Workday Inc (WDAY) Q4 2021 Earnings Call Transcript

Workday Inc (WDAY -0.85%)
Q4 2021 Earnings Call
Feb 25, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Workday's Fourth Quarter and Fiscal Year 2021 Earnings Call. [Operator Instructions] We will conduct a question-and-answer session toward the end of the call.

And with that, I will now hand it over to Mr. Justin Furby, Vice President of Investor Relations. Please go ahead.

Justin Furby -- Vice President of Investor Relations

Welcome to Workday's fourth quarter of 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 close of market and is posted on our website, where this call is being simultaneously webcast.

Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today. And include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions, including those related to the impacts of the ongoing COVID-19 pandemic on our business and global economic condition. 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 customer's page of our website includes a list of selected customers and is updated monthly. Our first quarter quiet period begins on April 16th, 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-Chief Executive Officer

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 of the pandemic, but there is significant cause for optimism. We had a 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 FY '22, we are well positioned to drive accelerated new bookings growth. Our solid results were driven by another quarter of strong execution of high conversion rates. We once again drove strength in North America, and our [Indecipherable], 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 supported 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 the engagement risk and execution line response.

The FINS plus solutions also had a strong quarter and continues 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, Zumes, an 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, a more than 50% growth for full year FY '21. 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 for 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 take light, and virtually, I might add, a record number of workers on the Workday platform in FY '21.

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. And I am pleased to say that trends continue and meaningfully 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 FY '22.

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 years plus at Workday, most recently serving as Head of North America Sales with an impressive track record, where he not only played an instrumental role in helping us win some of the world's biggest brands, but he also established high levels of operational and sales excellence across our North America region that have been critical to Workday's growth. 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, and on behalf of the entire Workday leadership team, I would like to express thanks to all of our workmates 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-Founder and Co-Chief Executive Officer

Thanks, Chano, and thanks everyone for joining today's call. Last August, we shared the exciting news of Chano's promotion to Co-CEO. And six months end, I couldn't be happier with the positive impact of this change. Chano has been at the center of our go-to-market and customer-facing activities, while 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 out market leading innovation 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 few years, we have delivered 50% more in terms of monetizable solutions as 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 the unique position to not only help companies close this gap through a new class of enterprise management cloud, but also 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 principal since we founded of 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. And 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 Chang's and Spectrum Health.

The world of finance is also being significantly impacted by the trend 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 HCM 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, only 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 the employees, 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 Chief Financial Officer

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 FY '20. This expansion was driven by a 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 the 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 FY '22. 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 FY '22, 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 FY '22, however, keep in mind that while we executed well this past year, we still experienced headwinds to new bookings. As I mentioned last quarter, these headwinds have implications for this year's Subscription revenue growth given the lag effect caused by Subscription revenue accounting rules inherent in SaaS businesses.

With that context, we expect FY '22 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 FY '22. For the first quarter of FY '22, 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 FY '21, 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 the 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 lengthening of overall contract duration, providing more predictability in our future revenue, while also adding to total backlog growth during FY '21. While we have historically guided to total backlog, given that variations in contract lengths 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 FY '22, 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 FY '22 however, the ACV up for renewal is relatively flat, compared to FY '21. 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 FY '22, and we expect the renewal base will grow again in FY '23. With all this as context, we expect the 24-month backlog to grow approximately 18% in Q1 of FY '22.

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 the margin standpoint, this past year we demonstrated the long-term scalability inherent in our model. Investing for growth remains priority number one, however, and in FY '22 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 reps capacity.

With this context and an estimated 100 basis point dilution from Peakon, we expect our FY '22, 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 multi-year trend of improvements in this metric.

The FY '22 non-GAAP tax rate remains at 19%. We expect operating cash flow in FY '22 to be approximately $1.2 billion, down slightly from record levels in FY '21, driven by the ramp in growth investments. We expect to invest approximately $170 million in Q1 of FY '22 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 headquarter strategy and affords us control of our core campus buildings.

We expect to spend roughly $270 million in FY '22 to support all other capital needs. This includes investments in leased 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 FY '22.

And finally, I'll close by thanking our amazing employees, customers and partners for their continued support and hard work, which allowed us to deliver 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.

Questions and Answers:

Operator

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Kash Rangan with Goldman Sachs. You may proceed with your question.

Kash Rangan -- Goldman Sachs -- Analyst

Hi. Thank you very much, team. 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 completely understand that 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. 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 you could -- we could see even better trends.

So if you can 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. Once again, congrats.

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

Thanks, Kash for the question. I'll take the first pass, which is the metric that we run the business on at Workday is growth in bookings and we are 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 backing into that. So I wouldn't look too much at specific gross bookings and then I would – I’ll try to figure out what we're actually doing in this next year, which is a reacceleration on the bookings front.

And then maybe I'll ask Chano and Robynne to add a few comments to that.

Robynne Sisco -- President and Chief Financial Officer

Yes. 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 sub-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 is a lag there, so it's going to take some time.

Kash Rangan -- Goldman Sachs -- Analyst

Wonderful. Thank you so much.

Operator

Our next question comes from the line of Mark Murphy with J.P. Morgan. You may proceed with your question.

Mark Murphy -- JPMorgan -- Analyst

Thank you. Yes, 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, that 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, maybe bite off a bigger chunk that would give you a tailwind?

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

That's a great question, Mark. 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 well, many of the core accounting projects were going to be delayed. The ones that were in '23 and '24 and '25 were getting sucked 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-Chief Executive Officer

Thank you, Aneel, and thank you, Mark. 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 to have before. So we're widening our addressable market.

Mark Murphy -- JPMorgan -- Analyst

Excellent. Thank you very much.

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

If I could I just add one more thing, that 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. And if you had told me that in April of last year, I would not have believed that. And so it's just -- 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 realized they needed to be, and so it's one of the drivers of our optimism going forward.

Mark Murphy -- JPMorgan -- Analyst

Thank you.

Operator

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

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you, guys, and it's good to hear the momentum is going back into the business. Chano, I guess that this would probably be a question for you. This quarter, you guys saw good durability in that upsell growth, that new ACV, up over 40% on a year-on-year basis. And if I'm not mistaken, this is the first quarter that you're anniversarying a really tough comp. I think you guys told us it was like up 50% in the quarter ago. So how does that -- can you talk to the balance sort of whether that's -- that type of strength is possible or it could be durable into the year ahead? Can you continue to see that type of growth coming from the upsell motion? And any sense you could give us in terms of what percentage of the overall new business does that represent today?

Chano Fernandez -- Co-Chief Executive Officer

Yes, thank you Keith. As we’ve highlighted, we had another fantastic quarter with 40% plus growth in add-on sales, and that makes kind of 50% for the whole year. That it was really driven across a lot of different products, including core FINS, Financials, Workforce Planning, Prism Analytics, Learning and Workday Strategic Sourcing. But some of the newer products were as well contributing, like Accounting Center, and People Analytics, Extend and heath [Phonetic] also contributed especially in the last quarter at those products were earlier in the year, meaning in the beginning of the year. So we see nice strength in pipeline build from our store based teams.

And there is a lot of momentum on this effort as we enter into FY '22. And definitely, this is a certain area where we are strengthening our investments as well that Robynne is commenting in terms of our investments on what are carriers. So in terms of the mix, it is definitely becoming a much more significant contributor of our new business in FY '21, the business that is coming from the upsell and the cross sell. And we expect that over the medium term, our growth will become increasingly more balanced between the new and installed base sales. But we have a lot of emerging opportunities we believe that will accelerate this year, and we're seeing signs of that in the pipeline as well, Keith.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. That's great to hear. And then maybe one for, Robynne, just on the margin side of the equation. Definitely understand that there's -- so there's some inorganic pressures that you have on the operating margins going into the year ahead. And then there's also just a reacceleration in spend against a subscription revenue line that amortizes off the balance sheet versus marks what's going on in real time. And then there's also some TV spending and the like that didn't take place in FY '21 that takes place in FY '22. Can you help us -- on those last two -- can you help us foot how much comes from the first versus the second, or more pointedly, what's the overhang that you guys experienced from T&E coming back?

Robynne Sisco -- President and Chief Financial Officer

So T&E, we don't expect it to really come back until near the end of the year, Keith, and even then 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 our spending around headcount, we were relatively flat in hiring last year. We did some strategic hiring, were relatively flat.

We're going to be hiring now across all areas of the company. As I mentioned, 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, right, which we think now's the time. I'm seeing great momentum in the pipeline generation, we think we can help that out by turning up the dial on marketing spend. And then investments in infrastructure, technology, data centers, really just across the board. Just – you see just amazing growth opportunity in ahead of us and now is the time for us to invest toward that.

Keith Weiss -- Morgan Stanley -- Analyst

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

Robynne Sisco -- President and Chief Financial Officer

That's exactly right. Your investment always has to take place before you're going to see the impact in your Subscription revenue line. And if you look at -- if you take out the impact of Peakon of 100 basis points, we're largely back on the trajectory we were before last year. And so we're just getting back to business and back to normal, and we feel really good that now's the time to make those investments.

Keith Weiss -- Morgan Stanley -- Analyst

Got it, got it. Makes sense. Thank you so much.

Operator

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

Kirk Materne -- Evercore ISI -- Analyst

Yes, thanks very much. Congrats on the result in -- that's great to hear about the pipeline builds going into this year. Along those lines, Chano, I was wondering if you could just talk a little bit about the international market opportunity? What you've seen in that theater or in those theaters, maybe also where you think core FINS is internationally. Obviously, the US saw HCM take off first and then FINS has been trailing it? I'm curious whether not core FINS can maybe land at more of a -- at the same time, maybe not in 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-Chief Executive Officer

Thank you, Kirk. And as you know, as you said, 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 and 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. And I think it's really when we get to the other side of COVID we should see accelerated momentum that is fully reflected on the numbers. And why I believe so is because the good news is that the pipeline is suddenly improving in the rest of the world markets, and I expect that they 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 that we saw in HCM, Kirk. And we're seeing good wins in international in similar verticals mainly in Financial Services and Professional Services and Hospitality. And 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 industries and clearly in some of the most mature countries like the UK, I would say, France and Germany. We're seeing and we have already a nice customer base of core FINS customers that they are becoming basically happy and referenceable.

Kirk Materne -- Evercore ISI -- Analyst

Thank you.

Operator

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

Brad Sills -- Bank of America Securities -- Analyst

Great. Hey, guys, and thanks so much for taking my question. I wanted to ask about the vertical pipeline. Obviously, you're seeing some real success in some of these key verticals for FINS, and as you know Financials is not a one size fits all. And you've done a tremendous job of adding more vertical functionality and 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've made investment 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 Thank you so much.

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

That's for you, Chano.

Chano Fernandez -- Co-Chief Executive Officer

Thank you, Aneel. 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. And the other one would be state and local and government not Federal. A nd on those three where we made investments, we're seeing very good traction in terms of the maturity of the solution by in terms of our customer wins and our conversion ratios.

Brad Sills -- Bank of America Securities -- Analyst

That's great. Thanks so much.

Operator

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

Brent Bracelin -- Piper Sandler -- Analyst

Thank you and good afternoon. 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 at Qualtrics. You're seeing new VC funding in the culture amp lattice [Phonetic] next think. 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-Founder and Co-Chief Executive Officer

I'll take the first two parts and let Chano address the third. This is a hot space, there is 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. And Peakon, if you look at all the magic quadrants and analyst reports, they're the leader. They're the best. And we looked at what we were doing and said, we can get there, but not in a time that mattered because the market is happening now, and these guys were the market leader. So we couldn't be more thrilled to have them as part of Workday.

And it's become a super high priority item for every CEO, CHRO to understand employee sentiment. In terms of -- the other thing I'd add is, they were a very cool machine learning first application. They countered on that machine learning to drive them to better insights. And that's the way that we want to go as well. So we're super excited about that synergy on that front. And in terms of upsell opportunity, I'll turn it over to Chano.

Chano Fernandez -- Co-Chief Executive Officer

Yes, Brent, clearly it has not closed yet, right? So I just wanted to mention that. But 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 had a great solution. The majority of their presence is in Europe, but they already have some nice flagship logo in the US. And clearly, with our distribution channel in the US and again, cautiously optimistic that this is going to be fantastic, what we can do to better.

Brent Bracelin -- Piper Sandler -- Analyst

Great. Well, sounds good and we'll be watching this one closely. Thanks.

Chano Fernandez -- Co-Chief Executive Officer

And I would just like to add that, again, even though it has not closed, the initial customers' feedback is very good.

Operator

Our next question comes from the line of Mark Moerdler with Bernstein Research. You may proceed with you question.

Mark Moerdler -- Bernstein Research -- Analyst

Thank you very much. And congratulations on the quarter. 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 Chief Financial Officer

Yes, 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. And the best way to really 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 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, frankly, one of the big reasons we decided to move towards guiding 24 month backlog is because that really takes a lot of that guess work around duration coming out.

We did see a lengthening on 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, right? So if customers are entering the longer contracts and then renewing under longer contracts, then that takes away some of the risk to your revenue for non-renewal. So we like that dynamic. We just are 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-Chief Executive Officer

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, right? So I think that the fact that customers are signing now better and longer contracts, which sometimes can be five to seven years longer, I think it's rare in the enterprise software and really speaks to the strategic nature of Workday and the trust that customers place on us.

Mark Moerdler -- Bernstein Research -- Analyst

Makes sense. Thank you very much.

Operator

Our next question comes from the line of Brian Schwartz with Oppenheimer. You may proceed with your question.

Brian Schwartz -- Oppenheimer -- Analyst

Yes. Hi, thanks for taking my question this afternoon and real nice job on the quarter. 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-Chief Executive Officer

Thank you, Brian. 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. And it is in the areas like installed base team, the rest of the world markets, our ongoing efforts in mid market to push in new countries, some of the vertical markets and then some new areas like the federal government. So it's clearly across the organization. So there will be marketing and presales, current securities and certain marketing and brand investments as well. So really, this is about driving the pipeline and bookings growth and basically chase the opportunity that we've been creating, and we have ahead of us to invest in capitalizing on our -- a bit across the board.

Brian Schwartz -- Oppenheimer -- Analyst

Thank you.

Operator

Our next question comes from the line of Brad Reback with Stifel. You may proceed with your question.

Brad Reback -- Stifel -- Analyst

Great. Thanks very much. As you guys think about the acceleration of the potential for acceleration in billings in fiscal '23 and beyond. Does the underlying sort of 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-Founder and Co-Chief Executive Officer

Well, 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 quickly as they could. Finance was not at that same place. And so during the pandemic, we saw companies that were moving to finance to the cloud, we saw other people saying, 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, the ones that the customers that were using legacy finance systems were challenged to run their business and said, we need to move to a modern finance system. And if you look at all the Gartner data that means that finance is going to be a pretty hot area over the next two to three years. Is there anything you want to add, Chano?

Chano Fernandez -- Co-Chief Executive Officer

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

Brad Reback -- Stifel -- Analyst

Great. Thank you very much.

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

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

Brad Reback -- Stifel -- Analyst

Great. Good luck.

Operator

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

Brent Thill -- Jefferies -- Analyst

Thanks. 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 Chief Financial Officer

Yeah, absolutely. So when you look back over our headcount growth in FY '21, 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. And those are weighted heavily towards sales and product more so than any other organization. So we do expect to invest a lot there. And 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 FY '22.

Chano Fernandez -- Co-Chief Executive Officer

Yes, I think we were mostly flat as you commented and is the area, as I said before. So installed base is rest of the world to support the new enterprise market efforts, some new areas like the federal government. And clearly, we are putting plans in place for accelerating there and bringing the people on board as soon as possible. And 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 are leveraging that opportunity ahead and the pipeline that we've been creating.

Brent Thill -- Jefferies -- Analyst

Thank you.

Operator

Our next question comes from the line of DJ Hynes with Canaccord. You may proceed with your question.

DJ Hynes -- Canaccord Genuity -- Analyst

Hey, thanks, guys. 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 using this many modules and maybe how that might compare to your best customers? And I'm wondering if there's any way to kind of put that comparison with spend per employee? It would just be helpful to help think about the capacity for the cross sell opportunity?

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

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-Chief Executive Officer

Yes, that's the main data we track in terms of the growth. So that means a significant part of the growth that we've been commenting, 50% plus last year on installed base, is coming from that 50% of the new solutions that we've been delivering over the last three years to the market. So those are contributing significantly. When you look at the pipeline, it's kind of pretty similar. The conversion rates are also higher there. Clearly, we're knowing every customer, the wider space we do have.

Clearly, usually we know that meeting enterprise customers tend to acquire a number higher SKUs, six or seven to start with through the launch deployment that we have for medium enterprise. But 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, is starting very nicely. And I hope can provide some much more detailed information on this on our upcoming financial Analyst Day.

DJ Hynes -- Canaccord Genuity -- Analyst

Yes. Okay, great. That's helpful. Thank you.

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

And 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. And 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 Closing Remarks]

Duration: 56 minutes

Call participants:

Justin Furby -- Vice President of Investor Relations

Chano Fernandez -- Co-Chief Executive Officer

Aneel Bhusri -- Co-Founder and Co-Chief Executive Officer

Robynne Sisco -- President and Chief Financial Officer

Kash Rangan -- Goldman Sachs -- Analyst

Mark Murphy -- JPMorgan -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Brad Sills -- Bank of America Securities -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Mark Moerdler -- Bernstein Research -- Analyst

Brian Schwartz -- Oppenheimer -- Analyst

Brad Reback -- Stifel -- Analyst

Brent Thill -- Jefferies -- Analyst

DJ Hynes -- Canaccord Genuity -- Analyst

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