-nationals. And then I hope you all saw and liked the visual UI redesign and I think this is really an important theme for us in development at Workday.
If you think about the mobile world and the mobile applications you have, you don’t just buy an app and use it for three years and have it not changed, your application probably changes fairly frequently during those three years. We have actually refaced our iPhone application I think three times over its four years of existence and that’s about the kind of pace that you need when it comes to mobile. And so the question we’ve been asking ourselves is well why not on the browser as well. Give it a fresh coat of paint and give it an update so Workday 21 will feature the redesign and the visual user experience that you saw Joe demonstrated today.
So, that’s a quick flip through our architecture where we’ve been with the products, what we’ve got going until Aneel and Dave expanded it today and I hope the information is helpful and I think we’ve got time for questions.
If you have questions raise your hand. Back there.
Kirk Materne - Evercore Partners
Kirk Materne with Evercore. Stan, can you talk about just the thought process about offering Big Data analytics on AWS to start, I was just kind of curious about why that decision was made as it actually I guess brings in another vender in between you and your customer. So I was kind of curious about why do that versus potential I guess just wait till your ready to have it in your own data center? Thanks.
Yes I guess my short answer would be at Workday we’re not good at waiting. I think we have -- using Amazon does expedite certain things standing up to do clusters in your own data center is something that we don’t know how to do a scale, we know how to do know it but we’ve got to operationalize that. We’ve got to operationalize that before we can really get it done and I think what we wanted to do was get it out there for some early customers and get some feedback on whether what we were doing was hitting the mark. And so for us it seemed like a shorter path to go leveraging Amazon. We’ve actually -- we used Amazon for some of our internal systems and we have thought about other potential uses for it and we just thought that it would be a good starting point for Big Data, but as Aneel announced today we will be talking the step of offering an option for bringing it into our data centers.
Yes in the back in the middle.
Raimo Lenschow - Barclays Capital
Raimo Lenschow from Barclays again sorry. I think I heard Aneel talking at the Keynote about you guys moving to a more agile software development process, can you talk a little bit about what it means, do we see a slowdown first, how far in the process and what it means for your suite of innovation? Thanks.
Yes, I think that’s -- I think we have a lot to say about that. We’ve been on a move to agile for the last couple of year inside of Workday development and the most recent sort of step forward on that is a rather large step forward. And it is to continuously deploy new functionality onto a single trunk code line, so that we don’t have multiple versions of code at anytime. So a couple of things on this technically what this allows us to do is what we’re flowing continuous updates out, it technically would allow us to go much faster in terms of the updates we did and what Aneel said, he’d prefer four updates or even more he is not kidding that is something that this technology would allow us to do.
But while we’re doing this we’re also going to just we’re going back two updates, but this technology because we’re continuously flowing new features out and actually doing conversions in the background all of this is important support for taking time out of the update window so our customers will appreciate that even though that they’re going to fewer updates. We just continue to look at the consumer Internet for how we sort of try to model our processes and if you look at sort of our production website there is multiple moves to productions a day, 100s in Amazon’s case. And so we just think it’s the right way to go.
Another part of your question about slowing down, yes, we hate slowing down but I do think that we’re in a mode right now, a real critical period of this switchover where we are being careful about how the new processes are working. But we expect it actually to help pickup our pacing of new feature development just very soon here.
John DiFucci - JPMorgan
Hi Stan, it’s John DiFucci from JPMorgan. Your back-end infrastructure, object-oriented architecture it is something that people talked about for a long time, but it doesn’t seem like the world was quite ready for it, now, you’ve done it. As you’re building out things is there any thought to and I don’t want to get too far ahead of ourselves here but is there any thoughts of commercializing that sometime in the future?
Yes, so we get the question about using the development platform for other purposes. There is maybe a lot thought to it and no plans to do it. Our real attitude about it is that we’ve got more than enough work to do just to support the growing applications business and there is a lot of dimensions for how we want to widen out the applications. And it would just be doubly difficult to do that and to create a whole separate business and it is a very different business to go tell someone else how to use your platform and how to do support them, so I’d say the short answer to that is no, but it’s pretty cool development environment that I think other people would like to use.
Akash Ranganath - Merrill Lynch
Hi Akash Ranganath, Merrill Lynch. I am wondering as you scale the number of users on the system, are there limitations to the object in in-memory model because you’ve certainly progressing along uncharted frontiers and we have lot of a lessons we’ve learned from the RDB miss trial, but I am just wondering what are the road blocks that you might encounter from a technology perspective and how do you circumvent those? Thank you.
Yes that’s great question. I would say the answer to your question, yes, there are limitations and we’ve hit them. We have been working to scale this technology and you’re constantly dealing with a ceiling of how much memory you can utilize. And so when there is only a certain size that your heap can get to and if it gets beyond that size you just take too long to load and so it’s impractical for us to use it. And so what we constantly are doing and I mean continuously over the last six years is being more efficient about how we utilize that maximum heap we’re being smarter about leaving step behind, we’re using whole new structures for how we represent and access data in in-memory and all of this gives us gains on a pretty much continuous fashion.
I have been amazed at how much our architects have been able to continuously tune and stay true to still using the in-memory concept, but basically really change the game for how we’re figuring out just what is the memory and who is accessing it.
I think we’ve got time for maybe one more question or not so yes right here.
Justin Furby - William Blair
Hi Stan Justin Furby with William Blair. I guess as wondering if you could talk a little bit about when you’re making decisions in terms of on the technology side when you would partner with a vendor and when you’d choose to build it internally I guess. I was surprised to see learning as something on the drawing board. How do you make those decisions and you just talk about kind of longer term, how you approach your bill versus partner?
Okay there is a couple of comments on that, I think that we have a strategy team that tries to make the decisions to what footprint we’re going after when we started Workday we envisioned HR as net of learning management and recruiting because we thought that there was good cloud-based solutions for that.
We got overwritten by our advisory councils saying for repeatedly in four years that we really need good recruiting solutions. And so there is the strategy we set and then there is listening to our customers and having them sort of take us where they need the solution to go and I think that works together to do the planning on a product level.
I’d say that company is biased though as to grow our solutions organically and our technology organically and I think so far there is -- we stayed pretty true to that, we’ve got one acquisition on the technology level and I think we’re likely to be sort of careful about how we proceed there going forward.
Alright, I’m past my time. So, thanks very much and I hand it back to Mark.
Thanks Jim. So, almost all investment models that I’ve ever seen come back to looking at the present value of expected future cash flows and I know that we’ve left a little bit of a conundrum for you since we are at cash flow breakeven and still have operating losses and are growing at very high rates. And so what I wanted to do is spend a little bit of time thinking about how you might think about us given where we’re at in this model. This is an IVC tam slide it’s -- some of you have seen this information of about a year ago that shows that the HCM overall market is about $10 billion, financial is about $25 billion with very large adjacencies around this overall tam.
The problem with looking at tam like this is to understand what are the various bits and pieces where you have independent solutions that are not tied to the overall the entire core application that you’re running. And also on top of that you have organizations like Workday who are disrupting the standard models and so when you look back in time you say how did these products fit into the tam.
The same issue likely occurred when you were looking at what’s the tam for a smartphone, when smartphones were introduced. And so wanted to take a little bit different look at our tam and why we focus back on customers. And so this is the population of organizations globally that have more than a thousand workers excluding governments and you can see it from the small little box. Today, we have about 500 plus HCM customers and inside that subset we have 50 plus finance customer. So, if you think about how we have been disrupting the applications market, my introductory statement about thinking about Workday as a 5,000 customer company as opposed to 500 customer company although ambitious is probably not exactly audacious.
So, where does that opportunity lead as you think about future value of -- the present value of future cash flows and I tried to think of how do I formulate this and the best I could come up with was to revert back to, I was a fourth grade boy a long, long time ago and so to revert back to some friends of mine, some fourth grade boys and with little short video and so if we could roll the video now please.
[Audio Video Presentation]
So what is Phase II? Mike and Jim stand and really what you heard about in the Keynote today was an awful lot about really about Phase II for Workday. And we have our own norms, we have a couple of guys that are geniuses at corporations and they let breakout products before and here we are again.
So what I wanted to talk a little bit is to how Phase II really ties back to Workday’s core values and this is something that Dave and Aneel set forth really early on in the organization. You heard Dave talk about it a bit today.
First it started with our employees and I have not been in a Company where you start first with employees with hiring top talent and keeping the employees happy with the general thought is that if you have good employees you will build great products and you’ll have customers that are happy.
We talked an awful lot about customer service, we talked about the 97% satisfaction rate. Innovation, I think certainly we have been known for innovation and part of what we want to continue to do is around innovation and these are all part of the core values of Workday. Dave touched about integrity that was the no BS comment it’s doing what you say you’re going to do and making your commitments with your customers.
Fun, I think you have seen fun throughout the day this is actually a stated core value of Workday. The final core value of Workday is actually profitability, so this is something that we have built in to our core as an organization and it is something that we're focused on, it’s not just about collecting customers and serving them. Well, ultimately this is a very profitable business model.
So what I wanted to do is to spend a little bit of time taking you through two examples of the 10 year value of a customer. And I wasn't so bold as to say the lifetime value of a customer. But we have two examples first is ABC company which is just a core HCM customer with very modest growth and no attachment of other Workday products.
Second is XYZ Corp which has some M&A characteristics to it and eventually adopts our financials product and just to talk through the 10 year value of these customers. First and foremost, we believe and you have heard me say this on earnings calls now for the past year that once we acquire a customer that will be a customer of ours for life.
So start with ABC Company, three year initial subscription, million dollar first year subscription, we have annual CPI built into the renewal and they add 3% employee headcount. We talk a little bit about the renewal period, so far we don't have a lot of history on renewals but that that we have has been really, really strong.
So if you just rollout the 10 year value of this customer, if you look at years four through 10. What we have added to contracts recently in addition to CPI is the innovation index. And that's us getting paid for the ongoing innovation functionality that we’re putting into our contracts. Initially this is something that was really in the sales person's toolkit to use, but off late we have been hitting at about 50% on the innovation index.
And it's really something that trades off discount, no innovation index smaller discount in the overall closed sales. So in this example ABC Company we have about a 7.5% CAGR on revenue.
If you look at the cost to acquire and to serve this company we start out what we call a year zero, and this makes the basic assumption that our entire sales and marketing cost net of the variable compensation that we pay out for landing sales in a given period runs about $0.69 on the dollars. That's fully burdened sales and marketing as you would pull it off of our non-GAAP P&L.
When you rollout to the first year of a three year subscription, our subscription gross margins are running at about 80% and then the commission cost for the quarter carrying reps are expensed over the lifetime of that contract. However the quarters that we pay to the presales organization to the regional sales organization et cetera are expensed in the first period. And so our sales commission expense is a little bit lumpier in the first year of a new contract.
And that carries on. We pay renewals on net new business, during the renewal period we'll pay commission on the net new business. And so when you roll this out over this very simple example of a customer, you see that we have a contribution profit towards future product development, towards G&A and towards that Phase 3 that runs in between 75% and 80% of the overall revenue for that particular customer at the end of this 10 year term.
And let's take XYZ Company, which is a little bit bigger revenue opportunity, they have taken on a 30% acquisition during year four and they add recruiting and time tracking during year four. And then in year seven they add financials. So again when you take this on you see post acquisition a 30% increase in headcount, we generally have a incremental per head pricing in our contracts once we hit the renewal period, and so that get's added to the 1.1 and then we add recruiting and time tracking at it which runs at a percentage, in total about three quarters of the price of the original HCM contract.
And then we add financials in year seven, and in this model you end up with a business that has, with a particular customer that has a 26% CAGR. If you layer essentially the same cost structure on top of the 75% to 80% contribution profit that goes towards future product development G&A and Phase 3.
So as we think about our overall tam we're more focused on the addressable market that we have for customers that have 1,000 employees or more. You have heard George Tenet today though talk about Allen & Co. and the fact that they have 190 customers. But what we really are focused on the market is that mid market 1,000 to 3,000 and then the enterprise sized customers that are above.
The overall customer value is the one that we value our customers and that retention is very fundamental to our overall business model. You are experiencing part of that……here at Workday rising. There is a one year payback on the cost to acquire a customer. If you think about the fact that we’re treating year zero before we even have the customer it’s about $0.69 on the dollar and then the first year commissions et cetera about $0.31. And then as long as we continue to innovate and execute and delight these customers, we think that we can retain them for the long period of time, which is why we don’t believe that a 5,000 customer headcount is really an audacious goal.
In the interest of time, I’m not going to recap all of the big investments that we talked about today. You heard a lot about product investments during the Keynotes. You heard Mike, Jim and Stan talk about some of the investments. Mike and Jim talked about the investments that we’re making in international and the international go-to-market. We have big opportunities. We’ve talked about the markets. We introduced recruiting, we introduced student or campus today and we believe there is just a lot of opportunity inside Workday. We’re at the very early stages and it’s an important time in our history. I am happy that all of you were able to attend. I’m going to bring up our Co-Founder, Chairman and Co-CEO, Aneel Bhusri for maybe a few comments and then for Q&A for the remainder of our session.
Well, thanks everybody for being here. Why don’t you just hang out with me on the stage and Mark did ask me to put together slides but I ran out of steam for my Keynotes so I never put any slides for this event. But really anything you want to talk about I guess I would start with a couple of comments from, I am going to just sit down. There has been a lot of questions over the last few quarterly announcements around financials, maybe just to pick up on a couple of things that Stan talked about and Mike Frandsen talked about, we run the company and particularly financials area as like it’s a mini business within Workday. Once a month I get together with everybody in sales, services, product development, marketing, and we look at where we are in financials. In many ways we are trying to recreate the same feeling we had at Workday in the early days of HR and so we’re doing that in financials.
And so far what I’m seeing makes me very optimistic. I know our business is going to start really generating a lot of good revenue opportunity, I just can’t tell you when. And this is very much like HR I couldn’t have told you when it’s just hit a tipping point and then things began to take off. We talked about the 24, 25 customers being live that Dave alluded to. We really only have one unhappy customer which is no different than our customer satisfaction rating across all of our customers. We’re working on making that one unhappy customer happy. We’ve got a couple others that we need to deliver product features to. But in general it’s a pretty happy customer base.
You saw that from the video I showed, those are all companies using both HR and Financials and we really do believe in this unified vision. If you’re a non-manufacturing company your biggest cost, your biggest asset are your people and yet historically the two systems haven’t been tied together.
Just to pick up on a couple other things before we open up for questions on the Big Data question that Stan alluded to, or that Stan was asked about, why don’t we start with Amazon? Just to add-on to what Stan said, it was about speed, it was also about learning how to run things in another person’s data center if that ever became important if we ever felt like we needed to move to an Amazon type offering we needed to learn how to do that rather than the way we had done it which is effectively hardwired our software through our own datacenters. So it’s a very, very useful exercise for the long run in particular to know how to burst out to someone else’s public cloud.
And lastly on the questions around the future opportunities and learning and budgeting and planning and all the other things, again just picking up from Stan, our philosophy is very simple. If we think we can build it with our existing technology or stuff that’s on our roadmap, so a typical business process automation act we’ll always choose to build it, recruiting is a good example of that time track it’s a good example of that student system is a good example of it.
Stan showed the slides around the original stack and our integration technology. We came to conclusion. We couldn’t build that with our existing technology and so we acquired a company called Cape Clear and in fact creating a third design center. We had a UI design center. We have an application design center and with the acquisition of Cape Clear six years ago we added an integration design center.
When you look at all the different opportunities in front of us, learning management is one that fits our technology well, so I would suspect that we would attempt to build it in the same way that we’re building recruiting. Budgeting and planning is really around the concept of modeling technology. Our tools are not really optimized for modeling technology so it’s more likely that we would more tightly partner or potentially even acquire one of the budgeting and planning companies, that’s probably a good place to leave that. And just sort of recapping what was covered today. Open it up for questions.
Mic’s around the room and of course yes go ahead.
Jason Maynard - Wells Fargo
Hey Aneel, it’s Jason Maynard. One of the slides I think it was in Bozzini’s presentation had 2,300 or 2,200 certified consultants and the ramp it was obviously up but it still seems that you are if you will constrained by the number of certified implementers and we talked to partners, global SIs it still feels like rates on Workday’s own professional services are fairly low relative and say sales forces listed rates it feels like certifications the bar to actually go through that process is pretty high. And then there is things that we hear from partners around not enabling hiring from competitive SI firms. And so there is a general feeling that you guys are really managing this maybe tighter than any other vendor have. And just to my question is so how do you balance maintaining quality control, but with also flexing and growing and ramping as fast as you want to ramp to support your customer acquisition goals?
Well it’s really hard to sacrifice on quality control and we do manage the ecosystem pretty tightly including our own consulting resources when we flex it, we frankly had some bad experiences where projects have gone awry and then we have had to go in and clean them up and so we are constantly trying to balance high quality of projects but growing the ecosystem. Once a firm gets a critical mass like a Deloitte or an Accenture, they tend to do better brining on, they are at 100 bring on the next 20 then if they are on 10 bringing on the next 20 because they can rely on that inherent knowledge base that they are building up.
So I think this is an issue that frankly goes away with time. We are also getting better at training the trainer and providing tools to let the various firms to train their own folks but it’s really important that they are certified and it’s really important that if there is one thing I worry about there are not enough people who have done two or three Workday projects in the ecosystem and if you let it go out of control you have a whole bunch of first timers on projects and the projects will go poorly, so I feel actually pretty good about where it is right now.
Steve Ashley - Robert W. Baird & Co.
Steve Ashley, Robert Baird I was actually over here I was just going to ask about reporting obviously you baked in analytics in your product and have you seen adoption, if you look at metrics just to see the extent and activity level that reporting is happening. And then beyond that do you have any sense of whether it’s expanded outside of the HR department or whether you are seeing any active use of the reporting in adjacent lines of business?
Absolutely, I think going back four or five years it became very apparent when I say reporting was actually a big opportunity for us in the HCM world. And we have customers like McKee Foods that have been pushing that technology from day one and thus the simple manifestation has been in the former management reports that a lot of people outside of, a lot of HR use analytics around hiring trends and analytics around turnover the ones that used to be hard to get are now really easy to get. It gets much more interesting with financials because financials is all about reporting and the initial insight for Big Data or the initial spark was that where a lot of our customers both on the HR side, and on the financial side saying this is great but we need to bring in third-party data because we want to do a comparison, we want to do a benchmark we want to look at best practices. And we were not willing to bring that data into the Workday transaction system like putting this Big Data area where people can put it off into effectively a warehouse, I think we are going to see a boon of analytics. I think it’s going to be part of the -- Big Data analytics being part of almost every financial customer I think will want to buy, if they don’t get it from Workday, they are going to have to find out, they are going to have figure out some other warehouse strategy because you just can’t get by with the transactional system themselves. Anyone adds in?
O’Neills Frankfield - UBS
O’Neills Frankfield with UBS. Just on financials, when you look at the tam at two and a half times that of financials, what are the mile markers from your perspective that you have to pass to, actually be able to address that tam can you help us walk through and we certainly realize that you can’t call an inflection point but what are those mile markers before you can layout a timeframe?
So I think Mike Frandsen did a great job laying it out today. Number one is just broad capabilities and we now cover all the major functional areas that our legacy competitors have in terms of the full financial suite, we definitely don’t have the depth they have. We have work to do some areas we’re a probably 90% or 100%, other areas are probably 80%, a big part of where we need to continue the work is on global if we are selling to a Fortune 500 company, they expect all those global features that Mike alluded to, we might be 50%-60% of the way there.
The last piece, the technology piece I feel very good about, we started on this Big Fin project well over a year ago today two-thirds of the processes that needed to be effectively rewritten to take advantage of our tabularization this new technology model, two thirds are done. And in some cases we have seen up to about 100% improvement in performance. When you look at the general lines, those general lines are, I know it’s probably arcane metric for you, but we really can’t equate general lines to size a company. At 200 million general lines, we are getting to a Fortune 500 company, pretty comfortably. So you see all those things kind of come in together.
The functionality is broad. We are getting deeper. We are global. We address the few pieces in reporting that we need to really place legacy systems. And then we tackle the scalability and as they come together much like HR, I expect that the business will take off but it’s no one thing. The part that Mike touched upon in the end, which I would think will be an important piece, much more so than HR financials has industry characteristics, that you have to take care of, in education and government it’s things like grants and endowments, in financial services it’s our is really balanced, for service providers like Accenture and Deloitte it’s professional services automation. And so we have to just go down that list of things to build. In healthcare, it is all about law tracking for inventory. We have got all these on our roadmap, they will all get built in as we knock them down we will open up yet another vertical.
Akash Ranganath - Merrill Lynch
Akash Ranganath, Merrill Lynch. My question was -- I certainly appreciate the fact that you’re building out the financials functionality, but at what point are we going to see enough pain in the customer base that will spark indeed a, maybe it’s a pain point, bunch of pain points or some positive catalyst that your product enables that, somebody else cannot empower the customer with that kind of functionality. So my question is more on whether you are waiting for the market itself to open up to provide you that $25 million tam?
I think the market is open. I really do. What we are finding so far in the markets where we are competing, there is not a lot of pushback on cloud, I would have expected more pushback in cloud. I think people generally think of financial assistance as more mission critical than HR, so very little pushback on cloud. The financial customers face the same problems the HR ones do. They are facing a painful upgrade. They want to move to the next version, its cost prohibitive, they want to look at alternatives.
I think our reporting in analytics are much more valuable in financials than they are in HR, just by the nature of the beast. And for many of the customers we were talking to, that is a huge pain point. Where it could be interesting down the road is the fire for us, really does take hold. There really is that international standard, I will guarantee you we will be the first financial vendor and I would actually guess, I would guess and that suite we will probably be able to get there too, but as a cloud vendor since we are innovating so rapidly we will be the first to support IFRS. And I hope that, selfishly I hope that’s like a mini Y2K where it forces people to upgrade to a more modern system to deal with the limitations of the past.
Heather Bellini - Goldman Sachs
Hi excuse me Heather Bellini with Goldman Sachs. It’s early days for your early time for your customer event this week, but I am wondering if you could share with us what’s different about the customer feedback or the customer conversations that you are having this year versus last year, and also given your customers are integral in terms of where you are going with your product footprint, what’s the next big area that they are trying to steer you towards?
So, I haven’t had any customer conversations yet. Like you know it was our first piece, I was held up in my hotel room yesterday as was Dave. But in general the feedback is, it’s different than it was two or three years ago, and that it was more geared around tactical blocking and tackling features that we were missing and in particular in HR, that we have now addressed. And now the conversation is around more strategic topics around really managing your talents. What do I do with this unified work force? What was unified data, and when I can really slice and dice my work force to get to better answers. So the customers are using the platform to be more strategic to get out of just doing transactions. That’s definitely, definitely changed.
I see the same thing as we had new modules like recruiting and that they become more tied to the entire platform and we’re able to do things that they just weren’t able to do before. We will see what happens but I would guess that half of the people in the room will be considering recruiting, I just don’t know over what period of time. But that’s been on average, the customers we talked to, the idea of unified recruiting is with HRs is really top of mind. One last thing to Heather’s question, there are no more questions about whether the cloud is going to be around. That is a very, very big difference.
Steve O'Brien - Jefferies & Company
Steve O'Brien with Jefferies alright the, when you look at the 25% to 60% improvements to your total cost of ownership versus some of the legacy vendors, do you sleepover, or do you see signs of in the future that they might address some of this through pricing or maybe more efficient, improved, enhanced database technologies that create a little bit better value in their TCO equation?
You mean with their legacy products?
Steve O'Brien - Jefferies & Company
I don’t worry about that. I really don’t. I just think that in any major technology transition, the legacy products just get left behind. Could they address it with a clean sheet of paper, I think anybody could do that. We do have a pretty significant head start. I think it was really important to highlight just on that topic, we can continue to make the TCO better by reducing the implementation cost historically, implementation costs were five to 10 times the cost of software, we're getting it down to one to two times the cost of software, with what Jim Bozzini is driving in the medium enterprise, if we can keep chipping that away, we can make the TCO even better, and something to note that, the medium enterprise might not be as pronounced or as large in the U.S. The U.S. is the center for Fortune 500, Fortune 2000 kind of companies.
But you go to markets like Germany you go to markets most of Europe, a lot of Asia, a lot of Latin America, it's a mid market. Most of the companies in these economies are between 1000 and 5000 and there that cost of ownership really is a great advantage if you can keep driving up that cost, so I think that'll open up international markets as well and that's why we're beginning to bump into the great plains dynamics of the world as well on replacing those as we tackle that market opportunity.
Okay, on your left in the back.
Kirk Materne - Evercore Partners
Kirk Materne with Evercore, Aneel could you talk a little about how you feel the progress is going in terms of the uptake of the payroll module along with HCM and given that payroll is a incredibly important aspect of a business payroll also bode well in terms of getting customers to buy off on the broader vision of HR and financials, I guess is that a potential precursor for customers you think would be most I guess accepting of moving on the financials ultimately?
It’s a great question. Payroll half the time reports to the finance department. And so in those cases it's definitely an avenue into getting to know the CFO and getting to know the finance organization. I feel very good about where our payroll product is, we wouldn’t move into building payrolls for the UK and for France if we didn't feel confident with where the U.S. payroll is today, there are some features, some union features that we still need to flush out for the U.S. payroll but we're getting to the place where areas where we're ahead of legacy systems and there are areas we're behind, but in general we're on parity so I feel very good about where our payroll system is and it is a great avenue into the financial products.
John DiFucci - JPMorgan
Hi Aneel, John DiFucci from JPMorgan, question is about, there's a lot of talk, and Jason asked a question about the SIs and that buildup. I just wondered what you're seeing there, because I wonder sort of how the legacy ERP vendors sort of they talked about moving and I guess they'd say they're still moving to SaaS solutions in the cloud, we saw some resistance initially with the legacy SI vendors and I just wonder if in some level they could actually thwart your progression and if you have to rely more on those SIs or those consultants that actually started with a clean sheet of paper like companies like Aperio and Bluewolf or is it different than the ERP business and will Aperio and Bluewolf those guys, can they get a lot bigger, can they get fast enough to grow with you or do you think you're going to be okay with just the SIs, I mean not just the Sis but the SIs will be able to do it overtime?
So I would say we definitely need both, the big SIs are global they have reached into many of the big Fortune 500 companies, but if you look at the early days of Workday it was all built on the backs of the Workday consulting organization and the more boutique oriented organizations. I think different, and so firms like Aperio I think they've got a great future and we're still in the very early days of the shift. The shift is further along in CRM it's now getting along in HR, we're just starting in financials so there's this massive opportunity in front for all these vendors, the big SIs have gotten religion around the cloud, and it's very simple, they were losing business, and at the end of the day customers today are just much more savvy than they were 15 years ago when they were choosing client server systems and so they know what they want, yes they'll take some input from the SI but also take some input from the software vendors and if you end up on the wrong side of the technology equation, historically that's not a good place to be.
I think the difference between the SI providers and software vendors is that there's no legacy code that they're shackled with. They can start a brand new practice, have a different methodology have a different mindset and attack the market rather than having a legacy line of code that they have to deal with, they don't have to do that so I think varying degrees, Deloitte I would single out as one that really embraced the cloud early on and has a great deployment model even though they're a big SI.
Karl Keirstead - BMO Capital Markets
Hi, Karl Keirstead at BMO Capital Markets, my question was related to a slide you had up early around 50% of the opportunity set coming from Europe and Asia Pacific, but I think in the subsequent slide 18% of your reps are there. So are we hitting a point where the non-U.S. opportunity is so significant that those two numbers are going to narrow.
I'd rather have Mike Stankey answer this, he's still here? He's doing another session, okay, well I'll take my best crack at it. The sales organizations outside the U.S need to follow the product, we built a global product, it runs across all parts of the world, but if you're headquartered in Germany you have an extra set of requirements because you report to all the local agencies in Germany in the same way that if you're headquartered in the U.S. As the product matures, you know we're having those capabilities, the local capabilities for France and Germany. We can sell to those multinationals but it won’t happen overnight.
The U.S. market is still the biggest market still largely untapped. We are going to continue grow our sales organizations around the globe but I don’t think we’re not going to do it in a crazy way just to put feet on the street, the market opportunity has to be there. Japan will be an interesting test for us. There seems to be an appetite for cloud but if I were to guess it’s two to three years behind that of where we’re in the United States that’s pretty similar to the way Mark Fenny often use a world as well that it’s two to three years behind and so got to make sure that we don’t burn a ton of money waiting for the cloud to get there, but we are going to continue to invest and I do suspect that’s going to grow faster than the U.S. especially once the global economy recovers.
I will come back to it though that to me the big opportunity outside the U.S. in many ways is the main market and that’s where we need to continue to refine that methodology around implementations.
And if you think back to the number of customers, the 23,000 customers, potential customers, with a 1000 people or more and about 10,000 of those are in North America and we are at the somewhere in stage of probably a few over 400 that we have thus far so we are at 4% penetration in North America, less than 1% in the rest of the world. So you’ll naturally see some shift of the sales organization to at least greater percentage hiring internationally but there is still a lot of room in North America as well?
Richard Davis - Canaccord Genuity
Yes Richard Davis, Canaccord Genuity. Is Workday a company that will eventually have a third leg, if you think about replacing ERP there is finance, HR, and manufacturing is there any thought at some point that you actually get into manufacturing systems for the cloud?
I had industry applications on my slide. I will not rule out manufacturing but I think it would be a distraction right now, could we be in that business 10 years from now very possibly in the next five years I doubt it for a couple of reasons there is so much opportunity in front of us in HR and financials and if I were to say the third leg I actually think Big Data analytics is the third leg that really didn’t exist in the ERP world that was a different area in the form data warehouses, so I think that’s the first third leg. But I would personally rather go after the third leg being student system for higher education, patient systems for healthcare, claim systems for financial services before I got into manufacturing. I don’t think manufacturing systems are going to go into the cloud and mass anytime soon.
Richard Davis - Canaccord Genuity
PeopleSoft to use a playbook and for acquisitions with red paring to get into manufacturing and then J.D. Edwards and your friend Mark has been spending about 3.5 billion in front office marketing technology, does your view changes at all in M&A from what you’ve seen others do and what you’ve experienced to PeopleSoft?
Well, if you were me I never would have done the J.D. Edwards acquisition. I was only a board member at the time. I thought doubling down on the ERP as a slow growth market was not a good bet but I wasn’t the CEO at the time. You won’t see us to a big acquisition like that at least not while Dave and I are running the company. You can see us do small acquisitions. I think a lot of what Mark has done has been really smart. He has flushed out the product line. They’re mostly small innovative companies. I think then what you have to do is go about and stitch them altogether but not huge legacy oriented acquisitions.
You could see us making a few two or three over the next year or two but none of them are going to be earth shattering from a dollar size and definitely not from a revenue size.
We have time for a couple of more questions I want to get you to the session, the customer panel which starts at 1 o’clock and then just have a few other things to talk about, so two more questions.
Do you think the number of employees at the 2000th customer is higher than the average employee account for today’s customer or lower? Do you think the customer size gets bigger overtime or are you going sort of further downward?
Over the last five years, our customer size has, our average customer size has moved up dramatically, it’s only in the last 12 months where we saw this opportunity for medium enterprise that we actually go back to that market. I think it trended up from an average of 7,000 employees per customer up to 15,000 and now we’re actually trying to bring it down a little by this focus on medium enterprise. It’s not something we actually -- I think that’s more of an outcome than it is a goal medium enterprise was something that really Mike Stankey came up with and none of us had really focused on that market definitely didn’t focus on it in PeopleSoft and it’s been a surprise to the upside how well we’re doing in that marketplace.
Just as a follow-up question the Big Data analytics, I guess Aneel when you look at it going forward do you still see analytics being a sort of a horizontal offering or do you think more analytics going forward this could be done within the application that you’re using on a day-to-day basis meaning we meet lots of people -- Workday clients that are pulling their data out and then doing analysis and visualization tool, do you think that in three or four years that they will be able to do most of that sort of analytics and reporting within the Workday cloud?
It really all depends on the type of reporting you want to do. If it will only rely on Workday data, many people are just going to running it off of Workday -- and that is what our embedded analytics provide today. If it involves bringing third party data inside that’s what we build Big Data analytics for and I think that is a next battleground the reason why I’m optimistic, we’re going to do well when we bring in third party data is that almost every analytic you can think about uses financial data as the denominator.
You think about cost per employee, revenue productivity, you think about turnover everything is a financially driven metric that the CEO and CFO care about and so the financial system generally has a pretty good shot at being the victory in the analytics market as well.
Just to close it, I want to thank everybody for attending, this is -- Workday rising is truly a customer conference as Aneel and Dave pointed out at the Keynote. We have even a limited number of prospects that attend and so this is a bit of an experiment for us to invite the investment community to our customer conference. So, it’s a little bit different than probably some of the other industry shows that you’ve been to. We’re opening up the customer panel for you at 1 O’clock. We hope that you will all attend.
After the 1 O’clock session this room will be available for you as a work room and also the partner booth et cetera will be open for you till 4 O’clock and then we’re holding a reception at the Westin for all of you and I hope that you’ll be able to attend. So, thank you very much.
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