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Workday, Inc. (NASDAQ:WDAY)
Q2 2019 Earnings Conference Call
September 4, 2018, 3:30 p.m. CT

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Welcome to Workday's Second Quarter Fiscal Year 2019 Earnings Call. At this time, all participants are in 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 Mr. Mike Magaro, Vice President of Investor Relations. Mr. Magaro, the floor is yours.

Michael Magaro -- Senior Vice President, Corporate Development & Investor Relations

Welcome to Workday's Second 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 Robynne's prepared remarks, we will take questions. Our press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast.

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

In addition, during today's call, we 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 third quarter quiet period begins on October 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 -- Co-Founder &Chief Executive Officer

Thank you, Michael. Hello, everyone. Thank you for joining us today. I'm pleased to share the details of another strong quarter in Q2, continuing our momentum as a vendor of choice for companies embarking on digital transformation across cloud finance and HR. Our customer satisfaction rate remains among the highest in enterprise cloud software and the success of our customers is an incredibly important part of our enduring business longer term.

Let me share some of the highlights from Q2, beginning with HCM. As of today, more than 35% of the Fortune 500 and approximately 50% of the Fortune 50 have selected Workday for core HR. Our continued success among the largest companies in the world is a direct reflection of the value we place on live, happy, and referenceable customers.

In the second quarter, some of the new customers we added include Eli Lilly and Company, Bridgestone Americas in North America, Siemens Healthineers in Europe, and DBS Bank in our Asia Pacific region. Notable go-lives in Q2 include Humana, Michelin, Samsung, and Target. We believe that our global HCM leadership position is once again being reinforced by industry analysts. Gartner published this magic quadrant for cloud HCM suites for midmarket and large enterprises on August 15, 2018 -- and once again positioned Workday as a leader.

We also continue to see strong traction in cloud financial management, where we had over 60% new customer growth in Q2 and also added another new Fortune 500 customer. We now have over 530 financial management customers, including eight in the Fortune 500. In the second quarter, Group Foncia, Kemper Corporate Services, and Horizon Healthcare Services are a few of the many new customers who selected Workday for core financial management. Also, and equally important, we had several customers go live in financial management in Q2 including Continental, Casualty Company, and Advantis Healthcare.

As we have continued to push into the financials marketplace over the past several years, it's become very apparent that for many companies the first push into the cloud is the in the area of financial and operational planning. This market dynamic is the main reason we accelerated our path into planning with the acquisition of Adaptive Insights, which closed August 1st. With Adaptive Insights, we now have the ability to sell best of breed planning on a stand-alone basis or as part of a broad ERP suite. Since the close, Adaptive Insights has been operating as a Workday business unit under the brand Adaptive Insights, a Workday Company. Adaptive Insights' CEO, and my good friend of 15 years, Tom Bogan is reporting directly to me and has joined the executive committee of Workday.

We are thrilled about the combination of Workday and Adaptive Insights, which will enable customers to better plan, execute, and analyze across the enterprise all in one system, the leading cloud platform, to drive their financial and business transformations. The acquisition increases the power and reach of the combined companies, who share a common employee first and customer centric approach to developing enterprise software.

Additionally, we have decided that our single planning solution moving forward will be the Adaptive Insights Business Planning Cloud. This represents a huge opportunity for us to increase the speed to market on our long-term vision of companywide integrated financial, workforce, and operational planning for all enterprises large and small. With an improved value proposition for the office of the CFO, we strongly believe that over time we will drive more sales for financials.

We believe having Adaptive Insights as a single planning platform reduces the complexity for both customers and employees. We're committed to unifying Adaptive Insights with Workday, not bolting it on. This means the power of one will stay intact, ultimately equipping our customers with access to one source for data, once security model, one user experience, and one workday community that enables them to plan, execute, and analyze all in one system.

Our investment in broadening our platform and extending our product capabilities is creating many levers to drive enduring long-term growth. While human capital management is our most mature segment and has fueled much of our growth, penetration rates for cloud HCM remain low globally. HCM only represents approximately 25% of our total addressable market long-term. We're in the early days of our journey as a company and remain focused on investing to drive customer success and to help transform the way our customers do business.

We look forward to sharing more about our products and marketing opportunities next month at Workday Rising, our annual customer conference. The Financial Analysts Day takes place on October 2nd in Las Vegas, and we look forward to seeing many of you there. And now, over to you, Robynne.

Robynne Sisco -- Co-President & Chief Financial Officer

Thanks, Aneel, and good afternoon, everyone. As Aneel discussed, we continue to see momentum in our business, driven by our differentiated technology and unique focus on customer success.

In the second quarter, we delivered total revenue of $672 million, reflecting year-over-year growth of 28%. Our Q2 subscription revenue was $566 million, up 30%. Year-over-year. Our subscription revenue outperformance was driven by net new customer growth as well as a record high for renewals achievement as a percent of the original contract value, a clear benefit of our consistently high levels of customer satisfaction.

Our Q2 professional services revenue grew 17% to $106 million. Total revenue outside the US was up 48% to $156 million, representing a record 23% of total revenue. Subscription revenue backlog was over $5.5 billion, growth of 26% year-over-year. Consistent with prior quarters, approximately two-thirds of the subscription revenue backlog balance will be recognized over the next two years.

Non-GAAP gross margins for the second quarter were down slightly to 74%, primarily as a result of a decline in our professional services margin. This normal seasonal decline was primarily due to the costs associated with our annual global partner conference as well as the impact of our annual employee compensation cycle, which went into effect at the beginning of Q2. Our non-GAAP operating profit for the second quarter was $68 million, an operating margin of 10.1%. This includes the impact of $3 million of expenses related to the Adaptive Insights acquisition, which was not contemplated in our previous guidance.

Our investment philosophy remains focused on growth and ensuring we deliver the best products to enable our customers to transform the way they do business. We remain early in addressing our long-term opportunity with a majority of our products still in the beginning phases of their growth curves. You should continue to expect that we will reinvest any incremental topline overperformance this year.

Cash flow from operations was $58 million in Q2, led by stronger than expected collections in our seasonally lowest cash flow quarter. Our trailing 12-month operating cash flow was $512 million, up 36% year-over-year. Our trailing 12-month free cash flow was $338 million, also up 36% year-over-year. Note that in calculating our 12-month free cash flow, we have excluded $161 million related to our owned real estate projects.

Moving to the balance sheet, total unearned revenue at the end of Q2 grew 21% year-over-year to just under $1.5 billion. Current unearned revenue was $1.4 billion, in line with our expectations of 25% year-over-year growth. Non-current unearned revenue was down 14% year-over-year.

During Q2, we completed the settlement of the convertible senior note that became due in July. The face value of the notes was settled with $350 million in cash. We also issued approximately 1.5 million shares per the terms of the conversation provisions. The shares issued were offset completely by our exercise of the related hedge and, as a result, the note settlement had no net impact on our share count. Our biggest investment continues to be in our people and in attracting top talent to Workday. During Q2, we successfully added and integrated over 500 net new employees, bringing our total workforce at the end of the quarter to over 9,100. We continued to execute very well operationally and finished a great first half of the year despite the difficult comps.

Now, let's turn to guidance. Please note that our guidance incorporates the impact of transaction and integration costs as well as the ongoing operations, net of purchase accounting adjustments related to the Adaptive Insights acquisition, which closed on August 1st. Additionally, given current FX rates, our subscription revenue guidance includes a headwind of several million dollars in the second half.

For subscription revenue, we're raising our full-year estimate to be in the range of $2.341-2.348 billion, or a growth of 31%. This guidance includes an estimated contribution of $42 million from Adaptive Insights. We expect our Q3 subscription revenue to be $609-611 million, or 31-32% growth inclusive of $18 million from Adaptive Insights. We still expect professional services revenue to be approximately $424 million in Fiscal 2019, of which approximately $9 million is from Adaptive Insights. For Q3, we expect services revenue of $112 million, with $4 million coming from Adaptive Insights.

We now expect our non-GAAP operating margin to be approximately 4% for Q3 and approximately 9% for the full year. This 300 basis point reduction from our previous full-year margin guidance is related solely to the Adaptive Insights acquisition. Approximately $40 million of this headwind comes from one-time transaction and integration costs with the remaining coming from ongoing operations. The GAAP operating margin is expected to be lower than the non-GAAP margin by approximately 31 percentage points in Q3 and 27 percentage points for the full year.

Our previous expectations of organic short-term unearned revenue growth in the low 20% for the third and fourth quarters this year is unchanged. Adding in Adaptive Insights, however, we now expect the growth in short-term unearned revenue could be up to 25% in Q3 and Q4. We expect operating cash flow to be approximately $550 million for the year, reflecting the full impact from the Adaptive Insights acquisition. We still expect FY19 capital spend to be approximately $200 million for our development center project and an additional $200 million for all other CapEx.

And finally, I'll close by thanking our amazing customers, partners, and employees for their continued support and hard work which allowed us to deliver great results for the first half of the year. We're also thrilled to welcome the incredible Adaptive Insights team to Workday and are excited about what we will accomplish together in the second half and beyond. We look forward to seeing many of you at Workday Rising in October as we share more insights on our strategic product initiatives and long-term market opportunity.

...

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

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Mr. Brad Zelnick of Credit Suisse. Sir, you may ask your question.

Kevin Maw -- Credit Suisse Group -- Analyst

Hi. This is Kevin Maw on for Brad. Thanks for taking the question. Congrats on the quarter. Can you give any update on how you're thinking about the go-to-market strategy with Adaptive and coordinating the salesforce with Workday's enterprise reps?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Sure. We're going to continue to sell Adaptive as a stand-alone best of breed planning product through the Adaptive salesforce, which will continue to grow, both in their medium enterprise and large enterprise businesses. You'll see them continue to focus on selling planning stand-alone. If it's inclusive of a larger ERP deal, either with financials or HR, then the Workday reps will take the lead with support from Adaptive. We're figuring out the compensation model just to make sure that everyone is acting in the right mode. It's important for us to continue to leverage Adaptive's place as a best of breed solution. So, it will be sold stand-alone, whether or not the customer is a Workday customer.

Kevin Maw -- Credit Suisse Group -- Analyst

Got it. Thank you. Can you give any color on how much Adaptive contributed to the subscription backlog for the quarter?

Robynne Sisco -- Co-President & Chief Financial Officer

Adaptive is not in subscription backlog for the quarter since we closed that transaction the first day of Q3.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Operator, next question, please.

Operator

Our next question comes from the line of Mr. Justin Furby from William Blair. Sir, your line is open.

Justin Furby -- William Blair & Co. LLC -- Analyst

Thanks, guys. Congrats. Aneel, in terms of subscription growth this quarter, it looked like it was more or less stable from Q1 at around 30%. For the last few quarters you had some pretty noticeable deceleration there. Do you feel like the business is nearing the floor in terms of organic growth over the medium term? What do you think Adaptive does -- you called out the inorganic pieces, but when you look out over the medium term, what does it do to your organic growth in terms of planning and driving that business but also driving financials deals.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

In terms of subscription growth, I would defer that question to Robynne. But, I think we've been pretty clear all along that the first half of the year had pretty challenging comps from last year. In the second half of the year, the comps are easier. In terms of Adaptive, we recognize through the past few years of selling core financials, as soon as we introduced planning we had a new entry into the sales cycle. The planning area was viewed currently as a good place to start in the transformation to the cloud and very strategic to the office of the CFO. We found that, while we were making traction with our own development efforts, we were two years or three years behind where the market needed us to be.

With Adaptive, we very quickly get into the market with a leader defined by Gartner and the Magic Quadrant. Those will open more doors for us on the broader financial management suite. So, it's the double bonus of now being viewed as a leader in that space as well as opening up the doors to larger core financial management business. We're very excited about it.

Also, the acceleration that we see as a big potential for us is in large enterprise. That has historically not been a focus of the Adaptive sales organization. They're going to move into large enterprise and we have hundreds of large enterprise sales reps that will be able to introduce Adaptive into the large enterprise accounts.

Justin Furby -- William Blair & Co. LLC -- Analyst

Got it. On the HR service delivery market, it seems like that's an opportunity, or a market starting to really inflect. Do you guys plan to enter that market directly at some point or is it to leverage partners? It seems to me there's a pretty big opportunity, even within your install base there. Thanks.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

For the time being, it's leveraging partners. But, it's definitely one of the areas on our roadmap as we explore new areas of growth.

Justin Furby -- William Blair & Co. LLC -- Analyst

Great. Thanks, guys.

Operator

Your next question comes from the line of Mr. Mark Murphy from JP Morgan. Mr. Murphy, you may ask your question.

Mark R. Murphy -- J.P. Morgan Securities, LLC -- Analyst

Thank you. I'll add my congrats. Aneel, I was thinking back to 12-18 months ago, and you seemed to be entering a pretty unusual period where there were many large enterprise HCM deals. It ended up including Walmart, Target, Dow Chemical, BT, and many others. I think you had a single quarter where you closed 13 Fortune 500s. I think it was partly due to some of the competitors' products that were being sunsetted or end of lifed. What are you observing today in terms of the HCM replacement cycle and when do you think is the next point in time where you would expect to see an unusual cluster of the large enterprise deals coming together like that?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

The large enterprise deals are continuing to come to Workday at a -- I think we're getting far more than our fair share. I think this past quarter we had eight Fortune 500 accounts that became Workday customers. It continues to be a very strong market. It's the second quarter, which is not typically a Fortune 500 quarter. That typically is our fourth quarter. We don't really see anything changing that dramatically. If anything, we're seeing some of the multinational Fortune 500 accounts not based in the US coming to market and looking for a partner to help them move HR into the cloud and go through their HR transformation. I'd say most of the international markets are three or four years behind the US, so some of those markets are really beginning to pick up now.

Mark R. Murphy -- J.P. Morgan Securities, LLC -- Analyst

Okay. Thank you, Aneel. Robynne, what are you observing today in terms of the typical subscription fees that are being generated in financials versus HCM. If you're comparing like-for-like sized organizations, if a company has 10,000 employees and you looked at the ratio of the subscription fee for financials relative to HCM, what exactly are you observing there and what do you think it would look like in the long run?

Robynne Sisco -- Co-President & Chief Financial Officer

Mark, the way our list price works is about a 1:1 ratio. We're seeing very consistent discounting rates across both of those products. Chano, is there anything you want to add?

Chano Fernandez -- Executive Vice President, Global Field Operations

That's accurate. That's what we're seeing.

Mark R. Murphy -- J.P. Morgan Securities, LLC -- Analyst

Thank you.

Operator

Our next question comes from the line of Mr. Keith Weiss with Morgan Stanley. Sir, you may ask your question.

Keith Weiss -- Morgan Stanley & Co. LLC -- Analyst

Thanks for taking the question. Nice quarter. In terms of financials, we noted in our recent CIO survey -- and a couple of the reasons for CIO surveys are ERP refreshes and ERP investment is rising up the CIO priority list. Are you seeing that in your interactions with customers? Are you seeing financials rise in priority?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Absolutely. I think the combination of core fins -- procurement, expenses, and planning -- altogether, we can be an ERP replacement today. It definitely seems to be the next area of focus from IT. It was CRM, then HR, IT, and now finance is the next big one to tackle. One of the reasons why it hasn't taken off in the past is that the products, including ours, were just not ready to take over the operations of the truly large multinationals from a feature function perspective. And we're confident that they are today. So, when they go off and do their analysis, they're comforted with the fact that, "I'm not actually giving up anything on the functionality side and I'm making a huge leap forward on the technology side."

Keith Weiss -- Morgan Stanley & Co. LLC -- Analyst

Got it. On the midmarket opportunity, any changes that you make with your midmarket focus with Adaptive? I know they had a really big midmarket presence within their customer base. Does that become a new distribution avenue for financials to come into the midmarket for you guy? So, the core financials.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

We've had a very strong run in medium enterprise since about a year and a half ago. Chano created hard and fast lines between large enterprise and medium enterprise all the way through the sales organization, all the way down to the rep level and all the way up to the senior sales executive level. With Adaptive, our medium enterprise business lines up very nicely with theirs. We'll be able to take their product into our existing install base medium enterprise account and sell into other accounts together.

The big benefit, though, is taking their great product and moving it into the large enterprise market and our 2,200 large enterprise customers. That is the biggest opportunity. Chano, do you want to add anything?

Chano Fernandez -- Executive Vice President, Global Field Operations

No, I think you're right. We had a great financials basically quarter, also in the medium enterprise. We commented on the customer growth of 60% year-on-year. That was tremendously strong on particularly that part of the market. We're very excited about, with Adaptive, extending the capabilities we have, particularly around financial planning and sales operation planning. We've not been playing that much before. It's been more workforce planning. I think that would be a great offering and we're culminating on the lining in that midmarket. We will see extended and has some opportunity there with large enterprise here in the US and particularly in the rest of the world where the Adaptive coverage is a shorter term -- basically, the footprint we have as a channel there.

Keith Weiss -- Morgan Stanley & Co. LLC -- Analyst

Super helpful. Thank you so much.

Operator

Our next question comes from the line of Mr. Kash Rangan from Merrill Lynch. You may ask your question.

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

Hi. Congratulations on showing such strong sequential billing cycle acceleration. I think you guided to that and you delivered. I'm also curious to get your thoughts on how to think about backlog growth rate. We're seeing more seasonality on the backlog, since sequentially it did growth. But, it has grown a little bit faster. Is the business becoming more seasonal and therefore the weight of backlog performance is going to be shifted toward the second half? And, Aneel, how do you expect the Adaptive acquisition to catalyze the sales cycles of financials customers and potential prospects and how they're likely to close on the broader GL and not just the planning aspect.

Robynne Sisco -- Co-President & Chief Financial Officer

Kash, on the backlog, we are seeing multiple dynamics there, including the seasonality that you've talked about. We've also had very difficult comps the first half of last year. So, that impacted the backlog revenue growth. And, we saw some headwinds in Q2 from both duration and FX. As the renewal cycles also can move around, that'll impact as well. So, on a quarter-to-quarter basis it could vary a little, but we do expect that, on the longer term, it's going to be a good indicator of our growth long-term.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Kash, there's no question that we believe planning will accelerate some of the core financial business as well. But, I think the most important piece is that, much like Workday, Adaptive is very focused on customer success. If they're able to get in the door and win even just the planning business, we'll get a shot at the HR business and the finance business down the road. It just gets us in the door. Once we get in the door, we're confident that we'll prove ourselves from a customer success perspective. It's one of the reasons we were so drawn to Adaptive. They have the same exact focus on employees and on customer success. I think it's going to dramatically open up the market.

So, you go visit a customer and they're not ready to swap out their core accounting system, but they are ready to take on a planning system, that's fine. We'll get in the door and, when they are ready to switch to core accounting, we'll be the best positioned, both from a product integration perspective and a relationship perspective.

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

Wonderful. Thank you so much. All the best.

Operator

The next question comes from the line of Mr. Brent Bracelin with KeyBanc Capital. Sir, you may ask your question.

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Great. Thanks for taking the question. Robynne, I wanted to follow-up on the subscription backlog growth metrics. If I look at our analysis over the last year, it looked like you doubled the number of Fortune 50 customers a year ago. When do those compares start to ease? Is that really the April quarter of next year? I'm just trying to understand when I think about the growth metrics on subscription backlog has decelerated. I get the tough compares. It sounds like there's FX as well. But, when are we through the bulk of the tough compares there?

Robynne Sisco -- Co-President & Chief Financial Officer

If you take out the very large deals, we're through the bulk of the tough compares right now. It was really the first half of last year where we had really strong reacceleration of net new ACV. So, we do expect net new ACV growth acceleration in the back half of this year as the comps get a little more favorable for us. I think the wildcard here is the large deals -- Fortune 500 -- and when those come to market, which can make the results lumpy. Certainly, when they do come to market, we do like our odds to win them.. We have great competitive win rates in that space, but they are a little hard to predict in terms of timing.

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Great. Aneel, as we think about eight Fortune 500 wins this quarter, one Fortune 500 cloud financial win, what's the pipeline activity? We continue to hear more around ERP refresh cycles and modernization projects. How does the pipeline on cloud financials in the Fortune 500 look for the second half?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Chano?

Chano Fernandez -- Executive Vice President, Global Field Operations

We have had solid pipeline growth for both financials in our international business in the second half. From a mix perspective, the financials continue to grow as a percentage of the mix, although clearly we have given sustained growth in AC and the mix shift is moving slowly. But, there are some large deals in the second half. It's always difficult to predict exactly the timing, if those deals are going to end up happening in Q4, as we have expectations for during Q3 and Q4, or a couple of them may slip one or two quarters, given the timing of those discussions. But, we have good coverage and healthy pipeline for that financial opportunity in the second half.

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Very helpful. That's all I had. Thanks.

Operator

Our next question comes from the line of Mr. Alex Zukin from Piper Jaffray. Sir, you may ask your question.

Aleksandr J. Zukin -- Piper Jaffray & Co. -- Analyst

Hey, guys. Thanks for taking my questions. A bigger picture question -- in terms of the Fortune 500 HCM deals that you expect this year versus next year and last year -- not just for you, but for the industry as a whole -- and maybe, with the positive economic backdrop of budget cycles, are you seeing in any way an acceleration of that cycle this year? Again, how should we think about the proportion of that activity over the course of this year and next year?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

It's a good question. I'm not sure we see an acceleration of activity. I definitely think we're through the early adopters segment of companies moving to the cloud. I would hope that we have a shot at getting to 50% of the Fortune 500. We're within distance of that over the next couple of years, if you look at the number that we're signing every quarter. The bigger phenomenon is that these Fortune 500 accounts, once they're live, are coming back and taking on more modules. We've shared this at past user conferences and we'll share it again. For that first dollar spent on core HR, it can be $2.00-3.00 more in add-on products, whether it's payroll or learning or recruiting -- time and now planning.

There are so many areas that, once we get that customer into production -- it's so important we get them into production -- they come back and buy more. That's probably the biggest phenomenon we've seen as these big companies have gone live, that our customer base sellbacks are much stronger than they were maybe two or three years ago.

Aleksandr J. Zukin -- Piper Jaffray & Co. -- Analyst

Got it. That's helpful. Aneel, on Adaptive, you mentioned that Adaptive will become your planning cloud solution. Can you maybe drill down into what exactly you mean about -- are you going to rewrite their product on your platform? Are you going to standardize on their platform to preserve that power of one? Maybe just drill a little bit deeper on that. Also, how long do you expect this process to take before you can start making the meaningful sales?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

I think we'll make meaningful sales immediately just selling it. It was a thriving business before Workday, and hopefully we can have it do even better. So, there are a couple of things into making it our platform. Number one, Workday had its own planning product, Workday Planning, that was primarily focused on workforce planning. Our original take was that we would continue to build workforce planning and Adaptive would focus on financial and operational planning. As we dug into it and understood the real breadth and power of the Adaptive platform, they're not that far away from workforce planning. Today, it made sense just to say, "Let's put all of our eggs in that one planning basket." So, we will be, over time, sunsetting the Workday workforce Planning product and moving all of those customers to the Adaptive planning platform.

In terms of the integration, I'll get in trouble with the development team, but I'll put a range on -- 12-18 months to completely have it unified. But, you'll see it in steps. The first step will be a very tight integration and making sure that the data models are in sync over time, user experience, and security. I think, within 12-18 months, you will not be able to tell the difference that one product was built separately. The beauty of it is that it's not a transactional application. Planning is built around a modeling engine. Workday did not have a modeling engine in its platform, so that's additive. Now, it's just making sure that the data models, metadata models, security models, and the user interface are all harmonized. That's something we've had good experience with in the past.

Aleksandr J. Zukin -- Piper Jaffray & Co. -- Analyst

Great. Thank you, guys.

Operator

Our next question comes from the line of Mr. Kirk Materne from Evercore ISI. You may ask your question.

Stewart Kirk Materne -- Evercore ISI -- Analyst

Thanks very much. Aneel, I was wondering if you could talk about adoption of the financial management product by vertical? I know your strategy in the financial management world is a lot more industry focused. Can you comment on the industry, if you're seeing good adoption or maybe the ones that are either ahead or behind what you were thinking maybe at the start of this fiscal year? Thanks.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Sure. We do have a much more industry focused approach to financials. Number one, because the financial products themselves require more industry capabilities than the HR products do. HR is pretty homogenous across different industries. With financials, we started out with E&G -- education and government. We continue to do very well in that space. Many of the largest universities use Workday Financials as well as Workday HR. That was followed on by healthcare and we continue to land some of the largest healthcare transformations as they move their financials into the cloud.

Technology continues to be a strong area for us, largely now on the back of 606 and people having to go through the painful change of their rev rec. Within Workday, that's already built in and easy to use. Other business services -- professional services -- have all been good areas for us. Financial services has been strong in pockets. Insurance has been one of our strongest markets of moving financials to the cloud. Wall Street banks have been slower. So, if I would say where I'd hope we'd see more traction, it would be in Wall Street banks. Wall Street banks were also later on the HR side due to the heavy regulation and the amount of work they have to produce for regulators. I suspect, in the next year or two, you'll start seeing the big investment banks coming to market with financials for the cloud. Chano, have I missed any?

Chano Fernandez -- Executive Vice President, Global Field Operations

I think you've covered it pretty greatly. When you look at the pipeline particularly in our core financials verticals that have been there for longer -- education, government, and healthcare -- you see that 70% of the deals are ERP deals, kind of having both HCM financials and the industry component as part of the mix of the pipeline. Clearly, win ratios are stronger today in verticals Aneel mentioned -- those services and people focused on outside of our core verticals.

Stewart Kirk Materne -- Evercore ISI -- Analyst

Great. Thanks very much.

Operator

Our next question comes from the line of Mr. Ross MacMillan from RBC Capital Markets. You may ask your question.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much. My congrats. Robynne, the commentary on the tough comps, from the HCM slate last year, are you explicitly saying that we should look for the backlog growth to reaccelerate in the second half? And then, FX -- you said several million, but I wondered if we're getting to a point now where the international known US dollar denominated business is getting significant enough such that we should start to think about constant currency versus reported growth? Was there any more color on that as you think about the back half? Thanks.

Robynne Sisco -- Co-President & Chief Financial Officer

Yeah, sure, Ross. With regard to the backlog growth, and the tough comps, I wouldn't expect backlog growth reacceleration because it's such a large number -- $5.5 billion. The backlog has reached the large numbers where it would be really hard to reaccelerate growth. So, we do expect to see a reacceleration of our net new ACV growth, but that likely won't lead to a reacceleration of backlog growth. We do expect the seasonal patterns of backlog growth to still hold going forward. So, relatively flat Q2 to Q3, and then our most significant uptick in Q4. We still are watching the backlog number. It's still a fairly recent metric for us. Now that our peers have started to adopt 606 and report this number, we're still beginning to evaluate the patterns and think about how we want to look at that and talk about it going forward.

With regard to your question on FX, the FX doesn't always impact us as much as some of our peers because we are functional US dollar currency and most of our entities out of which we sell -- which means, once we enter into a contract, then the FX rate gets locked once it's billed and then we actually hedge it going forward. So, the real FX impact is on new deals during the quarter and the year, whereby we may have gone into the year with an assumption of a British pound deal translating into a certain amount of USD and that may fluctuate over time. So, not as big of an impact for us as some of the other companies out there, but still something we're keeping an eye on.

Ross MacMillan -- RBC Capital Markets -- Analyst

Great. Thanks for the clarification.

Operator

Our next question comes from the line of Mr. Brian Schwartz from Oppenheimer. Sir, you may ask your question.

Brian Schwartz -- Oppenheimer & Co., Inc. -- Analyst

Hi. Thanks for taking my question. Aneel, how are you thinking about capitalizing on the opportunity in operational planning. If I recall Adaptive Insights, I think about 20% of their users are actually business users and are using it for operational planning. I think you mentioned Adaptive has a modern sales planning product that they just came to market. You're also talking a little bit more about ERP here on the call. So, how are you thinking about investing and capitalizing on the operational planning positioning that Adaptive Insights already has in the market today. Thanks.

Aneel Bhusri -- Co-Founder &Chief Executive Officer

It was definitely one of the parts of their strategy that was very attractive to us. That was not the Workday planning strategy before Adaptive. We were pretty narrowly focused on financial planning and workforce planning. Adaptive had several years ago embarked on sales and operational planning as its next push after financial planning. We are only going to accelerate that with more development resources for them. After that, they're going to focus on workforce planning so that we can retire our product. And, who knows after that? There are lots of different directions. It's a powerful planning platform built around a very powerful modeling engine. With their new versions, they're able to scale to the largest companies in the world. So, maybe manufacturing and raw material and parts is not something that happens in the next two to three years, but there is no reason it couldn't be part of the Adaptive platform long-term.

Operator

Our next question comes from the line of Mr. Todd Burke from Needham. Sir, you may ask your question.

Todd Burke -- Needham & Company -- Analyst

Hi, everyone. Congrats on a good quarter. Aneel, you'd mentioned that Target went live already, and knowing when that contract was roughly signed, it seems like your implementation cycles have actually become faster in HR. Can you talk about impacts you're seeing with getting better and improving those processes and how it might be speeding up your cell cycles and customers' willingness to dive into something like financials?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

I'm not sure if they've gotten faster. They're definitely more predictable. We've seen Fortune 500 -- even Fortune 50 -- companies go live in 12 or 13 months. Target had a great team in place. They really focused on the implementation and got it done in a very quick time. We've seen that in the past with companies like Bank of America, AstraZeneca -- it can be done in that 11- to 13- month timeframe. It's best in class for a Fortune 50 type company. What's making it more predictable are the tools we're delivering for the implementation side. We've had an ongoing development effort to streamline the inputting of data, the process configuration, where many of the functions are now automated. We actually did these things for the medium enterprise, to bring down the services cost. But, we now able to leverage some of these tools in large enterprise as well. It's definitely a big area for focus. We have some of our best people working on it in Dublin to make implementations faster and simpler.

Todd Burke -- Needham & Company -- Analyst

Got it. Very helpful. Robynne, you specifically called out improved renewals -- I think you said record high renewals. Was that on a gross basis or a net basis? If a gross basis, what is driving the improved renewals? If on a net basis, what are customer buying more of today than maybe a year ago?

Robynne Sisco -- Co-President & Chief Financial Officer

We've been reporting fairly consistently that, on a dollar value basis, we've been over 100%. Last quarter was really just a very stellar quarter for renewals. I'm going to turn it over to Chano to comment in a minute, but we actually have an increased focus on renewals and trying to sell more into that base and make sure we're maximizing the renewals. That was an organizational shift that Chano affected at the beginning of this year. Do you want to comment on that, Chano?

Chano Fernandez -- Executive Vice President, Global Field Operations

Yeah. Our customer base is increasing. We made a change in the go-to-market that some of you have noticed, which is putting more focus in terms of our customers for cross selling and upselling efforts. That seems to be paying off. If you look at the data from the first half of this year, we've doubled down the efforts with engagement of those customers, making sure we plan ahead of those renewals cycles properly. So, if anything, they can have expected or better than expected. That has happened, particularly in Q2, on a very high note positively. On top of that, we take those opportunities for an increase -- basically, adoption of new products, and that has come also on board very nicely within Q2. But, it's more direct compared to the initial contract in terms of performance.

Todd Burke -- Needham & Company -- Analyst

Helpful. Thank you.

Operator

We'll take our final question from Mr. Pat Walravens from JMP Securities. Mr. Ravens, you may ask your question.

Patrick D. Walravens -- JMP Securities, LLC -- Analyst

Great. Thank you. I'll add my congratulations. Aneel, if you look at the $40 billion CRM market, under what circumstances would it make sense for Workday to offer sales marketing or customer support solutions?

Aneel Bhusri -- Co-Founder &Chief Executive Officer

I've said this since we started the company -- Marc Benioff and Salesforce have been great partners and they've chosen not to enter our space and we've chosen not to enter their space, largely because the partnership we have together benefits both companies. If that were ever to change, then we might reconsider it. But, I don't see it changing and they continue to be one of our best partners. It's nice having partners where you're not competing. It just changes the relationship. I don't see that as one of our future growth areas.

There are so many other things for us to do. When I look at the world right now, 90% of our business comes out of HCM. Financials is growing at a nice clip. Prism Analytics, relatively new, growing at a very nice clip, planning relatively new. And then, of course, the Workday cloud platform slowly coming to market. It's already in limited general availability, but we can already see a lot of demand for that. So, we have enough irons in the fire, so to speak, that will keep us busy for the next several years without even considering a different category.

Chano Fernandez -- Executive Vice President, Global Field Operations

Given our edge, you mentioned that HCM only represents 25% of our total addressable market. When you look at the international markets, we're in such early stages without extending over there, that the opportunity of theirs is not super significant besides all the other areas and products you just mentioned. We have no -- we see no shortage of market opportunities right now that we need to execute on.

Patrick D. Walravens -- JMP Securities, LLC -- Analyst

Great. Thank you.

...

Operator

We now conclude this call. Thank you for joining us today. Have a great day. You may now disconnect.

Duration: 53 minutes

Call participants:

Michael Magaro -- Senior Vice President, Corporate Development & Investor Relations

Aneel Bhusri -- Co-Founder &Chief Executive Officer

Robynne Sisco -- Co-President & Chief Financial Officer

Chano Fernandez -- Executive Vice President, Global Field Operations

Mark R. Murphy -- J.P. Morgan Securities, LLC -- Analyst

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

Ross MacMillan -- RBC Capital Markets -- Analyst

Brian Schwartz -- Oppenheimer & Co., Inc. -- Analyst

Stewart Kirk Materne -- Evercore ISI -- Analyst

Keith Weiss -- Morgan Stanley & Co. LLC -- Analyst

Aleksandr J. Zukin -- Piper Jaffray & Co. -- Analyst

Justin Furby -- William Blair & Co. LLC -- Analyst

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Kevin Maw -- Credit Suisse Group -- Analyst

Todd Burke -- Needham & Company -- Analyst

Patrick D. Walravens -- JMP Securities, LLC -- Analyst

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Editor's Note: The original transcript incorrectly stated that Lufthansa selected Workday for core financial management services. The transcript has been updated to reflect that this should have been listed as Group Foncia. The Fool apologizes for the error.

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