Workday, Inc. (WDAY) Q1 2019 Earnings Conference Call Transcript

Workday, Inc. (WDAY -0.66%)
Q1 2019 Earnings Conference Call
May 31, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Workday's First Quarter Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question and answer session toward the end of the call. And with that, I will hand it over to Michael Magaro, Vice President of Investor Relations.

Michael Magaro -- Vice President of Investor Relations

Welcome to Workday's First Quarter Fiscal 2019 Earnings Conference Call. On the call, we have Aneel Bhusri, our CEO, Robynne Sisco, our Co-President and CFO, and Chano Fernandez, our Co-President. Following Aneel and Robin's prepared remarks, we will take questions.

Our press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast.

Statements made on this call include forward-looking statements regarding our financial results, applications, customer demand, operations, and other matters. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements.

In addition, during today's call, we'll discuss non-GAAP financial measures which we believe are useful supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to, and not as a substitute for and 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 second quarter quiet period begins on July 15, 2018. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2018.

With that, let me hand it over to Aneel.

Aneel Bhusri -- Chief Executive Officer

Thank you, Michael. I'd first like to thank everyone for joining our Q1 2019 Earnings Call. I'm pleased to report that our first quarter fiscal year 2019 got us off to a great start for the year. We continue to see strong demand across our human capital management and financial management suites of applications and we saw solid performance across customer size, geography, and industry.

Starting out with Workday HCM, we had another strong quarter as we continue to lead the market with our True Cloud platform. In Q1 we added Inner IKS Services, Meijer, Great Lakes, Tyson's Shared Services, Unisys Corporation, and a Fortune 100 pharmaceutical company among the many new HCM customers in the quarter. Our proven ability to support our customers' large volumes of data and transactions continues to be a big differentiator in our success. We now have over 2,200 customers and our commitment to their success is demonstrated by our industry-leading 98% customer satisfaction rate and reference ability. Notable go-lives in Q1 included 21st Century Fox, F. Hoffmann-La Roche Limited, Ingram Micro, and PricewaterhouseCoopers, to name a few.

Turning to Workday Financial Management, we continued to expand the depth and breadth of our cloud-based finance system and, in combination with Workday Prism Analytics, Workday Benchmarking, and Workday Planning, we are delivering a global solution that is essential for empowering business leaders. We saw continued momentum for our suite of applications in Q1, with new Workday Financial Management customers including Sprouts Farmers Market, Rivera, and RaceTrac Petroleum, one of the largest private companies in the U.S. We believe these wins, when combined with our momentum from fiscal 2018, demonstrate the growing traction of our financial management applications across medium and large companies.

In fact, Gartner published its May 2018 Magic Quadrant for cloud core financial management suites for mid-size, large, and global enterprises and, once again, Gartner acknowledged Workday as a leader for cloud core financial management applications. This year, we are proud to be recognized by Gartner and achieving the furthest overall position for completeness of vision.

As always, our key focus is bringing customers' live successfully. Among the many go-lives of Q1, I would like to highlight Aon, who became an HCM customer in 2013 and since that time has added additional products, including Workday Financial Management. Aon is now live on Financial Management in 28 countries, including Australia, Canada, Mexico, New Zealand, and the U.S. A special kudos to their great effort and progress with their global deployments.

I'd now like to spend a few minutes talking about innovation. As you know, innovation is a core value and part of our DNA at Workday. First, I'm pleased to share that Forbes recently named Workday No. 2 on its list of the World's 100 Most Innovative Companies. It's an honor to be recognized by Forbes and a testament to our customer-driven innovation.

In Q1, I'm pleased to announce that in just three hours, we move all customers to Workday 30. With this release, we expanded our global foundation and industry-specific capabilities in Workday Financial Management and delivered a set of new employee experience features in Workday HCM. We also delivered against the roadmaps for Workday Prism Analytics by introducing data discovery capabilities. In addition, we introduced first Financials benchmarks and expanded our HR benchmarks through our data-to-service offering. We continue to deliver against our unique vision of bringing planning, transactions, and analytics into one unified cloud system.

As we look forward to the rest of fiscal year '19 and beyond, we will continue our relentless focus on innovation and expect to see continued momentum from our growing family of applications.

Switching to the people front, as you all know, we believe a key part of our success continues to be our vibrant company culture, which allows us to maintain high levels of employee satisfaction and greatly helps us attract and retain talent across all levels of the company. And we believe this investment in our people continues to pay off. We are once again recognized globally as one of the best workplaces by Great Place to Work Institute, ranking No. 1 in the UK, No. 2 in Ireland, our largest office outside the U.S., and No. 3 in Germany. A very special thank you to our employees who make these rankings possible. We are very proud that, even as we maintain our very fast pace of employee growth around the world, our company culture remains strong.

All in all, this quarter was a strong start to our fiscal year. I will now turn it over to Co-President and CFO, Robynne Sisco. Over to you, Robynne.

Robynne Sisco -- Co-President and Chief Financial Officer

Thanks, Aneel, and good afternoon, everyone. As Aneel mentioned, we continue to execute well against our long-term market opportunity, differentiating ourselves through our technology and uniquely purposed customer success model. We are very pleased with our first quarter results, delivering total revenue of $619 million, reflecting year-over-year growth of 29%.

Our subscription revenue was $522 million, up 31%. Subscription revenue outperformance was primarily driven by solid net new ACV growth against a difficult comparison a year ago. Professional services revenue came in at $96.5 million, representing growth of 20%. We continue to see strong performance outside the U.S., with total revenue up 43% to $139 million, representing 22% of total revenue.

Subscription revenue backlog was $5.2 billion, growth of 31%, also against a very difficult comparison period a year ago. Consistent with prior quarters, approximately two-thirds of the subscription revenue backlog balance will be recognized over the next two years.

Our non-GAAP operating profit for the first quarter was $81 million, resulting in a non-GAAP operating margin of 13.1%. This strength reflects strong top-line growth, record gross margins, and the benefit of overall spend being slightly lower than expected. We did not see any material impact from FX changes within the quarter.

We achieved record high cash flow from operations of $184 million in Q1. Our trailing 12 month operating cash flow was also a record high at $470 million, up 28% year-over-year. Our trailing 12 month free cash flow was $310 million, up 24% year-over-year. Note that in calculating our trailing 12 month free cash flow, we have excluded $135 million related to our own real estate projects, as we consider these investments non-recurring in nature. As always, our cash flow results can vary with the timing of customer invoicing, as well as seasonal and varying spending patterns.

Moving to the balance sheet, total unearned revenue at the end of Q1 grew 18% year-over-year to over $1.4 billion. As expected, current unearned revenue grew 22% to $1.32 billion, which was in line with the low-20s growth we discussed in our Q4 call. The corresponding sequential decline in current unearned revenue from Q4 is the expected result of our compounding seasonality, as Q1 continues to represent the smallest portion of our annual net new ACV.

Non-current unearned revenue was down 21% year-over-year, consistent with the trend that started last year as we continue to see fewer customers electing to pay more than one year of ACV upfront.

We continue to invest in our people and in attracting top talent to Workday. During Q1, we successfully added and integrated approximately 360 net new employees to Workday, bringing our total workforce at the end of the quarter to almost 8,600.

Operationally, we executed exceptionally well in the first quarter, delivering overperformance on both the top and bottom line. We're extremely pleased with our results and have gotten off to a great start for fiscal 2019.

I'll now turn to guidance. Our focus remains centered on driving strong, sustainable growth and we will continue to prioritize both new customer acquisitions and long-term contract economics, which will likely result in continued quarter to quarter variability in some of our business metrics but which will serve us well in the long run.

Based on our outperformance in Q1, but keeping in mind we still have difficult first half comps from last year, we are raising our fiscal 2019 outlook and providing Q2 guidance as follows. For subscription revenue, we're raising our full-year estimate to be in the range of $2.275 billion to $2.290 billion. We expect our Q2 subscription revenue to be $557 million to $559 million or 28% to 29% growth, with sequential improvement in Q3 and Q4 of approximately 4.5% and 6.5%, respectively. Similar to last year, this pattern reflects our increasing seasonal trends toward larger Q4s.

We still expect Professional Services revenue to be approximately $405 million in fiscal 2019, as we continue to prioritize driving the highest levels of customer success above Professional Services revenue expansion. For Q2, we expect services revenue of $104 million.

For non-GAAP operating margin, we now estimate Q2 to be in the range of 9% to 10%, and we still anticipate 12% margins for the full year, as we prioritize continued investment in our growing business over margin outperformance. The sequential decline in non-GAAP operating margin from Q1 reflects typical seasonality and is primarily the result of our annual employee compensation cycle, which took effect at the beginning of Q2.

The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 24 percentage points in each remaining quarter and for the entire fiscal year.

We still expect short-term unearned to follow the patter we laid out on our Q4 call. We also still expect strong operating cash flow growth of 30% for the year. As a reminder, Q2 traditionally generates limited operating cash flows. This is due to the combination of seasonally low collections and the seasonally high sequential increase in expenses resulting from our annual employee compensation cycle mentioned earlier.

There is no change to our fiscal 2019 plans for capital expense for our development center project or other CapEx provided on our last call.

And, finally, I'll close by thanking our amazing customers, partners, and employees for their continued support and hard work. We are still in the early stages of executing against our long-term vision as a company but our progress wouldn't be possible without a shared goal. We are off to a great start and look forward to updating you on our progress throughout the year.

Operator, let's begin the Q&A process.

Questions and Answers:

Operator

And at this time, if you would like to ask a question, that is "*1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Justin Furby with William Blair & Company.

Justin Furby -- William Blair & Company -- Analyst

Thanks for taking my questions. I guess just two quick ones. Maybe first for Robynne. I think at the end there, you just reiterated your current deferred guidance, which I think is high 20s for Q2. Can you just remind us why that steps up so much from what you just printed in Q1? And then I've got a quick follow-up for Aneel.

Robynne Sisco -- Co-President and Chief Financial Officer

Yeah, Justin. So we actually said mid-20s for Q2. And the reason it steps up is we do get a slight tailwind in Q2 from some of the contracts that we entered into a few years ago but have step-up payments. So that's the primary driver there.

Justin Furby -- William Blair & Company -- Analyst

Okay. Got it. Thank you. And then, Aneel, I guess it seems like from the guidance, you guys are sort of implying that subscription revenue growth, at least if you look at the balance of the year, is pretty stable from what you just printed in Q1. And I'm just wondering, is that a reflection of Financial and some of these emerging products are sort of at a point where they're offsetting any potential slowdown in HCM? Or what gives you confidence around that stabilizing subscription growth? Thanks.

Aneel Bhusri -- Chief Executive Officer

I think we have a lot of growth factors. Financials, percent again year-over-year. And it continues to be now fairly healthy and becoming a more sizable business. And we've seen good uptake on Prism Analytics and Planning. And I'm very optimistic, probably not for the rest of this year, but I'm very optimistic about the Workday Cloud Platform going into next year. The demand continues to grow. We're beginning to do the pricing and packaging and I suspect it has the ability to be another booster for us going forward. So just a lot of irons in the fire in terms of continued growth. And then I'd say the last piece is the HCM business continues to be healthy. And, in particular, we are doing quite well outside the U.S. where the markets are probably two or three years behind, or maybe five years behind, in clouded options. So we're seeing that first wave of big companies moving to the cloud with Workday overseas and there's a lot more opportunity there.

Justin Furby -- William Blair & Company -- Analyst

Got it. Thanks very much.

Operator

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

Keith Weiss -- Morgan Stanley -- Analyst

Thanks. One clarification question and then one broader question for perhaps Aneel. Did I hear right on the call you said that your new ACV did grow in Q1? Because it was sort of a stepdown in terms of billings growth always on Q1 versus what we had last year. So we don't have much visibility into what new ACVs look like but our back-ending of a little math would suggest that's not the case. But you did say new ACV growth grew in Q1.

And then the broader question is just on sort of how machine learning is starting to impact the product portfolio. Are you starting to see people pick up some of that functionality? Is it starting to be more of a differentiator or more in use within a product functionality? And how is that impacting, if at all yet, how people are using the solutions today?

Aneel Bhusri -- Chief Executive Officer

We've had some machine learnings capabilities for now multiple years in areas like retention risk and talent scorecard and customer collections. I'd say the uptake is I think there's a lot of hype around machine learning. We're providing the technology for our customers to use. They're still getting comfortable with it. I think the tech vendors are out selling and marketing it probably ahead of where customers are in terms of using it. But it's picking up and it's definitely a differentiator because I think many customers have plans to use it in the next 12 to 18 months, once they get their data and processes in order. And a big part of that is getting clean data going forward. And in some cases, they're coming off of systems where they don't have clean data. So it takes a while to up-ramp it.

Robynne Sisco -- Co-President and Chief Financial Officer

And, Keith, on your first question, we did see net new ACV growth over Q1 of last year. So we're really pleased with the Q1 performance, particularly on a tough comparable. If you recall, in Q1 last year, we said we had our strongest net new ACV growth in almost three years. So a really difficult comp but we were still able to beat that for this current year. It's one of the reasons, frankly, that we wanted to give you guys some color around unearned balances and what we were seeing this year. Is because we did see, just with existing contracts, a lot of variation. So we thought that it was important that we share that with you. So the results that you're seeing are really due to the variation that we knew coming into the year on existing contracts.

Keith Weiss -- Morgan Stanley -- Analyst

Thanks. That's super helpful. Thank you so much.

Operator

Your next question comes from the line of Ross MacMillan with RBC.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much. Maybe one for Robynne, just to clarify. You'd helped us last quarter with the unearned balance trend through this year and I guess you gave us the view on Q2 after Justin's question. Could you just remind us what we should expect in Q3 and Q4? And then, Aneel, I just had maybe one for you on international HCM. You made some comments on that and I was just curious, from a competitive standpoint, I'd love to get your views on how the two big incumbents stack up internationally. Thanks.

Robynne Sisco -- Co-President and Chief Financial Officer

So, Ross, on your unearned question, so what we said last quarter was, for Q2, mid-20s current unearned growth, which you should take as 25%. For Q3 and Q4, we said low-20s in current unearned growth, which is about 20% to 22%.

Ross MacMillan -- RBC Capital Markets -- Analyst

Great.

Operator

Your next question comes from --

Aneel Bhusri -- Chief Executive Officer

Sorry. In terms of international HCM, I think I'll offer up a point of view and then I'll ask Chano to jump in. You know, over the last several years, the competitive win rates have remained pretty consistent. And we definitely see more of Oracle in the U.S. We see Oracle pretty much -- they're the competitor we see the most. We see SAP more in Europe and other parts than we do in the U.S. And maybe Chano can talk in more detail about what we're seeing competitively.

Chano Fernandez -- Co-President

Yeah. I think you're right, Aneel. Basically the opportunity there is fantastic. It's absolutely amazing and we're very pleased with some of the large new customers that we've been winning into the international markets. Win rates remain very strong. A little bit behind the U.S. but it's more a question of maturity. Clearly, as Aneel said, the difference is more that the stronger competitor there is potentially the Oracle one because of the higher in-store base. And as you know, we're just trying to gain this new business. We just really have to take the incumbents on legacies in place. But in the most mature markets, we have similar win rates as the U.S. ones. And the ones that we are more starting earlier, we are starting with really fractured customers in those markets and a few points behind as part of the maturity in terms of win ratios. But very strong ones.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from the line of Alex Zukin with Piper Jaffray.

Alex Zukin -- Piper Jaffray -- Analyst

Hey, guys. Thanks for taking my question. Maybe, Robynne, first for you. When you think about your pipeline and the potential seasonality for '19, does it strike you as any more or less backend-loaded than it has been historically? And how should we think about the progression of kind of subscription backlog through the year? And then one, just a quick follow-up for Aneel on the platform opportunity.

Robynne Sisco -- Co-President and Chief Financial Officer

Yeah, Alex, so with regard to seasonality, we have seen a trend of more backend-loaded years and we don't expect that to be any different this year. It is still early in the year. So we just finished our first quarter. It's our seasonally lowest first quarter so we really need to see how the year unfolds. But we do see that trend overall continuing.

And then with regard to backlog, you'll see somewhat similar trends as last year. Flat from Q4 to Q1, which is what we predicted and which did occur. A slight uptick in Q2. Q3 will be flat-ish again and then we'll get a big jump in Q4 due to the seasonal high of that quarter. So fairly consistent with what you saw last year in terms of trending.

Alex Zukin -- Piper Jaffray -- Analyst

Great. And then, Aneel, you mentioned some ramping excitement around the platform opportunity. Can you maybe talk about what you're seeing from either your partners or existing customers that's driving that enthusiasm?

Aneel Bhusri -- Chief Executive Officer

Well, as much as we're trying to keep it out of the sales cycle, customers are excited about it and they want to talk about it. So we are showing our customers and prospects the evolution of the Workday Cloud Platform, where it was a year ago and where it is today. And we've made tremendous progress. I think where it's getting more exciting for me is, as we're working through the pricing models, they're gonna be very fair to the customers. Probably some combination of access fee and then a usage model. You can see how that scales into a nice business over time.

I also think that there are good partners in our ecosystem. We've got a great partnership with Salesforce. There's some companies within the broader ecosystem that frankly are burning our compute cycles and we have somewhat of a free rider problem. This is not the indirect access issue. They're burning our computer cycles, our compute cycles, that we're paying for. And with the Workday Cloud Platform, we'll rework some of the partnership dynamics so at least it's a fairer model for us. As a system of record, we have so many different systems hitting our system and we just need to make sure that it's in the best interest of Workday, our customers, and our shareholders.

Alex Zukin -- Piper Jaffray -- Analyst

Thanks, guys.

Operator

Your next question comes from the line of Brent Bracelin with KeyBanc Capital.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Thanks for taking the question here. A question really around international Financial opportunity. With Aon now being live in 28 countries, I'm wondering if you could talk a little bit about the Financials opportunity, pipeline activity internationally, given Aon is now live in those 28 countries.

Aneel Bhusri -- Chief Executive Officer

Aon was a big milestone for us, to your point, for a complex global financial services company, proving out that Workday is a strong platform. And I think if you talk to the folks at Aon, they're very pleased with both the implementation and now their experience post going live. The first wave of larger financial services opportunities I think will still be in the U.S. U.S.-based multinationals. But we are beginning to see the pipeline emerge in markets that are natural markets, like the UK, like Australia, like Canada, which are more similar to the U.S. And over time, you'll see the large multinationals in the rest of the world emerge as well. But that's the pattern that we're seeing and I very much expect to continue to see over the next 12 to 18 months. I don't know if you want to add anything, Chano?

Chano Fernandez -- Co-President

No, I think you commented it all. Yeah.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Very helpful. And then one quick follow-up for Robynne. Financials business growing north of 15% year-over-year again. As you think about the pipeline for the rest of the year, do you think the mix between kind of mid-market and larger Financial customers will be similar? Or as you think about growth there, sustainability of growth in Financials, what's that mix between large and mid-market gonna look like here, based on the pipeline so far?

Robynne Sisco -- Co-President and Chief Financial Officer

Yeah. So we're really pleased with what we're seeing in the pipeline in the large enterprise for Financials. The medium enterprise continues to be a great, steady run rate business for us. I expect the mix to move around a little bit, given the number of large deals we get in any given quarter. But, in general, I think it will slowly creep up into the large enterprise over time.

Aneel Bhusri -- Chief Executive Officer

Definitely on the dollar perspective. On the customer account, that's not really what drives our model. So definitely on the dollar side, you'll see it continue to trend more toward large enterprise.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from the line of Adam Holt with MoffettNathanson.

Adam Holt -- MoffettNathanson -- Analyst

Hi. Thanks very much. First a numbers question for Robynne and then I had a product question for Aneel. On the numbers question, I just wanted to dig in a little bit to the seasonality of the business. Understanding that Q1 is a small quarter, seasonally quarter, etc., you'd think some of that would get picked up year-on-year. And the billings and bookings numbers were sub-10% by our calcs. Would you expect, triangulating what you said about deferred revenue current and the backlog, that bookings will actually accelerate on a year-on-year basis through the year? It looks like they should but I want to make sure that's right.

Robynne Sisco -- Co-President and Chief Financial Officer

Yeah. I mean, definitely we have a tougher compare in the first half than in the second half so we would expect to see that later this year. Having said that, it's early days so we'll need to see how the year unfolds. But I think you're looking at it in the right way.

Adam Holt -- MoffettNathanson -- Analyst

Thank you. And then, Aneel, we've been hearing some good things about Financials in the market. Sorry, the Planning product in the marketplace, both with respect to pulling forward the Financials business but also as a stand-alone. Are you seeing -- can you maybe walk us through in a little bit more detail what you're seeing there? Are you seeing more of a Trojan horse strategy around Planning plus Financials? And are you actually starting to see Planning deals outside of the Workday base or are they still largely in the base? Thanks.

Aneel Bhusri -- Chief Executive Officer

Well, we won't sell Planning stand-alone, at least not at this point in time. We will sell a subset of Financials with Planning that would include consolidation and reporting. But really the predominant model is Planning, either with HR or Planning either with Financials. And frankly it's a compelling application in both cases. In the HR side, we've had very significant uptake and interest on the workforce planning side. And in Financials, I'd argue Planning is the strategic application now for the CFO's office and it drives the execution system. I'd say the two strategic pieces are Planning and the analysis piece with Prism Analytics and those two together have definitely created a lot more interest in the Workday Financial suite.

Chano Fernandez -- Co-President

And I think, if I may add, Aneel, in many cases, we are seeing more and more of them together, which is a great opportunity just for the interest of our customers in Planning. Basically assumptions was also bringing third party data from other systems in combination with ours. So that's basically enhancing the opportunity going forward as we increase our customer base and the opportunity for selling through within them.

Adam Holt -- MoffettNathanson -- Analyst

That's terrific. Thank you.

Operator

And your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks for taking my question. Nice top-line growth. Aneel, I was curious to see, as you have the cohort of customers that signed contracts two to three years back that come up for renewals, what is the prospect for attaching new modules, such as Prism Analytics, Planning, and Financials, look like? And could that have a materially positive effect on the second half of this year or is still too early to talk about attach rate of new modules on existing contracts? Thank you. That's it for me.

Aneel Bhusri -- Chief Executive Officer

Okay. I'll take a crack at it and then I'll ask Chano to pipe in as well. I think just taking a step back, the most important thing to recognize is we now have 2,200 happy customers. And for really the first time in a concerted way, we're actually looking at selling back to those customers. And the renewal is just one moment in time to sell back. It tends to be a good one to add new modules. But Chano has put in place a strong customer base sales team so that we're engaging them more on those new modules rather than just renewal time, any time that they see an opportunity within an existing customer.

Chano Fernandez -- Co-President

Yeah, I would add that you've see that out of that loyal customer base, we have enjoyed good attach rates on more mature products. Like it could be recruiting, payroll, and tracking. We're seeing great growth, very high double-digit growth rates in areas like learning that have been out there for quite some time now. And we're experiencing the same but it's still earlier days. In Planning, not so early, and clearly high double-digit growth as well. And as well in areas like Prism, being a more newer product. So we're very excited about the opportunity that lies ahead. And if you look a few basically quarters forward, I would expect similar attach rates that we've been enjoying on the other solutions, as far as always managing to keep the customer focus and satisfaction that we've been doing.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Got it. I'll save the other questions for next week. See you then. Bye-bye.

Aneel Bhusri -- Chief Executive Officer

Thank you.

Operator

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

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Yeah, hi. Thanks for taking my question. Quick question for Robynne. Actually two questions. One on the gross margin, which hit a record here. I'm wondering if you still have room for more efficiency gains from these levels. And then the second question, I wanted to just follow-up. I think you mentioned in your introductory commentary that you didn't spend all the budget that you were planning for in Q1. And I was wondering if you could maybe just share with us what area of the business that you didn't fully advocate the spend in the quarter.

Robynne Sisco -- Co-President and Chief Financial Officer

Yeah. Brian, so where we came up slightly short on our expenses for the quarter was really in the timing of our hiring. So we didn't quite hire to plan. We do plan on catching up. Our focus is on investing back in the business, not on margin expansion, so it is our goal to actually reinvest any of our top-line overperformance and catch up on hiring and other spend.

In terms of gross margin, if you look at subscription gross margin, we think there may be some opportunity there but we're at pretty high numbers, up at 87, which was our midterm goal. It will be a little lumpy just based on timing of capital spend and other such things. But we will continue to get total gross margin expansion just as the mix continues to shift more toward subscription versus professional services. So we do expect continued efficiencies based on the mix shift, for sure.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Thank you.

Operator

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

Kirk Materne -- Evercore ISI -- Analyst

Yeah. Thanks very much and apologies for the background noise. But, Aneel, I was curious on the financial side if there are any verticals that you guys are -- I know you guys have a targeted approach to a select number of verticals. I was wondering, when you look at your pipeline and some of the enthusiasm from customers, if there are any verticals that are standing out to you right now? And maybe just start there.

Aneel Bhusri -- Chief Executive Officer

Sure. Not really much of a change here. I think anytime we put a vertical focus on selling, we tend to do well because we always back it up with product. So healthcare continues to do well for us. Financial services continues to do well. Our first industry foray was public sector with higher ed and state and local government. We had a series of very nice higher ed wins that we weren't allowed to disclose by name but they were prominent universities choosing our Financials. And then the last area, technology, I think with changes like 606 and other accounting changes, it just creates an impetus for people to look at changing their system. So really it's the world outside of manufacturing and supply chain. The services-based economy, they're all, at some point, gonna be upgrading their finance system and I think we're a good fit for those services-based companies.

Kirk Materne -- Evercore ISI -- Analyst

And if I could just ask one quick follow-up. Just when you look at the macro environment right now, which seems very healthy, has that changed the thought process at all from CFOs and executives around how fast they might want to move around taking financials to the cloud? Or is it still sort of a methodical approach to it from your point of view and no real change because of how the economy is doing broadly? Thanks.

Aneel Bhusri -- Chief Executive Officer

I'd love to say that we're big enough that we can look at the data and see economic trends and frankly I just don't think we're there yet. We're still driven by some big wins in a given quarter. I think frankly what's driving CFOs is more a focus on operational efficiency first and where the legacy systems are falling down. But more importantly now, moving toward analysis and prediction as to trying to get ahead of the curve with these faster and faster business cycles. And they are a conservative bunch, to be sure. And I think they have been more cautious than the HR or the sales worlds but they are coming around.

And I think what people are realizing is that, look, if you're on the legacy system, those systems are not changing. The vendors that sell those legacy systems aren't adding new capabilities there. So those systems are falling behind and at some point you don't have a choice. And I think that's really what's changed the mindset of the CFO. It's now a matter of when, not if. And so they're looking for the capabilities that would give them business advantage rather than just updating the platform technology-wise. And that's why Planning and Prism Analytics have been so powerful for us.

I don't really see it as them -- that has not come up in any of the sales cycles as being tied to the economy. Frankly, we did quite well during '08-'09 because we were viewed as a way to save money. So I didn't see it -- we didn't grow as fast but we still grew healthy during that economic downturn. So I'm not sure that we're super tied to macro cycles. But that's a good question.

Operator

We will now take two more questions. Your next question comes from the line of Mark Marcon with RW Baird.

Mark Marcon -- Robert W. Baird -- Analyst

Good afternoon. Thanks for taking my question. I basically have two questions. One would be, with regards to Financials, just coming off of the last comment that you just made in terms of the CFO attitudes, where would you say we are with regards to kind of the trajectory of Financials relative to HCM a few years ago? Do you think we are where we were four or five years ago, as it relates to HCM, when we're just looking at the trajectory of the Financials subscriptions, particularly with Aon having good success?

Aneel Bhusri -- Chief Executive Officer

You know, it's hard to unpack it because we're a much larger company now as well. So we have a much larger sales force. But if I were to guess, looking at all the data, in terms of adoption rates, I think we're probably five years behind where HR was in terms of adoption. And maybe even a year or two later. So when I go back to five, six years ago, cloud HR among large companies was beginning to take off. We had our first big customer was Flextronics in 2008. By 2011, 2012, it was becoming more mainstream and that's the time we went public in 2012. It feels about that in terms of the number of companies coming to market and the pace of growth of the pipeline, which bodes well. I've been saying about four or five years behind the last couple years, but the data has moved around quarter to quarter. I think now we've got trend lines that say it's probably five years behind and maybe slightly further behind outside the U.S. But it's growing nicely and now it's a consistent business, which is a big change in the last couple years.

Mark Marcon -- Robert W. Baird -- Analyst

That sounds like it bodes really well, in terms of the seriousness of some of the proposals that are out there as it relates to the fourth quarter and basically the selling cycle for this year.

Aneel Bhusri -- Chief Executive Officer

I believe so. It's still early. It's Q1. Q1 on both HCM and Financials is rarely a quarter where you see the big Fortune 500 accounts close. We always have a --

Mark Marcon -- Robert W. Baird -- Analyst

No, I'm not talking about closing. I'm talking about the seriousness of the discussions in advance of that.

Aneel Bhusri -- Chief Executive Officer

Yeah. No, and I totally agree with you. The thing is we won't know if they were truly serious until the fourth quarter on some of these big ones. But I think they are. And the way that the pattern of the fourth quarter last year worked, those ended up being serious discussions and we had a wave of big companies join us. And I think, if anything, it's going to be better this year.

Mark Marcon -- Robert W. Baird -- Analyst

That's great. And then just with regards to HCM internationally, can you just talk a little bit about how you would size that relative to the U.S. and if there's anything that we should take into account with regards to differences in terms of margins that we should expect?

Aneel Bhusri -- Chief Executive Officer

You know, the only data point I have is from a previous life at People Software. People Soft was not as global as SAP in that mid- to late-'90s time frame. I think it was 60/40 U.S. versus rest of the world on the HR side. I think it's reasonable to see us at 50/50 at some point in the not so distant future on the HR side and we're not anywhere close to that right now. Chano, you want to add anything to that?

Chano Fernandez -- Co-President

I think you're right on that assumption. That would be my expectation a few years from now. We are still opening, as you saw, quite significant markets. Markets like Italy, we just really entered this year. I mean, we clearly have kind of in excess of 300 already multinationals present there but really going into the market and making investments we had just done a couple of months ago. So that tells you that there are still key markets where we are still early. And clearly there lies a great opportunity ahead. Where we're looking in terms of pipeline today and growth and the terms of large, basically, customers and fractured companies talking to us is quite exciting and quite engaging and support a very growth factor going forward.

Mark Marcon -- Robert W. Baird -- Analyst

Great. Thank you.

Operator

And your last question comes from the line of Brad Rebak with Stifel.

Brad Rebak -- Stifel, Nicolaus & Co. -- Analyst

Great. Thanks very much. I'm not sure if I missed it. Did you guys provide the Financial Management and the Planning customer adds in the quarter?

Robynne Sisco -- Co-President and Chief Financial Officer

No, we did not this time.

Brad Rebak -- Stifel, Nicolaus & Co. -- Analyst

Is that something you can provide?

Robynne Sisco -- Co-President and Chief Financial Officer

No. I mean, we'll announce when we have significant milestones on that front but we don't intend to provide it at this time.

Brad Rebak -- Stifel, Nicolaus & Co. -- Analyst

Okay. And then, Robynne, on the headcount side, I think you grew about 25%, which was a little faster than any quarter last year. Was that meaningfully below plan or just modestly below plan?

Robynne Sisco -- Co-President and Chief Financial Officer

It was modestly below plan. We actually came into Q1 with a really good pipeline of candidates and really good momentum on the growth. So it was slightly below.

Brad Rebak -- Stifel, Nicolaus & Co. -- Analyst

Got it. Thanks very much.

Operator

We thank you for your participation in today's earnings call. You may now disconnect and have a great day.

Duration: 43 minutes

Call participants:

Mike Magaro -- Vice President of Investor Relations

Aneel Bhusri -- Chief Executive Officer

Robynne Sisco -- Co-President and Chief Financial Officer

Chano Fernandez -- Co-President

Justin Furby -- William Blair & Company -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

Alex Zukin -- Piper Jaffray -- Analyst

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Adam Holt -- MoffettNathanson -- Analyst

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Mark Marcon -- Robert W. Baird -- Analyst

Brad Rebak -- Stifel, Nicolaus & Co. -- Analyst

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