Workday Inc. (NASDAQ: WDAY) Q1 2021 Earnings Call Transcript

Workday Inc. (WDAY) Q1 2021 earnings call dated May 27, 2020

Corporate Participants:

Justin Furby — Senior Director of Investor Relations

Aneel Bhusri — Co-Founder and Chief Executive Officer

Chano Fernandez — Co-President

Robynne Sisco — Co-President and Chief Financial Officer

Tom Bogan — Vice Chairman

Pete Schlampp — Executive Vice President, Product Development

Analysts:

Stewart Kirk Materne — Evercore ISI — Analyst

Keith Weiss — Morgan Stanley — Analyst

Heather Bellini — Goldman Sachs — Analyst

Mark Murphy — J.P. Morgan — Analyst

Kasthuri Rangan — Bank of America Merrill Lynch — Analyst

Brent Bracelin — Piper Sandler — Analyst

David Hynes — Canaccord Genuity — Analyst

Scott Berg — Needham & Company — Analyst

Brian Schwartz — Oppenheimer & Co. — Analyst

Presentation:

Operator

Welcome to Workday’s First Quarter Fiscal Year 2021 Earnings Call. [Operator Instructions]

And with that, I will now hand it over to Justin Furby, Senior Director of Investor Relations.

Justin Furby — Senior Director of Investor Relations

Welcome to Workday’s First Quarter Fiscal 2021 Earnings Conference Call. On the call we have Aneel Bhusri, our CEO; Robynne Sisco, our Co-President and CFO; Chano Fernandez, our Co-President; and Tom Bogan, our Vice Chairman. 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.

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 filed with the Securities and Exchange Commission, including our most recent 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 customer’s page of our website includes a list of selected customers and is updated monthly. Our second quarter quiet period begins on July 16, 2020. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2020.

With that, let me hand it over to Aneel.

Aneel Bhusri — Co-Founder and Chief Executive Officer

Thank you, Justin, and welcome to Workday’s first quarter FY’21 earnings conference call. Before we get into our results, I want to express my sincere appreciation to our more than 12,000 employees who have responded in such a remarkable way to support one another and our customers during these uncertain times. This team continues to push forward across all areas of our business and I’ve never been more proud of them. As we continue to navigate this period, we’ve stayed very focused on our core values as our Northstar. That means our employees come first always and without exception. I also want to express my sincere thanks and gratitude to our customers, many of whom are on the frontline and putting yourself in harm’s way everyday. Thank you from all of us at Workday.

Over the past few months, we have worked closely with our customers to configure their Workday solutions to help them navigate new challenges and opportunities presented by this current environment. We’ve also heard from countless customers who, like us, are using Workday to seamlessly close their books 100% remotely for the first time ever. We have healthcare customers that are relying on Workday to redeploy critical people resources with great agility and we have heard from our planning customers who are using our solution to dynamically adjust their financial workforce plans. In fact, in late March we saw more than 30x increase in the number of scenario models that our customers were running. These are just a few examples where Workday has empowered our customers to better navigate this challenging and fluid environment.

Just before today’s call we announced one more. Workday and Salesforce have been great partners for a long time and now have countless joint customers. When the pandemic hit, many had to flip to a completely remote workforce overnight, closing offices, schools, services and more and others had to turn on a 24/7 team in an instant. Our HCM customers are leveraging the power of the data in Workday as a source of truth to manage their workforces which has included things like identifying essential workers, deploying people with relevant skill sets and more. And at the same time, Salesforce has just announced Work.com, which is a powerful platform for organizations to reopen safely and manage their logistics and returning to work. So, it only made sense to bring Workday and Work.com together in a way that will simplify things for our customers immensely, eliminating the need for reconciliation between various systems and more as they prepare their workforce and return to work safely and securely, and this is just a start.

Now, moving on to the business highlights from Q1, beginning with Workday HCM, where the journey to the cloud continued despite the challenging backdrop. In Q1 we were selected as core HCM vendor from one of the largest city governments, the City of Los Angeles. We also welcomed a utility company in EMEA with over 80,000 employees, as well as a large insurance company in Asia-Pac with over 50,000 employees among the many new HCM customers in the quarter.

Turning to Workday Financial Management. I’m pleased to say that we now have over 900 customers that have selected us as their core financial system. We saw continued momentum in Q1, including Financials first win, a Fortune 50 company, Fannie Mae. Other new financial customers included Louisville/Jefferson County Metro Government, Okta, as well as a large healthcare company with more than 60,000 employees. Amongst the many financials go-lives in the quarter, I would like to highlight Lithia Motors and RaceTrac Petroleum. We also saw solid demand for our expanding suite of products that support the office of the CFO and the Chief Procurement Officer.

On the planning front, we expanded our partnership with Microsoft, so Workday customers can run Workday Adaptive Planning on Microsoft Azure Cloud. Microsoft became the first Workday customer on Azure as they adopt Workday Adaptive Planning to help them with their planning, budgeting and forecasting. Scout RFP had a solid first full [Technical Issues] quarter under Workday with multiple Fortune 500 wins, including its largest-ever transaction with a large healthcare company and wins at Lowe’s and Albertsons. One of the many benefits of the cloud is that, we can deploy our customers 100% virtually and we showcased the strength in Q1 with more than 90 customer go-lives in March and April alone. Quite notably, two of these customers have more than 85,000 employees each; Jardine Matheson in APJ and John Lewis Partnership in EMEA.

Turning to product. We delivered our latest major release in March, which included enhanced workforce planning with Workday Adaptive Planning, availability of Workday Assistant, an intuitive chatbot to guide employees, new machine learning-based skills capabilities with Workday HCM to verify current employee skills and supporting reskilling efforts and new data visualization and benchmarking features with Workday Prism Analytics.

In addition, we made great progress on our extensibility journey. Just this past weekend, we moved our latest offering on Workday Cloud Platform, Workday Extend to GA. This is a significant milestone for us that we believe further increases our strategic positioning with customers and partners. In addition, to our powerful integration capabilities, customers can now build deep extensions from Workday’s core applications. As an example, within just a few short weeks, one of our customers built an app on Workday Extend that help facilitate hazard pay to their workers on the frontlines.

I’m confident that this period will ultimately serve as a catalyst to accelerate the adoption of our growing platform supporting HR and finance systems in the cloud. Now more than ever, companies are realizing the incredible importance of having agile flexible systems to support their mission-critical business processes.

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

Chano Fernandez — Co-President

Thank you, Aneel, and good afternoon, everyone. I’d like to spend a few minutes providing an update on the sales [Phonetic]. Before I do that, I would first like to thank our entire go-to-market team for their response to this new selling environment. Though I may be biased, I’ve long-held the belief that we have the best sales team in enterprise software and I have never been more confident in that belief than right now, having watched our teams engage with and take care of our customers and prospective customers over the last few months.

As Aneel mentioned, there were many highlights in the quarter, including the Financials first win in April at Fannie Mae. Key to signing this deal was Accounting Center, one of our new products that will enable Fannie Mae to account for and analyze their robust loan portfolio. The Medium Enterprise team also had another stellar quarter, continuing a multi-year trend we have seen since introduction of our launch program, a pre-configured deployment approach with a streamlined sales and delivery, which has dramatically reduced the cost to deploy.

In addition, momentum with our back-to-base team continued in Q1 with 50%-plus new ACV growth performance with our back-to-base team spanned across customer segments and products, including core FINS, Adaptive Planning, Learning and Prism Analytics. The mix of new ACV coming from installed customers has been on the rise for us over the last few quarters. We continue to add resources to better target the growing installed base opportunity and we expect to continue to lean into this effort in the quarters and years ahead.

We had considerable sales momentum across all areas of the business entering FY’21. However, as COVID-19 forced a lockdown across much of the global economy, we saw higher than normal deal pushouts, particularly in industries most impacted, including travel, hospitality and healthcare. All major geographies were affected, though we saw an earlier impact in our Rest of World markets.

Making the decision to move on to Workday has always been a very important and strategic one for companies and one that is not taken lightly. Given the importance of the decision and the strategic nature of the partnership with our customers, in this uncertain environment, there are companies that are prolonged with that decision process as they focus first on assessing and responding to the immediate impacts to their business. The good news is that, based on where we stand today most of the pipeline impact has been opportunities moving into later periods rather than deals altogether going away, with the largest expected impact to be in Q2 and Q3. It’s also important to note we have seen improved prospect engagements since April. We have also seen healthy pipeline growth for FY’22 as opportunity shift from first half to both Q4 and into FY’22.

Finally, we have adapted our messaging in areas of focus-based solution and industry, doubling down on the go-to-market motions that we are confident will yield the best returns in these times of uncertainty. We are in a competitive market but we feel very confident in our positioning and saw no meaningful changes to competitive dynamics in Q1. In addition, our discounting was in line with historical levels as most customers’ negotiations centered around more flexible payment terms to help ease the initial upfront cash burden. We view our customer relations as long-term partnerships and we are willing to leverage our balance sheet where we think it makes sense. We strongly believe that this unprecedented environment only strengthens the importance of having a single cloud system to plan, execute, and analyze your business.

I cannot tell you how many prospects I have spoken with over the last few months who have told me this environment has highlighted how ill-prepared their legacy ERP systems are for rapid change. At the same time, I have also spoken with many of our customers who have told me just how mission-critical Workday has been in helping their business respond to this crisis. And I have heard from many customers currently implementing, who are experiencing a faster, a more productive project on a fully remote basis.

There are many potential outcomes that will determine what the pace of recovery will look like and we expect the environment will remain very fluid throughout FY’21. Yet, despite some near-term uncertainty, we are confident that as the recovery takes hold, we’re incredibly well positioned to capture on the multi-decade opportunity that we see ahead of us.

With that, I will turn it over to Robynne.

Robynne Sisco — Co-President and Chief Financial Officer

Thanks, Chano, and good afternoon, everyone. Despite a challenging environment, we reported solid first quarter results, which we believe is a direct reflection of the mission-critical nature of our solution. I’m going to briefly recap our first quarter and provide updated guidance for FY’21 and then we’ll open it up to your questions.

We had our first ever $1 billion revenue quarter in Q1, with subscription revenue of $882 million, up 26% year-over-year and professional services revenue of $136 million, up 10%. Total revenue outside the US was up 30% to $256 million. Subscription revenue backlog was $8.19 billion at the end of the first quarter, growth of 20% year-over-year. Subscription revenue backlog that will be recognized within the next 24 months was $5.52 billion, growth of 21%. In Q1, our retention rates continued to be strong with gross retention over 95% and net retention, which includes upselling at the time of renewal, over 100%. As Chano mentioned, our add-on business is growing rapidly and we see strong sales back into our customer base, both during and outside of the renewal process.

Our non-GAAP operating income for the first quarter was $130 million, resulting in a non-GAAP operating margin of 12.8%. To help support our employees during these unprecedented times, in April, we paid a one-time cash bonus equivalent to two weeks pay to all our non-executive employees. This added $79 million to our first quarter and full-year FY’21 expenses both GAAP and non-GAAP that was not contemplated in the guidance provided during our Q4 call. Excluding this one-time bonus payment, our Q1 non-GAAP operating margin would have been 20.6%, well above our guidance, driven by top line outperformance, lower spend on travel, some non-critical program delays and more measured hiring. Q1 operating cash flow was $264 million, growth of 26% year-over-year. During Q1, we successfully added and integrated approximately 150 net new employees, bringing our total workforce at the end of the quarter to roughly 12,400.

And lastly, in April, we closed a $1.5 billion credit facility, comprised of a term loan and a revolving line of credit, which we believe strengthens our financial position and provides us greater flexibility as we plan for the future. As of the end of Q1, $500 million of the term loan had been funded. Overall, we’re pleased with our results and execution against a very challenging environment.

And now I’ll turn to guidance. When we provided our outlook in February, it was very early in the COVID-19 crisis and we could not yet reasonably predict or quantify the potential impact to our fiscal year. In the 90-day since then, we’ve started to see an effect on our business on several fronts, including new business bookings, GAAP and non-GAAP operating expenses and cash collections from customers. The updated guidance we are providing today takes into account these impacts based on what we have observed over the last few months. Significant near-term uncertainty still remains, however, so we are providing wider than usual guidance ranges to help take that into account. Built into our revised guidance is the expectation that the pace of recovery will be relatively slow with Q2 and Q3, being the most challenging periods, followed by a reasonable improvement in Q4.

Before providing our updated outlook, I wanted to make a few high-level comments around our business model. First, we primarily serve a large and medium enterprise market and although even the largest companies are not immune to the current economic environment, we believe they’re better positioned than SMBs to weather this downturn. Second, while our licensing model is based on the number of workers within our customer’s organizations, we have measures in place that help reduce near-term volatility from employment changes. As an example, our contracts are typically only trued-up annually to account for increases and decreases in worker counts. In addition, our contracts have base minimums, which limit our downside and it is only upon contract renewal, which is typically every three to five years that our customers have the opportunity to reset these base levels.

And finally, we are very strategic to our customers, which makes our products incredibly sticky. As a result, while we may see some moderation in retention rates in the near term, likely due to increased bankruptcies and reduction in base work accounts during renewals, we expect that our retention rates will remain high and we will continue to update you on this metric as we move through the year.

With that as a backdrop, we are lowering our FY’21 subscription revenue estimate to be in the range of $3.67 billion to $3.69 billion, or 19% growth. We expect our Q2 subscription revenue to be $913 million to $915 million, or 21% growth. We now expect professional services revenue to be $500 million in fiscal ’21 and $128 million in Q2. As always, our priority is to support our customers’ successful deployment and drive the highest levels of customer satisfaction. In line with these goals, we expect a balanced approach in terms of partner and Workday primes to ensure our partner ecosystem continues to be healthy and active. For Q2, we expect subscription revenue backlog growth in the mid- to high-teens. Given the current uncertainty around net new business, renewal rates and potential changes to contract durations during the remainder of the year, we will only be providing Q2 backlog guidance at this time.

Now, moving to margins. We estimate Q2 non-GAAP operating margins to be approximately 19%. For the full-year, we now expect the non-GAAP operating margin of 16%, up from our prior view of 14.5%. This margin improvement reflects our expectation of lower operating expenses versus our original plan even as we continue to invest and position ourselves to emerge from this period as an even stronger Company. The GAAP operating margin is expected to be lower than the non-GAAP margins by approximately 26 percentage points in the second quarter and 27 percentage points for the full year.

Our FY’21 capital investment guidance, excluding owned real estate, is now $280 million, down from our prior view of $350 million, as several large leased real estate projects have been postponed. We currently do not expect to invest any further in owned real estate during FY’21.

The FY’21 non-GAAP tax rate remains unchanged at 19%.

We had strong operating cash flow in Q1, but we have received and continue to receive requests from some existing and new customers for flexible payment terms. As always, customer relationships and customer retention are a top priority for us. During this challenging time, we’re committed to providing flexibility to those customers that have been hit hardest by the pandemic, so that we can emerge stronger together. Our ability to remain flexible in the area of cash is critical in supporting these goals, and we will, therefore, cease operating cash flow guidance for the remainder of this fiscal year.

In closing, we are confident in the fundamental strength of our business model, the resiliency of our customer base, and in the long-term shift of HR and financial applications to the cloud. We plan to operate with agility, while continuing to drive innovation to support sustainable long-term growth.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kirk Materne of Evercore ISI. Please proceed with your questions.

Stewart Kirk Materne — Evercore ISI — Analyst

Thanks very much and I hope you all are doing well. I really wanted to ask Aneel, why you jinxed fell on the long drive contest on Sunday. But, I guess, I’ll keep it to business for now. Chano, you mentioned that customers obviously deferring decisions, I don’t think that’s surprising to anybody. Is that just a matter of just business confidence and sort of managing budgets? And can you talk a little bit about whether or not that conversation is different if you’re having an HCM discussion versus a Financials discussion or it’s more — it’s pretty similar across both those product offerings?

Chano Fernandez — Co-President

On the HCM and FINS is a good question, but I would say that so far we haven’t seen one of these necessarily more or less impacted than the other by COVID. In both cases, there is significant ROI that we deliver to our customers and significant business benefits, but both of these are, as you know, very important systems and the drivers of the change vary by company and situation. So, it could be they need to have more agility or a burning platform or an executive change. And what we’re seeing our data is that, no one area either HCM or FINS is necessarily more or less impacted in the near term by COVID.

In terms of the overall — sorry, go ahead, Kirk.

Stewart Kirk Materne — Evercore ISI — Analyst

Good. Please, you go.

Chano Fernandez — Co-President

No, in terms of the overall, I think you asked about the pipeline move, if — am I right?

Stewart Kirk Materne — Evercore ISI — Analyst

Correct, yes. Thank you.

Chano Fernandez — Co-President

Yeah. Well, certainly, as we said on the prepared remarks, our pipeline has definitely moved around. And in some cases, deals push out a quarter or two, maybe in the large enterprise and really not significant or no changes in the medium enterprise. But I would say, we don’t have enough data yet to really call these accurately at this point in time. Definitely this is something that my team is carefully monitoring.

Stewart Kirk Materne — Evercore ISI — Analyst

If I can just ask one quick follow-up, you mentioned the back to the base growth was really healthy this quarter and I was just curious, given the fact that some of your customers might be pushing back bigger decisions for now, are you able to sort of toggle the sales force to focus maybe more on those back-to-base opportunities within your existing customer base? It would seem that the hit rate on those might be a little bit higher until some of the uncertainty dies down. Thanks very much for taking the questions.

Chano Fernandez — Co-President

Yeah. Thanks to you Kirk. As you know, we already did significant investments at the beginning of this year to prepare for — to cover the demand of the back to the base because we have a happy customer base, a great subset with SKU and solutions. So, definitely that demand was already increasing. So, we felt ourselves very well prepared for it, and as we said, we had a good growth in that back to base customer in Q1, but we also had the same in Q4 as well. So, we feel prepared for that market motion.

Aneel Bhusri — Co-Founder and Chief Executive Officer

If I could just add one comment to Kirk’s question. We did go through a similar environment with ’08 — in ’08-’09 and we really focused in on a couple things. One was a quick payback for customers and rapid implementation cycles where we could get HR up and running in six months and Financials maybe in a little bit longer than that. And we’re just dusting off that playbook and using it again to — for the net new business. I think that’s important to recognize now. It’s very similar to ’08-’09 from that perspective and there is a way through it.

Stewart Kirk Materne — Evercore ISI — Analyst

Thank you all.

Operator

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

Keith Weiss — Morgan Stanley — Analyst

Excellent. Thank you guys for taking the question. And I hope everybody is safe and healthy out there. This is a question for I think either Chano or Aneel. One of the things that I get asked a lot by investors is the priority for core HCM and core Financials when we get to the other side of this COVID-19 crisis. Can you talk to us a little bit about sort of the conversations you’re having with your customers on where they think sort of these HCM investments and Financials investments will fall on their kind of priority stack, if you will, once the spending opens up again, once those IT budgets start to get spent again?

Aneel Bhusri — Co-Founder and Chief Executive Officer

Well, I think first and foremost on the finance side, I think this crisis will be a catalyst for people switching from on-premise into the cloud for finance and we are already seeing the growth rates, but the growth rates are at healthy levels, but I’ve talked to lots of CIOs who said, I wish I had everything in the cloud right now. I’m struggling with my on-premise both because of the labor required and people required to be on-site and because of systems are really not very agile are flexible. And we see our customers coming up with new reports, with new work streams, all these things that they’re able to do in Workday. And so, I think it’s going to be a high priority on the finance side.

On HR, HR is going to continue to be healthy. I think what we’re going to see is a growing emphasis on the area of skills, the skills cloud, learning, talent marketplace, all the areas where we’re going to have over 30 million people unemployed, we’ve got to get these folks back to work and we got to get them the right skills and I think a lot of companies are going to be working probably alongside some of the states and local governments to figure out how to get these folks back to work and that will be right up our sweet spot.

And Chano, you want to add anything?

Chano Fernandez — Co-President

No.

Keith Weiss — Morgan Stanley — Analyst

And then plus one follow-up for Robynne. First of all, super cool of you guys to give that bonus to all the employees, I’ll hook you up with the Morgan Stanley CFO and maybe you guys could have a chat. And — but nonetheless, the full-year operating margin is still come up versus your prior expectations, definitely from what we had in our model. How should we think about like — and it makes a lot of sense, right? There is no travel going on and a lot of events are coming out of the equation. How should we think about the durability of that margin gain, of that 60%, if you will, as we move our models forward into FY’22, is that new base and then it’s going to grow from there or is this more a temporal step-up?

Robynne Sisco — Co-President and Chief Financial Officer

Yeah. That’s a great question, Keith, and it’s — given all the unknowns that we’re facing right now, it’s really hard for us to look into FY’22 at this time and we certainly do plan, as we start to see recovery, particularly in Q4 hopefully, that we will continue to invest in the business. So, I’m not sure that this is a new baseline but we certainly believe that we are showing the value of our business model and how it can leverage as we scale. But we still have a lot of important work to do and we’ve got a long-term very massive opportunity ahead of us, so we will continue to invest.

Keith Weiss — Morgan Stanley — Analyst

Got it. Excellent. Thank you, guys.

Operator

Our next questions come from the line of Heather Bellini of Goldman Sachs. Please proceed with your questions.

Heather Bellini — Goldman Sachs — Analyst

Great. Thank you so much for taking the question and hope you and your families are all doing well. I just had two. I was wondering if you could talk to us about how your salespeople and your partners are kind of dealing with lead-gen in this environment, kind of how they adopted if there is some stuff you could share with us there on how they might being creative on that front?

And then, Robynne, I know this isn’t something that you normally comment on any more, but just given the environment and your comments about 2Q and 3Q, being probably the more challenging quarters that you’re going to face, any high-level comments even about how to think about unearned revenue trends for the July quarter? Thank you.

Robynne Sisco — Co-President and Chief Financial Officer

Yeah. Heather, so I think we definitely expect that unearned will lag behind our backlog growth, right? And we’ll continue to do that. And part of that has to do with the fact that, as Chano and I both mentioned, we’re trying to be more flexible on cash, particularly for customers that have been most impacted, and Chano mentioned that a lot of his new customer negotiations, really that’s what they’re pushing on. And so, we really want to use our balance sheet to help them out during this time. And so, as you know, that will impact the billings and unearned, as well as the cash flow, and you should expect to see that throughout the rest of this year. The good news is, that actually doesn’t impact our revenue recognition profile. And so, we think it’s a good investment and that flexibility has and we believe will continue to allow us to maintain our discounting levels.

Chano Fernandez — Co-President

Heather, in terms of the — and thanks for your question and I hope you’re doing well, and keeping healthy too. In terms of your question on demand gen, our sales team obviously had to pivot during the course of Q1 to a fully virtual environment. But the reality is that, we have always had a pretty significant portion of our sales cycle that virtually anyhow, particularly the pre-sales motion and the demoing of our software. And so, what has changed is that, we have moved the entire process virtually.

In terms of what we adapted, as I said on my — some of my remarks, we adapted our messaging and areas of focus by solution and industry. And we clearly focused more on double down from those go-to-market motions that we have more confidence that would yield best returns during these times. And, obviously, you can think focus on more in some of the surging industries, or some solutions like it could be Planning or Prism, Learning or Scout, some of the motions that we think will produce better results.

Heather Bellini — Goldman Sachs — Analyst

Great. Thank you.

Operator

Our next questions come from the line of Mark Murphy of J.P. Morgan. Please proceed with your questions.

Mark Murphy — J.P. Morgan — Analyst

Yes, thank you. I’ll add my congrats. I am interested in how you would characterize the environment so far in the month of May just in terms of generating pipeline and booking new business? Should we think of that as being kind of a night and day difference versus late March, early April? Or is it something you’d call directionally better, but it will still kind of take some time to get back to the original plan? So I’m just trying to understand if you think it’s improving or degrading kind of between late March and the month of May.

Aneel Bhusri — Co-Founder and Chief Executive Officer

Chano?

Chano Fernandez — Co-President

Hey, Mark, it’s early days but we are still below our normal engagement levels and also we do all our normal pipeline builds. But there has been a significant uptake in engagement and positive sentiment relative to, I would say, four weeks ago. So, much of our activity, as I said, is now focusing a set of industries where we’re seeing the greatest near-term demand but we also continue dialogue in verticals that are more impacted by COVID to ensure that we’re well positioned as we emerge from this environment, Mark.

Mark Murphy — J.P. Morgan — Analyst

Okay. And then, as a follow-up, Robynne, I’d say it’s understandable that you are withdrawing the subscription backlog guidance in the back half. But that said, just considering that you still landed essentially within the original Q1 guidance for subscription backlog, I think surprisingly and during a real chaotic period of time. Do you see high odds that that backlog growth is going to end up, say, materially below this type of glide path that you’re on? Or is the confidence a little better than that, but it’s just kind of such a wide range of potential outcomes at this point that it’s hard to know?

Robynne Sisco — Co-President and Chief Financial Officer

Yeah. Mark, it’s a pretty wide range. Let me look…

Aneel Bhusri — Co-Founder and Chief Executive Officer

Well, let me start with this. I think what everybody needs to recognize is that, no one knows how it’s going to play out over the next couple quarters. We don’t know if there’s going to be another outbreak. And so, everything that we are saying is our best information at this point in time, Keith. I mean, if you know how it’s going to play out, please let me know.

So, with that, Robynne, jump in, but I think that has to be the backdrop on everything right now.

Robynne Sisco — Co-President and Chief Financial Officer

Yeah, that’s right. And as you know, the backlog is tied to net new, it’s also tied to renewals and then it’s tied to duration. And we really haven’t seen — we don’t have enough data yet to predict those and how that could play out over the back half of the year, because we just have far less visibility.

Aneel Bhusri — Co-Founder and Chief Executive Officer

Sorry, I didn’t realize that was Mark. Sorry, Mark.

Mark Murphy — J.P. Morgan — Analyst

Yeah. Thank you, Aneel. You can call me Keith, it’s fine.

Aneel Bhusri — Co-Founder and Chief Executive Officer

I called you Keith, I hope you are well.

Mark Murphy — J.P. Morgan — Analyst

Take care. You too.

Operator

Thank you. Our next questions come from the line of Kash Rangan of Bank of America. Please proceed with your questions.

Kasthuri Rangan — Bank of America Merrill Lynch — Analyst

Hey, thank you very much. I’m curious that the net new ACV growth of 50% within your base. How does that compare to recent quarters and how sustainable is this? And also curious what kinds of products are you having the biggest hit rate with — within the installed base? Thank you so much.

Aneel Bhusri — Co-Founder and Chief Executive Officer

Well, I’ll let Chano answer the first part. I would say that, it’s a lot of the — not surprisingly the customers that are adding are adding on to core HR and core finance. In this environment and Tom can comment on it, both Planning and Scout RFP have been very strong solutions. People are really struggling with the legacy planning tools. And, I mean, I even look at Workday, how many plans we generated in the last couple months because no one knows how this is all going to shake out.

And with Scout RFP, it’s a quick implementation, you can get in control of your spend in a very global and unified way, and that’s another thing that’s been doing well. But maybe I’ll let Tom comment and then Chano comment.

Tom Bogan — Vice Chairman

Yeah. Thanks, Aneel. That’s right. What we’ve seen is a real uptick in interest in planning. Companies are running, as you would expect, significantly more scenarios, as Aneel said. I think there was a period of time in March, we saw about a 30x increase in the terms of the number of scenarios that our customers are running. So it’s not surprising. So I think the importance of planning, and particularly cloud-based planning solutions, where the whole team can be connected holistically, has resonated with customers. We’ve seen tremendous interest in Workforce Planning. Everybody is thinking through what the next-generation workforce looks like. There’s obviously fundamental changes being driven to both location and the way we work, and that requires a focus on Workforce Planning.

And then, as Aneel mentioned, I think we’ve also seen a lot of interest in our sourcing products, because in periods like this, companies are extremely focused on ways that we can save money. As Chano mentioned in the script, we had the — we saw the largest deal ever in Scout’s history this quarter. So I think there’s a lot of resonance with customers, and we’re seeing that uptake. Chano?

Kasthuri Rangan — Bank of America Merrill Lynch — Analyst

Just listening to you Tom, it sounds like that or maybe this is the case or maybe it’s not the case. The shift to cloud-based financials could accelerate post-COVID. Is that right or too optimistic?

Tom Bogan — Vice Chairman

Well, I think generally — and there has been a lot written about this period of time accelerating trends that were already in place. And certainly, the trend towards cloud-based applications and the need to — and how effective it is during a period of time like this where people have to work remotely. As Chano and others have stated, there is uncertainty in the short term in terms of what the uptick in terms of adoption of enterprise applications will be in the short term. But there is no question in the intermediate and longer terms that there will be tailwinds towards the adoption of cloud-based planning and cloud-based applications more generally. Chano?

Chano Fernandez — Co-President

Thank you, Tom. Kash, we’ve seen the 50%-plus new ACV growth in the back-to-base motion in Q4 and in Q1. That’s the data we have disclosed so far. And I think this is an outcome of A, we having a happy customer base and certainly, the investments we’ve done on the go-to-market motion to cover that our customer base and as well, of course, the increase on broader solutions set and deeper one that solution offering that we have today at Workday.

Operator

Thank you. Our next question is coming from the line of Brent Bracelin of Piper Sandler. Please proceed with your questions.

Brent Bracelin — Piper Sandler — Analyst

Thank you and good afternoon. I wanted to follow-up on the Microsoft relationship. I know you guys first announced the global partnership back in the summer of 2016. So, my question here. What — how is the Microsoft relationship evolved over the last three-plus years and maybe the new scope of what you’re working with them on today?

Aneel Bhusri — Co-Founder and Chief Executive Officer

So, we’ve had a great partnership with Microsoft for a long time, really around Office 365 and where we play around teams and this just builds on that. Adding Azure into the mix right now just for Adaptive, but that’s — it’s also the first time that Microsoft has become a Workday customer, although LinkedIn has been a Workday customer for quite some time. So, it’s just adding — it’s just the natural progression of a partnership. I think Microsoft is a great company, Satya is a great CEO, we’d like to do more with them.

Brent Bracelin — Piper Sandler — Analyst

Awesome. And then just a quick follow-up relative to the concessions that you’re giving some of the most heavily impacted customers. I know, Robynne, you talked about the base minimum not really being up for negotiation every three to five years. But I just wondering, are you proactively looking to kind of work with these customers that are impacted, or is it something where it’s non-negotiable and you really don’t really see a change there until that is up for renewal.

Robynne Sisco — Co-President and Chief Financial Officer

Yeah. Brent, I mean, we’re taking all of our customer requests on a one-by-one basis, case-by-case. But really the vast majority of requests we’re getting are long payment deferrals, not renegotiating contracts but just deferring payments. So, we have not really run into an issue with customers trying to renegotiate base levels at this time, although certainly that could be the case for some that are most impacted by this.

Brent Bracelin — Piper Sandler — Analyst

Got it. Makes sense. Thank you.

Operator

Our next questions come from the line of David Hynes of Canaccord. Please proceed with your questions.

David Hynes — Canaccord Genuity — Analyst

Hey, thanks very much guys. Congrats on the results. Maybe I’ll take the other partnership question. Aneel, can you talk a little bit about — more about Work.com? What you’re doing with Salesforce? What it could mean for Workday’s business and maybe how you see that opportunity evolving over time? Can you guys hear me?

Aneel Bhusri — Co-Founder and Chief Executive Officer

Sorry. Mark has been driving the contact management piece for some time around contact tracing. And we actually had started that thinking and that work all the way back to SARS. So — and the Salesforce application at the end of the day is a content management — sorry, contact management application. So, it’s really well suited to that. Mark has the same goal, and Salesforce has the same goal that we do. We want to enable our customers to get their people back to work safely. And so, what we’re doing is, we have all the data about employees, locations, what they’re learning in terms of the learning content, and Salesforce has a whole set of things with Work.com around contact tracing, track and skills, shifts. And we’re just making sure that the two technologies are completely synced so customers don’t have to reconcile between the two. And so, if you’re a joint customer, hopefully, this solution is really going to help you manage your way back into the office. And I think, as you all of you know on the phone, I mean, Salesforce has been one of our best partners, if not, our best partner, almost since the day we started Workday.

David Hynes — Canaccord Genuity — Analyst

Sure. Okay. That’s helpful. And then maybe a follow-up for Robynne. So, a few folks have hit on back to the base strength in the Q&A. And I just want to tie that into net revenue retention. Gross retention has always been really strong, right, at 95%. But on the net side, is the consistent commentary about north of 100% just out of practice, or are you actually seeing improvement there? And, I guess, could you get any more granular on a number for net revenue retention?

Robynne Sisco — Co-President and Chief Financial Officer

Yeah. The way we actually measure net revenue is we only count add-on sales at the renewal point. And so, now that we’re really focused more on selling back into the base and that’s happening during renewal cycles, but it’s happening a lot more than ever outside of renewal cycles and that’s not captured in the net retention rate. So, I think it’s — we’re actually looking at a better way to measure it now that we’re doing so many add-ons outside of renewals and we’ll probably make a change there over the coming quarters. But for now, I would just think of it as, as long as the way we are calculating, it remains over 100%, that’s great news. And then on top of that, we’re selling a lot more into the base outside of those renewal cycles.

David Hynes — Canaccord Genuity — Analyst

Right. Okay. That makes a lot more sense. Thanks, guys.

Aneel Bhusri — Co-Founder and Chief Executive Officer

DJ, I’m going to ask Pete Schlampp, our Head of Applications to weigh in on the Salesforce partnership, too. He’s closer to what we’re actually doing from a product perspective. Pete?

David Hynes — Canaccord Genuity — Analyst

Sure. That’d be great.

Pete Schlampp — Executive Vice President, Product Development

Yeah. Thanks, Aneel. Good question, David. As I think about Salesforce and Workday, Salesforce has all this rich information about the workplace, and Workday has…

Aneel Bhusri — Co-Founder and Chief Executive Officer

Pete, your — I think your volume is on — not on.

Pete Schlampp — Executive Vice President, Product Development

Better?

David Hynes — Canaccord Genuity — Analyst

Got you.

Aneel Bhusri — Co-Founder and Chief Executive Officer

But you need to mute Zoom.

Pete Schlampp — Executive Vice President, Product Development

Thank you. Got it. So, as I think of the two, Salesforce has the data about the workplace and Workday has the data about the workforce. And some of the most rich data that we have is, data about skills. And so, as companies are going through these big transformations that are happening with workers, with, all of a sudden, some demands in certain areas that they didn’t have before and vice versa, being able to make those transitions quickly and use that skill data is so essential. So, when we think about getting companies back to the workplace safely, securely and their people back safely and securely, it’s about the data and bringing these two datasets together, whether that’s in Salesforce’s, in their Command Center, in the Work.com Command Center, or whether it’s within the Workday application set itself. And that’s how we’re going to really start things off is with the data integration and then develop more applications as we go forward.

David Hynes — Canaccord Genuity — Analyst

Okay. Got it. Makes sense. Thanks for all the color.

Operator

We have time for two more questioners. The next question comes from the line of Scott Berg of Needham & Company. Please proceed with your questions.

Scott Berg — Needham & Company — Analyst

Hi, everyone. Thanks for taking my question. I only have one here in essence of time. Aneel or maybe Chano, or probably, Aneel, just wanted to see if you had some additional comments on Workday Extend now that it’s finally available in GA? Trying to understand the revenue model of it going forward, kind of, how has it evolved today versus the initial announcement two years ago? And do you envision customers or other companies building commercial apps that they could actually sell off of it, like what happens on Force.com?

Aneel Bhusri — Co-Founder and Chief Executive Officer

Well, I’ll take a quick crack, then I’m going to send it over to Pete. And hopefully, Pete gets his technology right this time.

Pete Schlampp — Executive Vice President, Product Development

Sure.

Aneel Bhusri — Co-Founder and Chief Executive Officer

Teasing Pete. So, Workday Extend is really focused on extensibility for our customers. And we’re not looking to open up an ISV community to build commercial applications. Our customers are getting great value from Extend. I mean, we’ve had Extend in limited general availability for several quarters. And so, we really got a good handle on the used cases. And now, what we’re seeing customers doing is building, I call it, more mini apps or an extensions. They’ve done a lot of it around COVID-19, whether it’s to track essential workers, to track — one of our customers is tracking cases of COVID around the globe for manufacturing plants. So, it’s really whatever that our customers wants to do and extend our business model, but definitely not ISVs. And Pete, what else should we add to that?

Pete Schlampp — Executive Vice President, Product Development

Thanks, Aneel. You think I have the mute thing figured out here after working from home for the last two months. The — really I think the success we’ve had so far I’d like to highlight, 50 — over 50 customers using it, over 90 different solutions built on the platform already, so we’re going into this GA period with a lot of existing momentum. As we think about the products, we think about really extending the entire use — the entire surface of the Workday platform, all the applications that we have in Workday and then enabling our customers to extend those. And so, we continue to open up new surface areas. And I guess, that gives the different possibilities that customers can develop on top of the funnel.

Aneel Bhusri — Co-Founder and Chief Executive Officer

And, I guess, just to come back to the revenue question or the bookings question, I still wouldn’t expect much for fiscal year ’21, but I do think it can be a decent contributor in fiscal year ’22 and beyond, and a high growth contributor.

Scott Berg — Needham & Company — Analyst

Excellent. That’s all I have. Thanks for taking the question.

Operator

Our next questions come from the line of Brian Schwartz of Oppenheimer. Please proceed with your questions.

Brian Schwartz — Oppenheimer & Co. — Analyst

Yeah, hi. Thanks for taking my question. Chano, I had a follow-up question. I think it was to Heather’s about the marketing funnel on the lead generation. You commented on what the timing could be for these sales cycles. But can you shed light on what you are seeing in terms of the values? The deal value is holding up at a similar rate as you’ve seen in the past as they are progressing through the funnel towards closing. Thanks.

Chano Fernandez — Co-President

Thank you for your question, Brian. I would say, it’s very early days. And we’ve seen no shift of significance to comment on. Certainly, when I monitor the pipeline coming in for either, I know, later on to this year or new pipeline coming in from FY’22. At this point in time, we have been — and we’ve managed as well to qualify some significant or large deals in terms of value, even on the environment we are into. Of course, then we need to be able to progress those deals and finally closing, but nothing to highlight in terms of change on those deals either being consider that they are shrinking or are they having less duration or any kind of things like those, not really. We need more — definitely a bigger trend, and more data points during the rest of Q2 and Q3. But right now, that’s what I can share, Brian.

Brian Schwartz — Oppenheimer & Co. — Analyst

Thank you very much.

Operator

[Operator Closing Remarks]