Earnings Call Transcript - WDAY Q4 2021

Operator, Operator

Welcome to Workday's Fourth Quarter and Fiscal Year 2021 Earnings Call. I will now pass it over to Mr. Justin Furby, Vice President of Investor Relations. Please proceed.

Justin Furby, Vice President of Investor Relations

Welcome to Workday's fourth quarter fiscal 2021 earnings conference call. On the call, we have Aneel Bhusri and Chano Fernandez, our Co-CEOs; Robynne Sisco, our President and CFO; and Pete Schlampp, our Executive Vice President of Product Development. Following prepared remarks, we will take questions. Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast. 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 impact of the ongoing COVID-19 pandemic on our business and global economic conditions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Also, the customers’ page of our website includes a list of selected customers and is updated monthly. Our first quarter quiet period begins on April 16, 2021. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2020. With that, I will turn it over to Chano to share go-to-market highlights in the quarter. He will then turn it over to Aneel, who will provide updates on the strategy and innovation front, and then Robynne will close with our financials and guidance. We will then open the line up for your questions. Over to you, Chano.

Chano Fernandez, Co-CEO

Thank you, Justin. I hope all of you joining us today are in good health and that your families are doing well. It has been a challenging few months during the pandemic, but there is significant cause for optimism. We had very strong growth through the year as companies increasingly realize that HR and finance are the true backbone of their digital transformation. This realization is leading to significant pipeline improvement. And as we enter FY22, we are well positioned to drive accelerated new bookings growth. Our solid results were driven by another quarter of strong execution and high conversion rates. We once again drove strength in North America, with vertical standouts in education and government, healthcare, and the professional services market. Both the large and medium enterprise teams outperformed, driven by continued momentum in our installed base efforts, as well as improving performance in our net new business. The strength in our HCM solutions was a critical contributor to our Q4 performance with notable customer additions in the quarter, including Nike, ABB, Anthem, Cognizant Worldwide, Cox Enterprises, Ferrovial Corporacion, First Rank Bank, Laboratory Corporation of America, and Peakon paid retailers. We also saw significant uptake across our newer solutions that support the office of the CHRO, including People Analytics, Alpine Journeys, and Talent Marketplace. By leveraging these applications, organizations are addressing and fundamentally rethinking important questions like how to end institutional bias, how to reshape the workforce to meet today's demands, and how to spot engagement risks and execution line responses. The FINS plus solutions also had a strong quarter and continue to represent an increasing percentage of our new business mix. We have several strategic core FINS wins in Q4, including a Fortune 500 win of Franklin Tempesto, which included Accounting Center, Minnesota State Colleges and Universities, Sentry Insurance, the University of Maryland, College Park, St. Jude Children's Research Hospital, and Vanderbilt University Medical Center. We are excited by the accelerated pipeline of FINS opportunities, including emerging use cases with enterprise financing product-based industries like retail and manufacturing, where recent wins include one of the nation's largest pizza chain, Zoomies, and exporting goods retailer with over 1,000 stores. And we once again saw solid demand for our suite of products that support the office of the CFO and Chief Procurement Officer, including Workday Adaptive Planning, Prism Analytics, as well as Workday Strategic Sourcing and our broader Spend Management solutions. Our installed base team also had another solid performance with more than 40% growth in new ACV bookings in Q4 against a very difficult comparison, and over 50% growth for full year FY21. This team's execution was critical in driving growth over the past year, and we remain very optimistic that with an ever-expanding product portfolio, we can continue to increase customer wallet share in the years ahead. Our customer success and services organization also executed incredibly well, taking more than 250 HCM and FINS customers live in the quarter. Ensuring customer success has always been a core value for us at Workday, and I'm incredibly proud of how our services team and our partners have responded in this environment, helping to get a record number of workers on the Workday platform in FY21. Personally, one of the Q4 highlights was around our pipeline efforts. As we have described over the last two earnings calls, our pipeline generation has been improving since the onset of the pandemic. I am pleased to say that trends continue and accelerated in Q4 with record pipeline generation across all three regions. We still see some pipeline impact from COVID-impacted industries, but those headwinds appear to be lessening. The pipeline strength that we have seen, along with the stabilization in new business demand, drives our expectation that new business growth will accelerate in FY22. On the personnel side, I wanted to congratulate my good friend Doug Robinson on his recent promotion to EVP of Global Sales. Doug has been incredibly impactful over his 10-plus years at Workday, most recently serving as Head of North America Sales with an impressive track record, where he played an instrumental role in helping us win some of the world's biggest brands. In his new role, Doug will lead our global sales efforts, reporting directly to me, helping us to accelerate our FINS momentum while continuing to expand our international footprint. Congratulations, Doug, and I look forward to our continued partnership. Finally, before handing it over to Aneel, on behalf of the entire Workday leadership team, I would like to express thanks to all of our teammates across the globe. Your response to this challenging environment has been nothing short of amazing, and your resiliency has set us up for a strong year ahead. With that, I will turn it over to our Co-Founder and CEO, Aneel Bhusri. Over to you, Aneel.

Aneel Bhusri, Co-CEO

Thanks, Chano, and thanks, everyone, for joining today's call. Last August, we shared the exciting news of Chano's promotion to Co-CEO. In six months in, I couldn't be happier with the positive impact of this change. Chano has always been at the center of our go-to-market and customer-facing activities, allowing me more time to focus on our product strategy and innovation. This increased focus could not have come at a more important time. Our innovation cadence has accelerated, and we're excited to continue to bring market-leading innovations to support our customers. Chano touched upon our successes in expanding our presence within our customer base. A big part of the success was driven by the introduction of new products. Indeed, in the last three years, we have delivered 50% more in terms of monetizable solutions compared to the prior three years. As the trends around digital transformation and acceleration continue unabated, and with the increasing gap of what traditional legacy ERP can deliver and what our customers need, Workday finds itself in a unique position to help companies close this gap through a new class of enterprise management cloud, and to truly serve as the backbone of their digital transformation. We are enabling digital transformation journeys for more than 8,000 customers, including over 3,500 core HR and finance customers, and we're excited to go further with them on this journey and to embark on a new journey with our next wave of customers. This concept of accelerated business change has been a core design principle since we founded the company. Workday enables organizations to turn transactional silos into a complete unified picture, hardwired processes into responsive automation, and periodic into real-time and continuous planning, execution, and analysis. Our solutions aren't simply providing and accelerating existing processes, but we're helping thousands of companies fundamentally rethink the way they run their business. Many of these customers have relied on Workday to help them transform their organizations, including hundreds of customers that went live in Q4, such as Caterpillar, Comcast Cable, Cisco Systems, PF Changs, and Spectrum Health. The world of finance is also being significantly impacted by the trends surrounding digital transformation. Listening to our customers and how they were dealing with all this change, we decided to design and build Accounting Center, one of our most exciting products in recent memory and one that is now generally available. Built on an analytics engine, Workday Accounting Center ingests, enriches, and transforms operational transactions into accounting. Customers can gain insight into rich accounting detail with complete data lineage for drill back for source transactions, empowering them to report faster and reduce time to close. With this new offering as part of a broader suite of our enterprise finance solutions that includes Prism Analytics, Planning, and Consolidations, we're now able to address a broader part of the finance market, including product-based industries such as retail and manufacturing. These industries must maintain their existing ERP and industry-specific on-premise systems but want to use Workday to bring corporate finance functions into the cloud. It's one of the several emerging and exciting opportunities that grows our addressable market within the financial management solutions marketplace. On the ATM front, I'm proud to say that we are supporting customers in their efforts to prepare for a post-pandemic world. In Q4, we announced a vaccine management solution that provides leaders with insights to create a healthier workforce and a safer workplace. We've also seen strong interest in other timely solutions, such as VIBE Index and VIBE Central, which we announced last year, and we already have more than 500 customers live. These customers are now equipped to better view and analyze the diversity and representation of their workforce in one centralized place. One area in HCM that has accelerated during the pandemic is employee engagement. With so many companies dealing with remote workers, getting a sense of how employees are feeling about the organization, their manager, and their work became paramount. While Workday had been focused on employee engagement for several years and had introduced capabilities such as pulse surveys, we realized we had to offer more capabilities to our customers. That insight led us to Peakon, one of the acknowledged market leaders in this fast-growing space and a company built around a machine learning-first approach. By bringing our product offerings together, Peakon will allow Workday to greatly enhance our capabilities across several key areas, including understanding the voice of the employee, providing more robust capability in agile performance management, and becoming an engine to further our VIBE solutions as the most comprehensive on the market. I'm looking forward to welcoming the more than 250 Peakon employees, who will soon become workmates, including Co-Founder and CEO, Phil Chambers, who will continue as CEO of Peakon and will report directly to Tom Bogan. We're all excited about our future together. As we look forward to Workday's next chapter, I'm excited by the opportunity that is in front of us, and I'm very grateful to our employees for their dedication to innovation and customer success during these very challenging times. With that, I'll turn it over to our President and CFO, Robynne Sisco. Over to you, Robynne.

Robynne Sisco, President and CFO

Thanks, Aneel, and good afternoon, everyone. As Chano and Aneel mentioned, we executed incredibly well in the fourth quarter, demonstrating the strategic and mission-critical nature of our solutions and the resiliency in our business during these unprecedented times. Subscription revenue was $1.01 billion in Q4, our first-ever quarter over the $1 billion mark, representing growth of 20%. For the full year, subscription revenue was $3.79 billion, growth of 22%. Professional services revenue was $125 million for Q4 and $530 million for the full year. Fourth quarter revenue outside the US was $283 million, representing 25% of total revenue. Subscription revenue backlog was $10.09 billion, growth of 22% and our first-ever quarter above $10 billion in backlog. The outperformance was driven by better than expected new bookings against a very difficult comparison in addition to strong renewals, with gross and net retention rates over 95% and 100% respectively. Backlog also benefited from a notable lengthening of average contract duration for both new customers and renewals. Subscription revenue backlog that will be recognized within the next 24 months was $6.53 billion, growth of 19%. Our non-GAAP operating income for the fourth quarter was $211 million, resulting in a non-GAAP operating margin of 19%. For the year, non-GAAP operating income was a record $867 million, or 20% of total revenue, up more than 650 basis points from FY20. This expansion was driven by continued scale in efficiencies, a reduced pace of hiring and other COVID-related moderation of expenses, including reduced spend for travel and events. Operating cash flow for Q4 was $554 million, growth of 86%, bringing our full year operating cash flow to $1.27 billion, 47% growth. Record cash flow results were driven by strong cash collections as well as substantial operating margin expansion. Our total workforce at the end of the year stood at more than 12,500 employees, and we have begun to ramp up hiring for FY22. Overall, we are very pleased with the strong company-wide execution in our seasonally most important quarter. Turning now to guidance. Although the environment remains uncertain, we are encouraged by our momentum in recent quarters and have seen an improvement in both close rates and pipeline growth. We're cautiously optimistic that the environment will continue to improve as we move through FY22, driving a faster pace of digital transformation initiatives across HR and finance. We are focused on driving accelerated bookings growth this year which we expect will ultimately result in a faster pace of future subscription revenue growth. When thinking about our subscription revenue growth for FY22, however, keep in mind that while we executed well this past year, we still experienced headwinds to new bookings. As I mentioned in last quarter, these headwinds have implications for this year's subscription revenue growth, given the lag effects caused by subscription revenue accounting rules inherent in SaaS businesses. With that context, we expect FY22 subscription revenue to be in the range of $4.38 billion to $4.40 billion, representing 16% year-over-year growth. This guidance includes the pending Peakon acquisition, which we anticipate closing later this quarter and is expected to contribute less than 1 percentage point to our subscription revenue growth in FY22. For the first quarter of FY22, we expect subscription revenue to be between $1.018 billion and $1.020 billion, representing 16% year-over-year growth at the high end. Keep in mind that because of the leap year in FY21, we have one less day of revenue recognition in Q1 than we did in the year ago period, representing a nearly $12 million impact to Q1 subscription revenue and affecting both our sequential and year-over-year growth rates. We expect subscription revenue to sequentially increase from the previous quarter by just under 6% in Q2 and approximately 4% in Q3 and 4.5% in Q4. From a backlog perspective, last year we saw a lengthening of overall contract duration, providing more predictability in our future revenue while also adding to total backlog growth during FY21. While we have historically guided to total backlog, given that variations in contract length are difficult to forecast and can impact total backlog growth by several percentage points in either direction, we now feel it's appropriate to guide to 24 month backlog, which will help isolate fluctuations in contract duration. When considering 24 month backlog, keep in mind that the two primary drivers of growth are net new bookings and the timing of renewals. For FY22, we believe net new bookings will have a positive impact on backlog growth given our expectation of new business reacceleration. When we look at the historical impact of renewals on backlog growth, we have consistently seen growth each year in the amount of ACV up for renewal, making renewals a positive contributor to backlog growth. In FY22, however, the ACV up for renewal is relatively flat compared to FY21. This dynamic is purely a function of the mix of historical contract lengths but will serve as a headwind on both the 24 month and total backlog growth for this fiscal year. From what we see today, this headwind will not persist beyond FY22 and we expect the renewal base will grow again in FY23. With all this as context, we expect the 24 month backlog to grow approximately 18% in Q1 of FY22. We're expecting professional services revenue to be approximately $139 million in Q1 and $590 million for the full year. This represents a return to growth in professional services revenue, driven by our expectation of improved new business trends. 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, this past year, we demonstrated the long-term scalability inherent in our model. Investing for growth remains priority number one; however, in FY22, we expect to increase our pace of hiring across the company, but with a focus on sales, marketing, and product, specifically targeted at accelerating pipeline growth and advancing our strategic product roadmap. Included in these investments are increased marketing and brand campaigns as well as significant planned growth in quota-carrying rep capacity. With this context and an estimated 100 basis point dilution from Peakon, we expect our FY22 non-GAAP operating margin to be 17%. 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 26 and 24 percentage points lower, respectively, than the non-GAAP margins. Further, we expect our stock-based compensation expense as a percent of revenue will decline by approximately 1.5% this year, starting a multiyear trend of improvements in this metric. The FY22 non-GAAP tax rate remains at 19%. We expect operating cash flow in FY22 to be approximately $1.2 billion, down slightly from record levels in FY21, driven by the ramp in growth investments. We expect to invest approximately $170 million in Q1 of FY22 for owned real estate investments as we finalize the purchase of five buildings at our Pleasanton campus that we currently lease. This purchase is important to our headquarters strategy and affords us control of our core campus buildings. We expect to spend roughly $270 million in FY22 to support all other capital needs. This includes investments in lease facilities, corporate IT infrastructure, and customer data centers to support our continued business expansion. These data center investments, along with other investments we're making in our technology and platform, including our entrance into the federal market and our expanded use of the public cloud, are expected to reduce our non-GAAP subscription gross margins to slightly under 85% in FY22. And finally, I'll close by thanking our amazing employees, customers, and partners for their continued support and hard work, which allows us to deliver great results during an unprecedented year. We are more confident than ever in the long-term opportunity ahead and look forward to keeping you apprised of our progress throughout the year. With that, I'll turn it over to the operator to begin Q&A.

Operator, Operator

Our first question comes from Kash Rangan with Goldman Sachs.

Kash Rangan, Analyst

I'm trying to reconcile the strength in the quarter. Congratulations, that's a fantastic quarter. You've seen accelerating backlog growth for the past four quarters, and you're talking about accelerating pipeline growth going forward. Yet, I can really understand the new business bookings were somewhat challenged. But I'm also trying to reconcile all the positives against the outlook of fiscal '22 subscription revenue growth here. Maybe if you could just shed a little bit finer light on how we should expect the shape of fiscal '22 to unfold? And obviously, the point is well taken that getting out of fiscal '22 into '23, we could see even better trends. So can you just paint the shape of the recovery? And where do we bottom out in terms of subscription revenue growth, when are we likely to see the acceleration based on all the good things we're hearing from you guys? Thank you so much, and congrats again.

Aneel Bhusri, Co-CEO

I'll take the first pass, which is the metric that we run the business on at Workday is growth in bookings. And we're really excited about what we see over the next 12 months. Subscription growth bookings is a derivative of that number. And as you know, subscription accounting is based on multiple years factoring into that. So I wouldn't look too much at subscription gross bookings. And I would try to figure out what we're actually doing in this next year, which is a reacceleration on the fiscal front. And then maybe I'll ask Chano and Robynne to add a few comments to that.

Robynne Sisco, President and CFO

So as you know, our subscription revenue this year is really a direct result of the headwinds to that new business that we experienced last year, and we've been previewing this the last couple of quarters. So that's an important point. I'd also point out that we've been saying for a while now that our goal has been to flatten the declining growth curve and then ultimately reaccelerate. And as you can tell by the fact that our Q1 revenue guide growth is the same as our full year, this is the year we expect to flatten that curve, which is a really positive thing. And then to Aneel's point, if we can reaccelerate the bookings growth, which we absolutely believe we can, then that will ultimately lead potentially to subscription revenue acceleration. But there's a lag there, so it's going to take some time.

Operator, Operator

Our next question comes from the line of Mark Murphy with JP Morgan.

Mark Murphy, Analyst

Great to hear all the positive news. I'm wondering if you can provide any insight into the internals of the financials business the last two to three quarters. Is it safe to assume that the bookings mix of the core general ledger softened up a bit just because of macro uncertainty, and maybe that pivoted more toward planning and scout and those other areas? Just trying to understand the magnitude of any shift there. And then moving forward, what do you think is the main catalyst that a finance team is focused on to say, now we're looking at the right conditions to modernize the general ledger and maybe bite off a bigger chunk that would give you a tailwind?

Aneel Bhusri, Co-CEO

Let me just cite some Gartner data that we got a few months ago, and I think it's instructive for how the market is working today. So they let us know that core accounting or core finance inquiries were down 14%. Core planning inquiries were up, I think, close to 30%. And as the pandemic eases, what they also said was that while many of the core accounting projects were going to be delayed, the ones that were in '23 and '24 and '25 were getting pushed forward because people realized that they needed to start on that digital transformation journey for financials. And so while it's been a tough time for financials during the pandemic, I actually think from here on now it's going to get accelerated. But I really want to let Chano comment on this.

Chano Fernandez, Co-CEO

FINS is certainly a key part of the reacceleration story, Mark, and we are seeing more of these opportunities coming to market. And not only did we see improvements in our FINS business in Q4, several strategic wins that we mentioned, but we also have solid FINS pipeline growth as well. But it is broader than core FINS, as you’ve highlighted. It is a broader solution set, and we're selling into the office of the CFO, which also includes spend management, analytics, and our planning solutions, as Aneel was highlighting. So we're really meeting our customers where they are in the journey. And there are emerging opportunities to our entire enterprise finance solution, which leverages Prism and Accounting Center, where we're now better positioned to go after product-based industries like retail and manufacturing, and that opportunity we did not have before. So we're widening our addressable market.

Aneel Bhusri, Co-CEO

If I could just add one more thing. We had a business plan going into the year pre-COVID. And without going into the details, I can't go into the details of how close we were, but we were in shouting distance of our original plan around our overall business. If you would have told me that in April of last year, I would not have believed that. It's a great testament to our team but also the fact that digital transformation is accelerating and the folks that were not on cloud platforms realize they needed to be. It's one of the drivers of our optimism going forward. Thank you.

Operator, Operator

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

Keith Weiss, Analyst

It's encouraging to see that momentum is returning to the business. Chano, I think this question is for you. This quarter, your team experienced strong durability in upsell, increasing new annual contract value by over 40% year-over-year. If I'm correct, this is the first quarter you're comparing against a particularly challenging result where you reported a 50% increase in the previous quarter. Can you discuss whether that level of strength is sustainable or if it could continue throughout the upcoming year? Can we expect to see consistent growth from the upsell approach? Also, do you have an estimate of what percentage of the overall new business that currently represents?

Chano Fernandez, Co-CEO

As we highlighted, we had another fantastic quarter with over 40% growth in add-on sales, making it 50% for the whole year. That was driven across many different products, including core FINS, Financials, Workforce Planning, Prism Analytics, Learning, and Workday Strategic Sourcing. Some of these were products as well as contributing, like Accounting Center, People Analytics, Extend, and Health also contributed especially in the last quarter as those products were earlier in the year. We see nice strength in pipeline build from our store-based teams. There is a lot of momentum on this effort as we enter into FY22. This is certainly an area where we are strengthening our investments, as Robynne is commenting with regard to our investments in what are carriers. In terms of the mix, it is definitely becoming a more significant contributor to our new business in FY21, coming from upsell and cross-sell. We expect that over the medium term, our growth will become increasingly balanced between new and installed base sales. We have a lot of emerging opportunities that will accelerate this year, and we're seeing signs of that in the pipeline as well, Keith.

Robynne Sisco, President and CFO

I understand the pressures on operating margins as we head into the upcoming year. There is also an increase in spending related to subscription revenue that is reflected on the balance sheet rather than in real-time figures. Additionally, there was travel and entertainment spending that did not occur in FY21 but could happen in FY22. Can you clarify how much of the increases are attributed to the first factor versus the second, or more specifically, what impact the return of travel and entertainment spending has had? T&E, we don't expect it to really come back until near the end of the year, Keith. Even though we're not quite sure exactly, we don't believe it's going to come back 100%. So we expect that pace to continue to be slower. So we really are focusing more when you look at increases in the spending around headcount. We were relatively flat in hiring last year. We did some strategic hiring; we're relatively flat. We're going to be hiring now across all areas of the company with, as I mentioned, a specific focus on investments in sales as well as in product to take advantage of the great opportunity that we see in front of us. We're going to spend more non-headcount-wise in marketing, which we think now is the time. We've seen great momentum in pipeline generation. We think we can help that out by turning up the dial on operating spend. We're also making investments in infrastructure, technology, and data centers, really just across the board that indicates amazing growth opportunities ahead of us, and now is the time for us to invest towards that.

Keith Weiss, Analyst

So this is subscription model, right? The subscription line reflects what happened last year in terms of billings and deferred revenue buildup, but you need to invest this year for a better demand environment. That mismatch—that's what's pressuring your margins in the year ahead?

Robynne Sisco, President and CFO

That's exactly right. Your investments always have to take place before you're going to see the impact in your subscription revenue line. If you take out the impact of Peakon of 100 basis points, we're largely back on that trajectory we were on before last year. So we’re just getting back to business and back to normal, and we feel really good that now is the time to make those investments.

Operator, Operator

Our next question comes from the line of Kirk Materne with Evercore ISI.

Kirk Materne, Analyst

Congrats on the result, and that's great to hear about the pipeline builds going into this year. Along this line, Chano, I was wondering if you could just talk a little bit about the international market opportunity. What you've seen in those theaters, and maybe also where you think core FINS is internationally? Obviously, the US saw HCM take off first and then since it’s been sort of trailing. I'm kind of curious whether or not core FINS can land at more of—at the same time, maybe not the same accounts, but at the same time or proportionally in some of these international markets that are a little bit smaller? Thanks.

Chano Fernandez, Co-CEO

As you know, we are much earlier days in penetrating international markets relative to where we are in the US, but we see a big opportunity in the rest of the world. We are very optimistic around this opportunity and what it means for us. I think we also saw a bit more impact from COVID in the rest of the world market than we have seen here in the US. I think when we get to the other side of COVID, we should see accelerated momentum that is fully reflected on the numbers. The good news is that the pipeline is certainly improving in the rest of the world markets, and I expect that there would be a key contributor to the acceleration this year too. In terms of financials, I would say that I don't think the gap is as big in terms of lagging behind what we saw in HCM. We're seeing good wins in international in similar verticals, mainly in financial services, professional services, and some hospitality. Now with Enterprise Finance, we are expecting as well—and with Accounting Center that we can see into broader industries and some product industries. But initially, we're more focused on the services industry and clearly some of the most mature countries like the UK, France, and Germany, where we're seeing a nice customer base of core FINS customers becoming very happy and referenceable.

Operator, Operator

Our next question comes from the line of Brad Sills with Bank of America Securities.

Brad Sills, Analyst

I wanted to ask about the vertical pipeline. Obviously, you're seeing some real success in some of these key verticals for FINS. As you know, financials is not a one size fits all, and you've done a tremendous job of adding more vertical functionality. I think, seeing some of the traction in some of these verticals that you're citing with some of these wins here. I guess my question is, if you look across the verticals where you made investments for FINS, where do you feel best? Is there one that is ramping perhaps faster than others where perhaps the vertical functionality is ahead of the others, others that we should expect more in the future? Any commentary on just the vertical pipeline across the different key verticals for FINS.

Chano Fernandez, Co-CEO

Brad, I think there are three I would highlight. One would be clearly financial services. The other one would be healthcare, and those are very significant deals for us. The other one would be state and local government, which is not sad at all. On those three where we made investments, we're seeing very good traction in terms of the maturity of the solution but in terms of our customer wins and our conversion ratios.

Operator, Operator

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

Brent Bracelin, Analyst

For me, obviously, the success you're having upselling add-ons in the installed base is very encouraging here, which leads to my question on Peakon. I know it's still very early. But as you think about this employee experience market, it is moving fast. Microsoft made a big splash last month. SAP did a partial spin of Qualtrics. You're seeing new VC funding into Culture Amp, Lattice, next thing. What's been the early feedback so far on Peakon? How is it different? And how quickly could you scale the attach rate in the installed base? Thanks.

Aneel Bhusri, Co-CEO

I'll take the first two parts and let Chano address the third. This is a hot space. There's no question about it. We actually had good offerings in the space. And then COVID hit and the demand for more insight into how employees were feeling during this period of time just exploded. Peakon, if you look at all the magic quadrants and analyst reports, they're the leader. They're the best. We looked at what we were doing and said, we can get there, but not at a time that matters because the market is happening now, and these guys were the market leader. We couldn't be more thrilled to have them as part of Workday. It has become a super high priority item for every CEO and CHRO to understand employee sentiment. In terms of the other thing I'd add is that they were a very cool machine learning-first application. They counted on that machine learning to drive them to better insights. We’re super excited about that synergy on that front. In terms of upsell opportunity, I'll turn it over to Chano.

Chano Fernandez, Co-CEO

Brent, clearly, it has not closed yet, right? So I just wanted to mention that. We are really excited when the deal closes, and we are cautiously optimistic that it's going to be a fantastic one. We have some great learnings out of Adaptive and Scout that certainly are going very well. But as Aneel is saying, this is such a hot space. They have a great solution. The majority of their presence is in Europe, but they already have some nice flagship logos in the US. Clearly, with our distribution channel in the US, we are cautiously optimistic that this is going to be fantastic for what we can do to better serve the market. I would just like to add that, again, even though it has not closed, the initial customers' feedback is very good.

Operator, Operator

Our next question comes from the line of Mark Moerdler with Bernstein Research.

Mark Moerdler, Analyst

Robynne, I think you mentioned this a bit, but could you give a little additional color? Last quarter, you discussed the expectation of contract duration decreasing for billings both on the new contract side and on the renewal side. Can you give us a little more color on how big an impact did this really have and how do you see that in terms of the pipeline in terms of what you think those contracts are going to be? Are they going to be shorter? Are they going to be a return to what we've seen in the past? Thank you.

Robynne Sisco, President and CFO

Mark, when we were forecasting total backlog, it's really hard for us to forecast the duration, and you saw that this past quarter in Q4. The best way to measure that impact is if you look at the 24-month backlog growth; it was 19% in Q4. The total backlog growth was 22%. So that differential in growth rate is due to the increase in duration, which we had not been able to foresee when we first entered into the quarter and had our earnings call. So that's one of the big reasons we decided to move forward guiding 24-month backlog. It really takes a lot of that guesswork around the duration coming out. We did see a lengthening of durations in Q4 across both net new contracts as well as renewals, which was a really interesting dynamic. Overall, we let our customers drive the length of contracts that they want, but we see longer contracts as a positive for us as you don't have renewal risk as often. If customers are entering longer contracts and then renewing under longer contracts, then that takes away some of the risk to your revenue for non-renewal. We like that dynamic. We’re just going to let our customers continue to drive that, so it's difficult to predict. And I don't know, Chano, if you want to add anything to what you're seeing?

Chano Fernandez, Co-CEO

I would just say that—as we said, we have to expand our guardrails in place for contracts, but we really don't incentivize our sales teams on total contract value. So it's really driven more by customers than any other thing. The fact that customers are signing longer contracts, which sometimes can be five to seven years, I think it's rare in enterprise software and really speaks to the strategic nature of Workday and the trust that customers place in us.

Operator, Operator

Our next question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz, Analyst

Chano, I have one question for you. It's just around the increase in the sales and hiring comments this fiscal year. I was just wondering if there's any particular product area or geography where you see that there's a big opportunity where it's more a function of just not having enough of the sales bandwidth. Does anything stand out to you as you increase your growth investments in this year's fiscal plan? Thanks.

Chano Fernandez, Co-CEO

I mean, we're making investments in a number of areas within sales and marketing, helping support our growth efforts because we see the opportunity is clearly there. It is in areas like the installed base team, the rest of the world markets, our ongoing efforts in the mid-market to push into new countries, some of the vertical markets, and then some new areas like the federal government. So this is clearly across the organization. There will be marketing and presales, current securities, and certain marketing and brand investments as well. So really, this is about driving pipeline and bookings growth across the board.

Operator, Operator

Our next question comes from the line of Brad Reback with Stifel.

Brad Reback, Analyst

As you guys think about the potential for acceleration in billings in fiscal '23 and beyond, does that the underlying foundation of that, the split between HCM and financials look different going forward, or do you expect it to be similar to where we are today? Thanks.

Aneel Bhusri, Co-CEO

I would just say the HR world was already pre-pandemic full into the mode of cloud-first, and almost every function in HR was moving to the cloud as clear as they could. Finance was not at that same place. During the pandemic, we saw companies moving to finance to the cloud, while others said, hey, let's just wait until we get out of the pandemic, and then we want to move forward. The most optimistic thing that I learned over the last 12 months around finances was that customers who were using legacy finance systems struggled to run their business and said they need to move to a modern finance system. If you look at all the Gartner data, that means finance is going to be pretty hot over the next two to three years. Is there anything you want to add, Chano?

Chano Fernandez, Co-CEO

Not much. I think we saw improvement in new ACV in Q4 across both of the areas. But even more encouraging, the pipeline signs across both HCM and FINS plus, both for new opportunities as well as solid traction in the installed base. So we see opportunities in both.

Aneel Bhusri, Co-CEO

If I could add just one thing, we saw companies struggling with their legacy finance systems during the pandemic accelerate their requirements to move to a cloud-based solution, and it's a very lowly penetrated market right now. We just have a lot of upside. I know I've been the pied piper talking about finance for probably a decade at this point, but I really think finance transformation is upon us.

Operator, Operator

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

Brent Thill, Analyst

Robynne, you mentioned you're going to be leaning back into sales hiring this year. I'm just curious if you could just maybe give us the shape of the curve of hiring, specifically in sales this year versus kind of last year? I just want to clarify that I think you said hiring was pretty flat. Can you just give us any color around what you anticipate doing into this fiscal year? Thanks.

Robynne Sisco, President and CFO

When you look back over our headcount growth in FY21, it was pretty flat. I think incremental hires were maybe a few hundred across the whole year. We'll do significantly more this year across all areas. Those are weighted heavily towards sales and product more so than any other organization. So we do expect to invest a lot there. I'll hand it over to Chano to talk about where some of those investments will occur, but it will be a significant acceleration of hiring in FY22.

Chano Fernandez, Co-CEO

I think we were mostly flat as you commented, and it's the area, as I said before. The installed base is in the rest of the world to support the new enterprise market efforts, some new areas like the federal government. Of course, there will be some growth compared to what we had last year. It's not like we're going to go into high double-digit growth, but I guess some nice single-digit growth and then hopefully continue that trend, with that acceleration investments in sales as we leverage that opportunity ahead and the pipeline we've been creating.

Operator, Operator

Your next question comes from the line of DJ Hynes with Canaccord.

DJ Hynes, Analyst

Aneel, in your prepared remarks, you quantified the increase in the number of SKUs you guys have made over the last three years. So I think you said it was up 50%. Do you have any data that says our average customers are using this many modules, and maybe how that might compare to your best customers? I'm wondering if there's any way to kind of put that comparison with spend per employee? It would just be helpful to think about the capacity for the cross-sell opportunity.

Aneel Bhusri, Co-CEO

DJ, I don't have that exact data. What I do have is data, and I'll turn over to Chano about what percent of our new bookings in Q4 came from new products, because I think that's a more telling data point on how are these new products doing within our customer base. So Chano, what do you think?

Chano Fernandez, Co-CEO

Yes, that's the main data we track in terms of growth. A significant part of the growth that we've been commenting, 50% plus last year on the installed base, is coming from that 50% of the new solutions we've been delivering over the last three years to the market. Those are contributing significantly. When you look at the pipeline, it's quite similar. The conversion rates are also higher there. We clearly know that meeting enterprise customers tends to acquire a number higher SKUs, six or seven to start with through the launch deployment that we have for the medium enterprise. With the increased efforts in terms of both product innovation and the sales capacity that we’d be adding into installed base, those penetration ratios in terms of how the new SKUs are progressing, moving towards the best performance peers, are starting very nicely, and I hope we can provide more detailed information on this at our upcoming financial Analyst Day.

Aneel Bhusri, Co-CEO

I would add, Keith, that we have a lot of upside with Peakon. This area of employee engagement is one of the hottest areas in the market right now. We were already in that market with our own pulse surveys, but clearly the market wanted more. This company during the pandemic grew far more rapidly than Workday did, and I'm excited to bring this great capability to our customers.

Operator, Operator

Ladies and gentlemen, we have reached the end of today's question-and-answer session. This will conclude Workday's Fourth quarter Fiscal Year 2021 Earnings Call. Thank you again for joining us.