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Workday (WDAY) Q4 2019 Earnings Conference Call Transcript
WDAY earnings call for the period ending January 31, 2019.
Workday (NASDAQ:WDAY)
Q4 2019 Earnings Conference Call
Feb. 28, 2019 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Welcome to Workday's fourth-quarter and fiscal-year 2019 earnings call. [Operator instructions] And with that, I'll hand it over to Mike Magaro, vice president of investor relations.
Mike Magaro -- Vice President, Investor Relations
Welcome to Workday's fourth-quarter fiscal 2019 earnings conference call. On the call, we have Aneel Bhusri, our CEO; Robynne Sisco, our co-president and CFO; Chano Fernandez, our co-president; and Tom Bogan, CEO, Adaptive Insights. Following Aneel and Robynne's prepared remarks, we will take questions. Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast.
Statements made on this call include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we'll discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance.
These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Also, the Customers page of our website includes a list of selected customers and is updated monthly.
Our first-quarter quiet period begins on April 15, 2019. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2018. With that, let me hand it over to Aneel.
Aneel Bhusri -- Chief Executive Officer
Thank you, Mike, and good afternoon, everyone. Thank you for joining us today for our fourth-quarter earnings call. I'm pleased to report that Workday had another strong quarter, capping off a great year. We continue to attract new customers, and many of our current customers are growing their investments with us.
We now have over 2,600 customers, and our commitment to their success is demonstrated by our 98% customer satisfaction rate and broad referenceability. In Q4, we saw healthy demand across all product areas. Starting out with Workday HCM, we had another strong quarter as we continue to lead the market with our differentiated suite of products. In total, we added 10 new Fortune 500 customers and now have approximately 40% of the Fortune 500 using our HCM product line, including half of the Fortune 50.
New customers include A.P. Moller-Maersk, Caterpillar, Sumitomo Chemical and Wyndham Worldwide Operations. We continue landing these large marquee accounts in no small part due to our proven ability to uniquely support our customers' high volumes of data and transactions. Notable go-lives in Q4 include Lloyds Bank plc, McKesson and Siemens AG.
Switching over to the world of finance. Q4 was our best quarter ever for our Financial Management product line. In the fourth quarter, we added 79 core Financial Management customers, including four new Fortune 500 customers, two of which were net new customers and two of which who were existing customers that added on Financials. A few of the notable new Financial Management customers include Ryder Truck, Ameriprise and Banner Health.
One interesting new trend is that we are beginning to see large enterprise companies now starting their finance and HR journeys with Workday Financial Management. This is a new development and something we view as a positive indication of the growing awareness of our Financial Management applications and the high levels of satisfaction our finance customers have experienced in the past several years. In addition to the strong growth from our core Financial Management Suite, we saw strong momentum in our second full-quarter selling the Adaptive Insights Business Planning Cloud. Indeed, it was an excellent quarter of execution within the core Adaptive Insights business, with over 200 new Planning customers for its stand-alone offering.
We also achieved great success bringing Adaptive Insights into new large enterprise opportunities as addon sales into the existing Workday customer base, adding Planning in more than 50 new Workday platform deals and 30 existing Workday accounts. With Workday Prism Analytics, we had a record quarter in terms of number of new customers and again had triple-digit ACV growth, giving us strong momentum heading into fiscal-year '20. Indeed, our customers seem to be resonating with the idea of bringing any type of operational data securely into Workday in order to deliver better business insights and outcomes. Switching to the people front.
A key part of our success continues to be our vibrant company culture, which allows us to maintain high levels of employee satisfaction and greatly helps us attract and retain talent across all levels of the company. To that end, I'd like to thank our entire team for making Workday No. 4 on Fortune's 100 Best Companies to Work For list in the U.S. Being a great place to work is something that Dave and I have cared about since day one, and it's an honor for the Workday team to be recognized on this prestigious list.
As we look forward to fiscal year '20 and beyond, we will continue our relentless focus on innovation and expect to see continued momentum from our growing family of applications. We're confident in the pipeline we have built and the sales execution model we have in place. As such, we expect fiscal-year '20 to be another strong year of growth. I will now turn it to our CFO and Co-President Robynne Sisco.
Over to you, Robynne.
Robynne Sisco -- Co-President and Chief Financial Officer
Thanks, Aneel, and good afternoon, everyone. Our fourth quarter capped a very strong year as we continue to demonstrate momentum across our subscription revenue growth drivers. We not only added a record number of net new customers in Q4, we also closed a record number of core Financials deals. Our high levels of customer satisfaction continued to drive strong renewal rates and add-on sales, supporting our thesis that satisfied customers not only become long-term customers but grow their relationships with us over time, both of which drive long-term shareholder value.
Our subscription revenue grew 37% to $674 million for the fourth quarter and was up 33% to $2.386 billion for the full year. Total revenue was $789 million in Q4, reflecting growth of 35% from last year and $2.822 billion or growth of 32% for the full year. We continue to see global expansion as one of our growth levers, with total revenue outside the U.S. up 41% to $184 million in Q4, representing 23% of total revenue.
Subscription revenue backlog was $6.74 billion, growth of 30% year over year, driven by strong net new bookings, success with add-on sales into our customer base and strong renewals, with net retention once again over 100%. Subscription revenue backlog that will be recognized within the next 24 months was $4.47 billion or growth of 29%. Our non-GAAP operating profit for the fourth quarter was $93 million or 11.8%. For the year, non-GAAP operating profit grew 35% to $291 million or 10.3% of total revenue.
Benefiting from strong collections in Q4, operating cash flow for fiscal '19 was $607 million, representing 30% growth from last year. The integration of Adaptive Insights have gone extremely well. And the headwind to cash flow from the transaction and integration costs we incurred in the second half of FY '19 is now largely behind us. Current unearned revenue was $1.84 billion in Q4, up 29% year over year while, total unearned revenue grew 27% year over year to $1.95 billion.
We successfully added and integrated more than 2,300 net new employees to Workday this year, which include approximately 500 from the Adaptive Insights acquisition, bringing our total employee count at year end to over 10,500. Operationally, we continue to execute well against our long-term vision, and our great second-half performance capped a very strong year. Now let me turn to guidance for fiscal 2020. As we enter the year, we see strong growth levers across all our products and geographies.
We remain early in addressing our long-term opportunity, with most of our products still in the beginning stages of their growth curves. And you should continue to expect that we will reinvest any incremental top-line overperformance this year. For the first quarter, we expect subscription revenue to be between $692 million and $694 million, representing 33% year-over-year growth. For the full year, we are raising our subscription revenue guidance to a range of $3.03 billion to $3.045 billion, representing year-over-year growth of 27% to 28%.
Sequentially, we expect subscription revenue to increase from the previous quarter by approximately 7% in Q2 and approximately 5.5% in Q3 and four. On the professional services front, we continue to value and support a growing SI ecosystem. Our partners are seeing robust growth in their Workday practices, and we will continue our tight alignment with them to ensure customers have successful implementations that support the highest levels of customer satisfaction and business value. We are expecting professional services revenue to be approximately $120 million in Q1 and $500 million for fiscal 2020, growth of 24% and 15%, respectively.
Professional services margins will be slightly lower than last year as we continue to invest in programs to support customer deployments and to sustain our high levels of customer satisfaction. As we enter FY '20, I want to reiterate that we don't run the business to maximize either unearned revenue or calculated billings. As we discussed throughout this past fiscal year, our focus continues to be on new customer acquisition and long-term customer economics, which means that we will likely continue to see variability in unearned revenue throughout the year. We believe that our subscription revenue backlog is a much better gauge of the health of our business over the long term.
And even though backlog will have some variability quarter to quarter based on contract duration and the timing of renewals, including early renewals associated with add-on business, unlike billings and unearned, it filters out the noise caused by varying invoicing terms. Based on our current outlook, we expect total subscription revenue backlog to have year-over-year growth in the high 20% range in the first half of the year. Given the accelerated growth we experienced in the back half of FY '19, the comps get more difficult in the second half of FY '20. So we are currently expecting year-over-year growth in the second half to be in the low 20s.
Consistent with the preliminary outlook we gave last quarter, we expect a 200 basis point improvement in our non-GAAP operating margin for the full year, bringing our margin to approximately 12.3% for FY '20. The margin improvement reflects leverage as we scale, with continued investment in products and other areas of business to support our long-term growth aspirations. We estimate non-GAAP operating margins of approximately 13% in Q1 and expect a normal seasonal sequential decline in Q2 as we invest in our people through our annual compensation process. The GAAP margins for the first quarter and the full year are expected to be approximately 27 to 28 percentage points lower than the non-GAAP margins.
We expect operating cash flow in FY '20 to be approximately $790 million or 30% growth. The non-GAAP tax rate remains 17% for FY '20. Our Pleasanton development center construction project will be completed this year, and we plan to begin occupying the building in Q2. The FY '20 capital outlay for this project will be approximately $130 million and be front-loaded toward the first half of the year.
We expect to spend an additional $280 million in FY '20 to support our other capital needs, primarily related to investments in data centers to support our customer growth, leased facilities and corporate IT infrastructure to support our continued business expansion and large furniture purchases in Q1 as we prepare the development center for occupation. And finally, I'll close by thanking our amazing customers, partners and employees for their continued support and hard work, which allowed us to deliver great results this past year. We are still in the early stages of executing against our long-term vision as a company, but our progress wouldn't be possible without shared goals. We look forward to updating you on our progress throughout the year.
With that, let's begin the Q&A process.
Operator
[Operator instructions] Our first question comes from the line of Mark Murphy from JP Morgan.
Mark Murphy -- J.P. Morgan -- Analyst
I wanted to ask about the four Fortune 500 wins in Financials in a single quarter. It seems impressive. And just to clarify, I think two were HCM customers, which added Financials. Two, I believe you said, were net new.
Does that mean that they were platform wins or Financials only? And then could you just comment in general on which incumbent systems are being replaced more commonly?......MORE
