Workday, Inc. (WDAY) Q4 2022 Earnings Call Transcript

Workday, Inc.  (NASDAQ: WDAY) Q4 2022 earnings call dated Feb. 28, 2022

Corporate Participants:

Justin Furby — Vice President, Investor Relations

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Chano Fernandez — Co-Chief Executive Officer

Barbara Larson — Chief Financial Officer

Analysts:

Kash Rangan — Goldman Sachs — Analyst

Kirk Materne — Evercore ISI — Analyst

Mark Murphy — JPMorgan — Analyst

Keith Weiss — Morgan Stanley — Analyst

Michael Turrin — Wells Fargo — Analyst

Brad Sills — Bank of America — Analyst

Strecker Backe — Wolfe Research — Analyst

Brent Bracelin — Piper Sandler — Analyst

Brad Zelnick — Deutsche Bank — Analyst

Brent Thill — Jefferies — Analyst

Raimo Lenschow — Barclays — Analyst

Presentation:

Operator

Welcome to Workday’s Fourth Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions]

With that, I will now hand it over to Justin Furby, Vice President of Investor Relations.

Justin Furby — Vice President, Investor Relations

Thank you, operator. Welcome to Workday’s Fourth Quarter Fiscal 2022 Earnings Conference Call. On the call, we have Aneel Bhusri and Chano Fernandez, our Co-CEOs; Barbara Larson, our CFO; and Pete Schlampp, our Chief Strategy Officer. Following prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions, including those related to the impacts of the ongoing COVID-19 pandemic on our business and global economic conditions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our 2022 annual report on Form 10-K for additional information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today’s call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday’s performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Also, the customers’ page of our website includes a list of selected customers and is updated monthly. Our first quarter fiscal 2023 quiet period begins on April 16, 2022. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2021.

With that, I will hand the call over to Aneel.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Thank you, Justin, and good afternoon, everyone. Thank you for joining us today for our fourth quarter fiscal year ’22 earnings call. Before we begin, I want to spend a moment acknowledging the current situation in the Ukraine. Our thoughts are with all of those who are personally impacted by the devastating situation, including Workday contractors in Ukraine, workmates across the region in Europe and families of military personnel who have been deployed in the region. Turning now to our business results. I’m pleased to report that Workday delivered an exceptional fourth quarter, which helped us achieve the fastest growth in full year new ACV bookings in over five years. This acceleration in our business, along with our relentless focus on employees, customers and innovation, is serving as a strong foundation for driving durable growth on our path to $10 billion in revenues and beyond. Our business success is enabling us to attract talent at a pace we have never seen before and is allowing us to continue to expand and support new customers across our broad suite of solutions aimed at the CHRO and CFO. Indeed, we now serve more than 60 million total users across 9,500 organizations, including more than 4,100 core HCM and finance customers. As our customer community continues to expand, so does our opportunity to serve them in more strategic ways. As Chano will soon share, we closed several significant transactions within our customer base sales team in Q4.

Our continued commitment to our customers’ success is also reflected in our industry-leading gross retention rate of over 95%. Additionally, we are seeing customers increase their engagement and usage of our applications as evidenced by the over 440 billion transactions processed within Workday in fiscal year 2022, which is an increase of 67% over the previous year. Altogether, we now work with over 50% of the Fortune 500 and over 25% of the Global 2000. Before I turn it over to Chano who will share more on our go-to-market success; and Barbara Larson, our new CFO, who will provide specifics on our raised growth outlook for fiscal year ’23, I’d like to share some fourth quarter highlights. First, momentum for our human capital management suite remains strong as organizations continue to transition their HR operations to the cloud. In Q4, we saw a healthy demand across all HCM product areas driven by our ability to attract new customers while strengthening and deepening our relationships with existing ones. New customers in Q4 included Allied Financial, DICK’S Sporting Goods, National Australia Bank Limited, Rite Aid Corporation, Smithfield Foods and seven-Eleven, to name a few. Notable HCM go-lives in Q4 included Evonik Industries, Anheuser-Busch InBev and Wells Fargo Bank as we continue to have over 70% of our HCM customers in production. Switching over to our financial management applications. Q4 was another solid quarter with several marquee wins, including Genpact Limited, Mass General Brigham, University of Melbourne and US Bank.

During the quarter, we doubled the number of add-on core financial management wins when compared to the same period a year ago and had several customers go live, including Bright Horizons children centers, Sharp Healthcare and SS&C Technologies. In addition to the strong growth from our core finance application, we saw continued momentum from our expanding suite of products that support the office of the CFO, including planning, analytics and spend management, where our Strategic Sourcing solution experienced roughly 50% new ACV growth. And our procure-to-pay solution grew even faster. We continue to see very healthy attach rates for spend management solutions within our financial customers, illustrating how finances increasingly partnering with their procurement peers, drive visibility and bottom line impact with a single solution. As we head into fiscal year ’23, we are confident in the opportunity we have in front of us and our ability to execute on our growth initiatives on our path to $10 billion in revenues. As such, we expect fiscal year ’23 to be another strong year for us. Lastly, I’d like to share a couple of updates related to Workday’s Board of Directors. First, Tom Bogan, who most recently served as Vice Chairman of Corporate Development, retired from Workday on January 31. And while we’re excited for Tom and his well-deserved retirement, we are thrilled to announce that he has joined our Board.

Tom came to Workday in 2018 as part of the Adaptive Insights acquisition, a company he led as CEO for nearly four years. During his time at Workday, Tom has been a trusted adviser, a true culture champion and passionate leader who embodies Workday’s values. We are fortunate that he will now lend his expertise and guidance to help us capitalize on new opportunities for the business and work to accelerate future growth. The second update I want to share is that Dave Duffield, my mentor, best friend and Workday’s Co-Founder and former CEO and Chairman, has stepped down from our Board of Directors and will now carry the honorary title of CEO Emeritus. While Dave will no longer be on the Board, he remains our largest shareholder and will continue to provide his invaluable counsel as an adviser of Workday. When Dave and I started Workday nearly 17 years ago, our goal was to build a lasting multigenerational company with employees at the center and relentless focus on customer service and innovation. We wanted to have fun along the way. The growth we’ve experienced this past year in the face of a challenging macro environment has only solidified my belief in the foundation that we have built, thanks to the amazing group of employees and leaders who embrace our values and are committed to delivering the industry’s best products and customer experience. I will end by saying that I’m quite optimistic about our future.

With that, I’ll turn it over to our co-CEO, Chano Fernandez. Over to you, Chano.

Chano Fernandez — Co-Chief Executive Officer

Thank you, Aneel, and thank you to everyone for joining today. I want to start off by acknowledging the more than 15,200 Workmates across the globe who helped drive our incredibly strong finish to the year. Amazing job. I can’t wait to see what we accomplish together in FY ’23. I’m also looking forward to safely spending time with many of you this week at our sales kickoff here in Las Vegas, where we are taking great care to follow the safety measures in accordance with the CDC and local authority guidelines. As Aneel mentioned, we delivered an exceptional Q4 and growth reacceleration driven by a strong execution and healthy demand across solutions and regions. Our performance in North America was a standout, and we had another solid quarter internationally where Asia Pacific markets such as Australia and New Zealand were a highlight, in addition to healthy growth in key EMEA market such as Germany. We had a solid quarter of landing net new core HCM and FINS customers, including several Fortune 500 and Global 2000 companies, along with healthy activity in the medium enterprise. Our expanding portfolio of landing solutions also experienced significant momentum, including Peakon, Workday Strategic Sourcing and Planning where new customers included Sonic Healthcare, Plastic Omnium and At Home Stores. And we couldn’t be more excited to add VNDLY to our portfolio of strategic landing solution.

Even though it’s early, we’re already seeing the results with Q4 wins including RSM, Leonardo UK and Guild Mortgage, among others. In addition to strength from our net new teams, our customer base sales teams drove outstanding performance across both add-on and renewals, once again demonstrating the strategic nature of our platform. Customer base expansions in Q4 included US Bank who purchased core FINS, Accounting Center, Prism and Extend; FIS who purchased Workforce Planning, Extend and Canadian U.K. payroll; and Merck, BP International and Advocate Aurora Health who all added Extend. In Q4, we also expanded our relationship with Accenture, who is deploying Peakon to gain a real-time post on its employee base to help power its global talent strategy. As strategic partners of ours, Accenture is applying its innovation in this area to drive engagement and deep employee-related insights for our mutual customers. From an industry lens, we continue to see our differentiated value proposition winning in the market. In financial services, for example, we closed several strategic deals in Q4, including core FINS win at the aforementioned US Bank, CUNA Mutual and Penn Mutual Life Insurance; and core HCM wins at National Australia Bank, Allied Financial and Auto Club Group. In addition, we expanded our footprint with several financial services customers this quarter, including Commonwealth Bank of Australia, Kemper and Western Union.

Industry-specific investments such as Accounting Center, along with our deep industry knowledge and our rapidly expanding reference base of customers, which now includes more than 70% of the financial services companies in the Fortune 500, are all key to our success. And it’s not just the innovation we are driving that is enabling our success but also that of our partners, such as PwC, who created a solution for multidimensional bank planning and profitability by leveraging Workday Financials, Extend, Accounting Center, Prism and Adaptive Planning. Our partners are key to our industry approach, and we’re excited by the innovation happening across our ecosystem. We enter FY ’23 with healthy pipelines and clear momentum in our business. In order to capitalize on that momentum, we plan to continue making significant investments within our go-to-market and service and support team with key focus areas, including customer base, international, industry and emerging land motion, all of which are important growth vectors in achieving our goal of sustaining 20%-plus subscription growth well into the future. Part of this investment involves strengthening our leadership team as we continue to scale, to which I’m pleased to welcome Patrick Blair as our newly appointed President of the Americas. Patrick brings more than 25 years of enterprise software sales experience and not only is a proven leader but is a great person and a tremendous fit into the organization. I couldn’t be more happy to have him join that and the team to lead our largest market.

With that, I’m now pleased to hand it over to our newly minted CFO and a cool star within the Workday organization, Barbara Larson. Barbara, over to you.

Barbara Larson — Chief Financial Officer

Thanks, Chano. I appreciate the kind words. Good afternoon, everyone, and thank you for joining us. I look forward to working with all of you over the coming quarters and years, and I’m thrilled to be joining Aneel, Chano and Pete today to update you on our progress. I joined Workday seven years ago and have witnessed unbelievable growth in the company over that time. One observation I’d make is that our market position has never been stronger, and the broad-based momentum that we saw across the business in Q4 serves as a great validation of that. Now let’s turn to our results. Subscription revenue was $1.23 billion in Q4, representing year-over-year growth of 22%. For the full year, subscription revenue was $4.55 billion, growth of 20%. Professional services revenue was $147 million for Q4 and $592 million for the full year. Fourth quarter revenue outside of the U.S. was $348 million, representing 25% of total revenue. 24-month backlog at the end of the fourth quarter was $7.98 billion, growth of 22%. The strong result was driven by new bookings outperformance and continued strength in renewals with growth and net retention rate over 95% and 100%, respectively. Total subscription revenue backlog was $12.81 billion, growth of 27%. Our non-GAAP operating income for the fourth quarter was $237 million, resulting in a non-GAAP operating margin of 17.2%. As expected, our non-GAAP operating margin declined from last quarter driven by an accelerated pace of hiring, the rollout of our previously mentioned cash-based performance bonus and other growth investments made across the business, including the recent VNDLY acquisition.

For the year, non-GAAP operating income was a record $1.15 billion or 22.4% of total revenue, showcasing the strength of our business model. Operating cash flow for Q4 was $615 million, bringing our full year operating cash flow to $1.65 billion, growth of 30%. Record cash flow results were driven by solid operating income performance as well as strong cash collections throughout the year. Our largest investments continue to be in our people and attracting top talent to Workday. We successfully added and integrated roughly 1,000 net new employees in Q4, including over 140 from VNDLY, ending the year with more than 15,200 employees, growth of 21% and in line with our hiring aspirations when we entered FY ’22. The record hiring is a testament to our culture, our global brand and the significant growth opportunity that we have ahead. Overall, we are very pleased with the strong company-wide execution in our seasonally most important quarter. Turning now to guidance. We are encouraged by the significant momentum in our business, and we’re optimistic that the environment will remain robust throughout FY ’23 as organizations continue to prioritize and invest in their strategic finance and HR transformation initiatives. With that context, we now expect FY ’23 subscription revenue to be in the range of $5.53 billion to $5.55 billion, representing 22% year-over-year growth. For the first quarter of FY ’23, we expect subscription revenue to be between $1.263 billion and $1.265 billion, representing 23% year-over-year growth at the high end. We expect subscription revenue to increase sequentially by approximately 7% in Q2 and approximately 5.5% in Q3 and Q4.

We expect the 24-month backlog to grow approximately 22% in Q1 of FY ’23. We are expecting professional services revenue to be approximately $160 million in Q1 and $650 million for the full year. We will continue our tight alignment with our growing partner ecosystem to help ensure customers have successful implementations that support the highest levels of customer satisfaction and business value. From a margin standpoint, since the onset of COVID, we have demonstrated the scalability inherent in our model. As we’ve discussed, however, investing for growth remains our number one priority. In FY ’23, we plan to continue hiring across the company at a rapid pace with a focus on sales and products. We are also expecting a return to travel and in-person events. And as we have discussed, we’ve rolled out a performance-based cash bonus program across the company. Given this ramped level of investment and taking into account our increased revenue outlook, we are raising our FY ’23 non-GAAP operating margin guidance to 18.5%. Investing for growth remains our focus, and we will continuously evaluate gross margin trade-off. But we’re currently expecting to resume margin expansion in FY ’24 and have continued confidence in reaching 25% margin at $10 billion in revenue. We estimate non-GAAP operating margins of approximately 19% 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 28 and 24 percentage points lower, respectively, than the non-GAAP margin.

The FY ’23 non-GAAP tax rate remains at 19%. We expect operating cash flow in FY ’23 to be approximately $1.65 billion, flat from record levels in FY ’22, driven by the ramp in growth investments, the corresponding decrease in margins and an estimated $80 million onetime tax payment related to the expected transfer of acquired intellectual property. We expect capital expenditures of roughly $475 million in FY ’23 to support continued business expansion and phased return to office with investments across our existing facilities, corporate IT infrastructure and customer data centers. This includes opportunistic data center investment that was previously planned for FY ’24 as we manage the supply chain and plan for future growth. And finally, I’ll close by thanking our amazing employees, customers and partners for their continued support and hard work, which allowed us to deliver exceptional results during yet another unprecedented year. We are more confident than ever in our long-term opportunity ahead.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your questions.

Kash Rangan — Goldman Sachs — Analyst

Hi, thank you very much. What a finish to the fiscal year. Several metrics to that, but Aneel, I’m just curious to get your take. The number of transactions in fiscal ’22, up 67%. Your total subscription backlog, if I heard you right, was up 27%. And you’re now close to 70% of Fortune 500. And I think the number was about 50% not too long ago. It’s clearly an acceleration in your reported results, and you’re calling for acceleration in fiscal ’23. As you look at this, what is the best way to look at your longer-term targets? Is there — are we tracking even quicker towards the longer-term target, just at a very high level? Thank you so much.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Thank you for the question, Kash. This was a phenomenal year, the fastest growth we’ve had in several years from a new ACV bookings perspective. I first want to thank the team, Doug Robinson and Chano, for driving great results. I also think it comes back to existing customer satisfaction and a growing product line. And that combination with the innovation that we’re building into these products, I think, is really driving that growth. Also, I think for anybody that was going through the pandemic and was still on-premise, it was really tough to run your business with those kind of applications. And so as difficult as the pandemic was, I do think it was a forcing function to move to the cloud for the ability to run your business remotely or at least in a hybrid manner, and we benefited from that. And I also think the competitive landscape continues to be positive for Workday. So very optimistic going forward. And we’ll see where it goes, but we’re very optimistic going forward. Chano, anything to add?

Chano Fernandez — Co-Chief Executive Officer

Nothing to add, Aneel. Maybe the only clarification, Kash, the 70% is of the Fortune 500 within the financial services vertical. But we still, of course, have a great market share north of 55% on the Fortune 500.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

And Kash, when we say the transactions were up 67%, to me, that’s just awesome. That means the customers are really using our product and getting value from our products. So while our growth rate revenue-wise is not 67%, the transaction numbers just say that people are — our customers are getting value from using the system and growing a lot faster than we are.

Kash Rangan — Goldman Sachs — Analyst

Wonderful. Congratulations. Thank you.

Operator

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

Kirk Materne — Evercore ISI — Analyst

Yeah, thanks very much. I’ll echo the congrats on a nice end of the fiscal year. Chano, I was wondering if you could just talk a little bit more about the international opportunity as you look out to calendar ’22, fiscal ’23. Just where do you think you are in, say, APAC and EMEA in terms of you getting into those bigger sort of core FINS deals or HCM? It’s obviously a little bit more wide open for you all outside the U.S. So can you just give us an update on international and kind of what your plans are for the go-to-market in that area this year? Thanks.

Chano Fernandez — Co-Chief Executive Officer

Thank you, Kirk. We saw a noticeable improvement on our international markets this last fiscal year, and we see great continued momentum, which is reflecting on the pipeline in FY ’23. We have a healthy growth across regions with significant wins at companies such as National Australia Bank, GenPact and the University of Melbourne, Power Leisure, among others. I would say as new customer base grows internationally, we are adding sales capacity in our customer-based teams internationally as well. And finally, Peakon has also helped open new customers and opportunities for us, and they had a really strong quarter in EMEA landing new customers. But just as a reminder, Kirk, international remains one of the largest opportunity for us, and we’re really in the early innings of the journey but still having a great foundation and proof point with many referenceable customers across HCM and Financials at this point.

Operator

Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your questions.

Mark Murphy — JPMorgan — Analyst

Yeah, thank you very much and I’ll add my congrats on a great finish to the year. I wanted to ask you about the procurement opportunity because, Aneel, I believe you mentioned 50% new ACV growth in Strategic Sourcing. And I think you said it was faster growth in procure-to-pay. So I’m curious if there is any extra type of tailwind on the procurement side due to reopening or anything else and just whether those results increase your conviction to try to invest more aggressively into procurement as a major focus area.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Well — so Mark, I’d first say, we’re going to continue to invest aggressively on the procurement side. It’s a big market opportunity. Our products are strong, but there are gaps that we need — we still need to fill. I think the growth rate was attributable both to the interest in that space, but also the attach to financials. There’s just a lot of companies that want to buy finance and procurement together from one vendor in a unified way. So for people who want to buy best-of-breed but they want to buy them in a unified way and in the cloud, we are a great solution. And I think that’s becoming more and more the case. So I think I would attribute a lot of that success to that unified view between procurement and finance, which historically worked close together anyways.

Mark Murphy — JPMorgan — Analyst

Thank you.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Chano or Doug, do you want to add anything?

Chano Fernandez — Co-Chief Executive Officer

Well said, Aneel.

Operator

Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley.

Keith Weiss — Morgan Stanley — Analyst

Excellent, thank you guys for taking the question and congratulations on a great end to FY ’22. I wanted to talk about the increase of the subscription revenue guide. Up in that subscription revenue guide by two percentage points is no small feat when you’re talking about a revenue base as big as what you guys have and the momentum necessary to make those changes in such a big subscription base. Can you talk to us about what happened in Q4 that gave you guys the confidence to up the revenue guide in that fashion? And then on the backlog side of the equation, at the beginning of last year, we were talking about expiry base and how that was a headwind to growth on the 24-month backlog as you guys talked about a couple of percentage points. Does that become a tailwind now as we start to anniversary that? And can you talk to us about where does that tailwind — if it does exist, where do we see that? And how long into the year would that persist? Thank you.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

I’m going to make one very quick comment and hand it over to Chano. I would just say that we wouldn’t up the guidance the way we did if it was just based on Q4. It was a super strong year throughout, Q1 to Q4. Every quarter was better than our plans. And so as we think about the future, I’m going to turn it over to Chano, but we would never up guidance just on one quarter.

Chano Fernandez — Co-Chief Executive Officer

Thank you, Aneel, and thank you for your question — sorry, Aneel.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Go ahead, Chano.

Chano Fernandez — Co-Chief Executive Officer

Thank you for your question, Keith. I’ll make a comment and then hand it over to Barbara. I think it’s — first of all, it’s the investments we’ve been doing from a go-to-market and product perspective. They’re paying off with undeniable, let’s say, positive trend that COVID is creating within the back office and the relevance of the solutions we bring to the market. The pipeline momentum that we have been seeing for several quarters now, Keith, continued in Q4. So we enter FY ’23 with healthy growth in pipeline. I would say this across both net new and customer base and also HCM and Financials. So healthy pipelines combined with favorable growth rates that we’ve been seeing is what is giving us the confidence and the momentum that we’re seeing in the market. But Barbara, anything to add?

Barbara Larson — Chief Financial Officer

Yes. I’ll just round it out with an answer to your question on backlog. So as both Aneel and Chano mentioned, we’ve got significant momentum entering FY ’23, and you see that reflected in our backlog guide for Q1. With respect to renewals specifically, as we’ve said, we are expecting to return to a more normalized rate of growth for our renewal base in FY ’23. So therefore, that headwind that we faced over the last year to 24 months backlog does go away this year.

Keith Weiss — Morgan Stanley — Analyst

Got it. Would it be correct to think of it as a tailwind now? Or is it just kind of neutral and it’s just a normalized operating environment?

Barbara Larson — Chief Financial Officer

It’s best to think it’s neutral and it’s kind of more of a normalized growth rate this year.

Keith Weiss — Morgan Stanley — Analyst

Excellent. Great quarter guys. Thanks so much.

Barbara Larson — Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed with your question.

Michael Turrin — Wells Fargo — Analyst

Hey, there. Thank you and congrats from me as well. Maybe one on margin. You set the stage for some of the impacts there a few months back. You’re already bringing targets up there as well for fiscal ’23. You mentioned still some moving pieces with return to travel. We know it’s a tight labor market. So maybe if you could just add some more around what gives the confidence to bring those targets up here. And any additional color or commentary around the pace of hiring is also appreciated. Thank you.

Barbara Larson — Chief Financial Officer

Yes. Absolutely. I’ll give you some specifics on the margins. So we are planning to add more head count this year than we did last year, again, with a focus on sales and product. If you think about hiring last year, it was weighted more towards the back half of the year. We’ve got that hiring engine ramped now, and we expect to add head count relatively evenly throughout the rest of the year this year. We also are planning to layer back some of the costs back into the business, so return to office, travel, the in-person events. We’re all here together today sitting at SKO. And then finally, just a reminder that our company-wide bonus program did roll out in Q4, and this has a full year impact of approximately 300 basis points in FY ’23.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

But if I were to start with the headline, the headline is our higher growth rate does cover some of it. And let’s just start with that, that the higher growth rate gives us more ability to drive a higher margin. In addition to everything, that all else sets up 1%.

Michael Turrin — Wells Fargo — Analyst

Helpful. Thank you.

Operator

Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.

Brad Sills — Bank of America — Analyst

Oh, great. I’ll echo the congratulations on a really nice quarter, guys. Just one on verticals. I know this has been a big focus. And certainly for FINS and for ERP financials, it’s not a one size fits all. Are there any industries where you’re further along here or ones that we should expect to become more incremental contributors from here? Obviously, financials is a key one. You’ve got a lot of success there. Are there others like that where you can get to the kind of penetration you’ve seen in the near term?

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Chano, do you want to take that?

Chano Fernandez — Co-Chief Executive Officer

I’m happy to take it. Brad, hope all is well. Clearly, financial services, and I think a very important and relevant as well, the core FINS win with Accounting Center and the rest of solutions from US Bank and some of the great customers going live within our financials vertical and what we mentioned with that 70%-plus of the Fortune 500 financial services companies being already customers. Healthcare as well performing in Q4, Brad, including strategic wins at companies like Mass General Brigham and Wellstar Health and several others. I commented on my remark notes as well Extend solution in customers like Advocate Aurora and some others expanding our portfolio. Higher education that we’ve been mentioning, and we have some significant momentum, including as well some go-lives and some more customers joining our student solution as a whole. Last but not least, I think you are aware, this year, we will start with our authority to operate in the spring within the federal market, and that is more a long-term one. So you should not expect significant impact this year. But clearly, you should expect that it will be a growth vector for us going forward.

Brad Sills — Bank of America — Analyst

Great to hear. Thanks, Chano.

Chano Fernandez — Co-Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Strecker Backe — Wolfe Research — Analyst

Hi. This is Strecker Backe on for Alex. So when we talk to partners, there just seems to be an ever-increasing focus on the FINS side of the business. So can you talk about that FINS pipeline some more and then if you have seen or expect to see any bottlenecks related to a tougher hiring environment or tighter labor environment for the SIs? And then just a quick second one, does your guidance assume any increased conservatism coming out of Europe given the situation between Russia and Ukraine? Thank you.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

On the finance side and then I’ll turn over to Chano. On the finance side, we feel very good where we are product-wise. I think the SIs are ready. Finance, definitely, the function took a hit during COVID because we were viewed as longer-term projects, but those projects are coming back online very quickly. It’s not back to pre-COVID days, but it’s coming back, and that’s a very positive data point for us. And candidly, as it relates to finance, it really just is a two-horse race between us and Oracle, and there’s plenty of room for both of us. Oracle is doing well. We’re doing well. As the market comes back, there’s a huge growth opportunity for both of us. And Chano, do you want to talk about Europe?

Chano Fernandez — Co-Chief Executive Officer

Yes. I would comment on the partners and talk about Europe. I mean we are focused on ensuring that we don’t have any bottlenecks on the partners in our ecosystem, and we feel good where we are. As a matter of fact, I’m having some discussions with partners this week, and it is quite exciting kind of the investments that they’re planning within their finance programs. So that’s great to see. Not sure what was the question regarding Europe was, I think, was more a macro one, if I understood correctly.

Barbara Larson — Chief Financial Officer

Yes. It was related to the guidance. I can go ahead and answer that. We haven’t built in any increased conservatism as a result of the geopolitical environment right now.

Strecker Backe — Wolfe Research — Analyst

Thank you very much.

Barbara Larson — Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Brent Bracelin with Piper Sandler. Please proceed with your question.

Brent Bracelin — Piper Sandler — Analyst

Thanks for taking the question here. And good afternoon. Aneel, you had me at the fastest growth in new ACV bookings in five years. Wanted to walk through and drill down into the why now. Appreciate Doug’s commentary around this big opportunity to sell into the installed base. Is that really resonating? Or are there other industry factors, be it labor shortages, driving a need to invest more in HCM and/or just a return to office that’s also contributing to the acceleration here in new ACV bookings? Any color there would be helpful. Thanks.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

Honestly, you kind of answered the question. It’s all of the above. I talked to so many CEOs during COVID who just wanted to know how their employees were doing and their engagement levels. Peakon has been a great acquisition that way, everything about comp, everything about engagement, retention, everything. And if they had a legacy system, they were struggling. And so that was a driver on the HR side. And we’re returning back to work, all the things you mentioned matter. I’m going to — I’d like to answer it. But at the end of the day, it was Chano and Doug that really drove this great success over the three years. So I want to turn it over to Chano to give you his perspective.

Chano Fernandez — Co-Chief Executive Officer

I think you provided a great context, Aneel. If I may add, I believe there are undeniable market trends in our favor, the ones you mentioned: a significant amount of digital transformation happening across many businesses in all industries. And we’re truly the backbone to enable those transformations and really the only cloud-first solution doing so across HCM/finance, legacy systems that are built for the old ways of doing business or current business models and business agility. Aneel mentioned the need to engage better with employees. They’re changing workforce and skills understanding. So just to name a few, these are all C levels and CEO discussions that we’re having, and frankly, we are really well positioned to provide solutions to those challenges and partner and help our customers to transform.

Brent Bracelin — Piper Sandler — Analyst

Helpful color. Thank you.

Operator

Our next question comes from the line of Brad Zelnick with Deutsche Bank. Please proceed with your question.

Brad Zelnick — Deutsche Bank — Analyst

Great. Thanks so much, and congrats, not only on the strong result but the breadth across geos, products, various segments, installed base and new ACV, I mean, it really sounds like a strong finish. And I know we’ve touched on verticals a few times in the call, and you’ve featured financial services, you called out retail as particularly strong in your press release. We’ve picked up strong things happening in education and SLED more broadly and in other verticals. And I’d just be curious if maybe you can comment on some of the verticals and opportunities that we might be talking about a year from now and things that might be brewing and maybe even some of the concerns around service-based industries: hospitality, leisure, travel, the extent to which they are bouncing back. Thank you.

Aneel Bhusri — Co-Founder, Co-Chief Executive Officer, and Chairman

I’ll comment on higher ed and government, and then I’ll let Chano talk about the future. But we’ve had a commitment to higher ed and state local government, not since we started the company, but not too far afterwards. That was a big focus of Dave’s as it relates to higher ed, and a lot of the state and local stuff are intertwined with higher ed. So we continue to be very strong there. That was our first industry/vertical we went after. And as the student system that we’re building gains more functionality, it’s becoming more accessible to larger and larger universities. It’s a great solution for a university. You buy the higher — you buy the student system and you get HR and finance along with that. And in the case of public sector, state, local government, we have worked to build all their unique roles into the products. So you see it in cities, you see it in states quickly adopting Workday. So that is a market — that’s probably our first vertical before financial services. And then Chano can talk about what comes next.

Chano Fernandez — Co-Chief Executive Officer

Yes. I think what comes next is, I mentioned before the federal government. It remains as the large on-premise for — opportunity for HR and financials application, and we see really a great opportunity there to provide cloud solutions for a significant portion of the market. I mentioned before an authority to operate coming only spring game. I think you should also think about on the core services verticals because the wins that we have like in US Bank now and core financials and the momentum we see in the pipeline, hopefully, that will keep progressing, and you see us gaining traction there. And last but not least, set of those, let’s say, core services verticals and our core financials and financial task category overall applying there are better. I think our land motions with Planning, Sourcing, Peakon and VNDLY will allow us to even penetrate further on those verticals, even outside of our more natural, let’s say, ones where we — they are not — maybe — might not be ready yet to transform core HCM or core Financials, but definitely will be ready to land and take advantage of some of the solutions we provide there.

Brad Zelnick — Deutsche Bank — Analyst

Thanks very much for the color.

Operator

Thank you. We will now take two more questions. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Brent Thill — Jefferies — Analyst

Chano, you mentioned healthy activity in medium enterprise. I’m curious if you could elaborate on what you’re seeing there.

Chano Fernandez — Co-Chief Executive Officer

The medium enterprise has been executing really well for quite some time now. We’ve been highlighting that one. And we see significant long-term opportunity within this segment, and this continues to be a significant investment focus for us. I think we’ve done a nice job of tapping into that market and figuring out a way to rightsize the deployment costs with our launch investments, and we are really well positioned with the broader platform solution. So honestly, the team has been doing extremely well, growing significantly fast, and we’re excited by the momentum and the pipeline and the investments that we’re doing to that market.

Brent Thill — Jefferies — Analyst

And was there — as a quick follow-up, was there any follow-up on what you’re seeing with Planning uptake? I know that’s been one of your stronger growth areas. Any color there would be helpful.

Chano Fernandez — Co-Chief Executive Officer

Yes. Planning, as you know, is a core focus for us as part of our FINS+ approach. That has been again a solution that has benefited from the trends out of COVID, and we’re pretty happy how we are doing regarding Planning overall and the referenceable customers we do have. And we do have more investments coming on to that solution as part of our land motion and some more sales specialists just supporting those go-to-market efforts, particularly this year and going forward.

Brent Thill — Jefferies — Analyst

Thank you.

Operator

Our final question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Raimo Lenschow — Barclays — Analyst

Thank you. Thanks for squeezing me. And congrats from me as well. Chano, I wanted to go back to a question I asked last quarter already and there — it’s about the evolution of pipeline. Can you talk a little bit of what you’re seeing there? Because if it all plays out well, then actually this quarter, the partner should have built more for the next year. And I guess, the increase in guidance showed the confidence as well. But then also how do we have to think about the increase in capex, where you pull forward ’24 spending into next year? That all seems to suggest that the post-pandemic build-out of the pipeline and changes in the pipeline and continues there. But maybe a couple of words on that one. And congrats from me as well. Thank you.

Chano Fernandez — Co-Chief Executive Officer

Thank you, Raimo. I think the way to think about the pipeline is that there is good momentum, as I said, that has been building during the last few quarters, and we also saw that in Q4. And I think it’s broad-based. It’s across net new. And Aneel mentioned some of the results in Q4 with the extraordinary performance of that team. It’s around customer base. It’s around HCM, Financials. From a regions perspective, we see it balance as well in North America, but also the rest of the world. So I think that’s the way we look at it and the right way to think about it going forward. So it’s now more a question turning on to the execution and that the investments we are doing within the new go-to-market and sales folks that are joining, really enabling them properly to properly position the value proposition and keep our conversion ratios as we’ve been performing within the last — this last FY ’22.

Raimo Lenschow — Barclays — Analyst

Thank you.

Operator

[Operator Closing Remarks]