Workday, Inc. (WDAY) Earnings Call Transcript & Summary

All right. Great. Thanks, everyone, for joining us here this afternoon. My name is Matt Pfau. I'm the analyst at William Blair that covers Workday. For a complete list of our disclosures, you can visit www.williamblair.com. I'm also required to inform you that I personally own shares of Workday. And so with the disclosures out of the way, we have with us here today, Robynne Sisco, Co-President and CFO of Workday. So thanks, Robynne, for being here.

I think most people have some idea of what Workday does, but maybe it'd just be helpful to talk through the company's journey a little bit and how the business has evolved since going public in 2012. Specifically, I'm thinking about expanding your presence beyond HCM.

Yes. Thanks for having me, Matt. And thanks for everyone who's on the Zoom joining. So maybe just a brief background. Workday was founded in 2005. So we've been around about 15 years. Our co-founders: Dave Duffield, who is the PeopleSoft founder; and Aneel Bhusri, who was a PeopleSoft executive, founded Workday on the heels of the Oracle acquisition of PeopleSoft, and they really wanted to make sure that Workday control its own destiny. So they actually put in place a dual stock structure that prevents a hostile takeover so that they didn't have to worry about that happening to them again. We really took a cloud-first based approach, and the goal was to develop multi-tenanted SaaS for the back -- critical back office systems, particularly surrounding HR and financial solutions. And from Day 1, it was our goal to serve the largest companies in this world as well as the mid-market. So we have multiple products core to our product bases, our HR solution. And then we've got a lot of add-ons that surround that: payroll, recruiting, learning, workforce planning. And then in the financials area, everything from GL to financial planning, spend management, expenses, projects, procurement. And then we have some solutions that apply across the suite such as analytics and our Workday cloud platform that is beginning this year. We believe our competitive advantage is that we are pure multi-tenanted SaaS. So most of our competition, particularly in the large enterprise, is with the larger legacy firms that offer on-premise software. And even though they've started to move to the cloud, they're really not true multi-tenanted SaaS like we are. All of our customers are on the exact same version, and we think that, that provides superior customer service. We have superior usability, flexibility. We're built on all the latest technology. We have proven ability to scale up to the largest companies in the world and support them. We've got single system across our SKU. So really, whether you use HCM or financials, you're really in the same system. You're just buying rights to certain things. And so it's really a single, single system, not multiple systems that are pulled together and loosely integrated. And we think that that's really important as we can provide a similar user experience, same data model, same security model across all of our modules. And really unifying HR and FINS system provides inherent advantages that you can't have when you have quite silo-ed solutions and you're moving data back and forth and having to support all of these different firms, these different software packages. You can really seamlessly move around within Workday across all of the modules. So since Day 1, we've focused on our core values. Our employees are always first to us. We have over 12,400 Workmates today. We put them first because we inherently believe you can't have happy customers unless you have happy employees that are going to treat those customers well. We've had a relentless focus on customer satisfaction from Day 1. And getting customers not only to buy our service, but getting them up and running and live and referenceable and happy has always been key to us. Over 70% of our customers are live on our products. Those 30% are -- who aren't live are in the implementation mode. That's a key metric that we track. We have customers inspection over 95%, which is really unheard of in an enterprise software. And all of our employees are incented to keep that number high. So everyone's got a bonus tied to that number being over 95% customer satisfaction. We focus on relentless innovation, and we're really customer-driven. So we listen to our customers, and they really drive our product suite, what do they want us to do next. They're involved in the design of our products, and they're the early adopters of our products. So we rely on them to help shape with the Workday world looks like today. And our core values have gotten us to where we are today. We have over 3,200 HR and FINS customers. 45% of the Fortune 500 are our customers, and we'll do over $4 billion in revenue this year. And maybe, Matt, back to your question about how we've done since the IPO. We have seen massive growth since our IPO. It's been incredible. I actually joined right around that time in 2012. We had about 1,400 employees. We now have over 12,000. Now we had a couple of hundred million in revenue. And it's been quite the journey. And I think our growth primarily since then has been driven from HCM in terms of the numbers. So HCM is about 80% of our revenue base exiting last year. But the FINS market is growing faster. And so it's been interesting to watch because when David and Aneel founded this company, they built HCM and Financial at the same time, right? But what we saw was HR moving to the cloud first, and it's really now that we're starting to see momentum with the large enterprise that is starting to look at moving their financial systems into the cloud. And we've had good traction with that pre-COVID. And we're -- there has been some impact on both to our HCM and FINS pipeline this year. But so far, we've had really good momentum inside -- in the U.S. and outside the U.S., right? We're growing faster outside the U.S. than we are within the U.S. because we started here first. It was the first market to move. So we're highly penetrated there. But we do have people all over the world across Europe, across Asia Pac, and we're starting to see good traction there as well. And as I mentioned before, have high-growth rates outside of the U.S.

Great. Let's dig into the financials a little bit more. So it's interesting because especially with large enterprises, this has been an area of software that has been very, very slow to move to the cloud whereas some others are much, much more penetrated. So maybe why has it taken large enterprises so long to move their financial systems to the cloud? And then what are some catalysts that could finally get this market to start converting over? Because of these financial systems that are out there are 20-plus years old and were implemented for Y2K.

That's right. That's right. So it's interesting because those of us that go into the finance profession that become accountants and controllers and then later, CFOs, we tend to be very conservative, right? And I think that, that has been part of the journey of financials moving to the cloud. When I talk to other CFOs, say, 3-plus years ago, there's really a big question in their minds as to whether they would ever move financials to the cloud. They were worried about the risk, they were worried about confidential data being in the cloud. They were worried about not controlling their own servers and their own data centers. And really putting that critical business system into the hands of somebody else was something that they weren't sure that they would ever do. Now the conversations that I have, have really shifted. And almost every single CFO that I talk to says that they absolutely are going to move financials to the cloud. It's just a matter of when. And every company is drawing their own decision about when the right move is. And I think that finally, we have enough other systems in the cloud like CRM, which is really the trailblazer here, HCM. They now understand that it's not higher risk. In fact, it's lower risk, right? Leave the data center operations to the people like us who do it for a living and are really, really good at it. They understand the benefits that they're going to get from continuous innovation from updates with almost no down time, right? And those are value propitiations that really resonate with them, having real-time data, having machine learning embedded in their system to make them more efficient. And so the pendulum has really swung on the sentiment with these large companies. I do think there are -- again, it will still be a journey, right? Not everyone's going to flip over this year or next year. Some of the drivers we've historically seen have been when companies are facing major upgrades to their financial system. Well, that's the perfect time for them to go out and see what else is out in the market because upgrading these legacy on-prem systems is not an easy thing, right? It's a multiyear project that often costs tens and tens of millions of dollars. And now when you're looking at putting in cloud systems and implementation of a new cloud system is usually less expensive and faster than upgrading an old on-prem system. So that's been a big triggering event in the past. The other one we've seen is companies that have had significant changes to their businesses since they put those systems in 20, 25 years ago, whether it be a lot of M&A, whether it be changing business models, right, they've found that their on-prem systems really had prevented them from affecting the changes to their business that they needed to make and that their back office systems were no longer supporting them. So that's the big triggering event, too. We've also seen some changes in regulations that really helped build awareness and helped adoption. Things like the 606 revenue standard being implemented. A lot of the CFOs that I talk to that were on on-prem systems, it was a massive project for them to implement and adopt that new standard. They had essentially $10 million 18-month IT projects surrounding their adoption profile, where our customers that were on Workday FINS, which included us, we early adopted, there were no systems issues at all. We built in the functionality they needed, and they were able to implement and go on, and they were able to do it faster and without any additional IT cost. So that's been a driver as well. I believe that this COVID crisis will be another accelerator for FINS adoption. A lot of the CFOs I'm talking to are struggling to navigate their businesses through these uncertain times on a system that doesn't give them the visibility that they need, isn't flexible to help them change and adapt as they need. And so they're coming out of this with a realization that, "Boy, I do not have the systems I need to react, and I need to do something about that." The time like of that's a little uncertain. We'll have to see how the situation evolves when we start through the recovery. But I do think that it's times like these that really spotlight the limitations of these legacy systems.

Yes. That makes sense. Also in -- so in 2018, I think it was you -- you acquired Adaptive Insights. And partly, the planning space was taking off. So that was, I think, part of the investment thesis. But also another significant, I think, part of that was to get a better foot in the door with CFOs and help those discussions and those relationships. So maybe we can talk about how that's progressed since you made the acquisition. And are there any other areas or touch points you can use to sort of get in the door and maybe when CFOs are ready to make decisions for those core financials, get in that conversation as well?

Yes. So we had actually started building our own planning product organically a few years before the Adaptive acquisition, and we did that because we're hearing from our customers that they weren't happy with the planning tools that they had. And we had a vision, and we still have this vision, that the ability to be able to plan in your transactional system, which is something that no company has ever done before, was going to be really critical to the future of business, and so we thought that building it organically was the right way to go. What we found a couple of years in is that the planning market was moving, and our product wasn't ready. And not only was our product not ready and still not going to be ready for a few years, but when it was ready, we won't going to have the ability to sell it separately from a core HCM or core Workday SKU and financial SKU. And we realized that particularly the larger companies, they didn't -- they weren't necessarily ready to replace their GL, but they wanted planning financial planning and they wanted workforce planning. And so we pivoted and went out and scoured the landscape to see what companies might be able to accelerate our time to market, but also help us stay true to this vision that we have of planning and transacting in the same system, and Adaptive perfectly fit the bill. They had a technology that was going to be really complementary to Workday, and they had a company culture that honestly felt just like Workday. It is an amazing company. And in hindsight, we looked back, and this has been just a hugely, hugely successful acquisition for us. We have helped them accelerate their sales because they were viewed really as an SMB product. And while they were doing all of the product work to -- to get their product to scale up into the large enterprise, they were having trouble actually getting their foot in the door. Well, under us, that's not a problem anymore. We've got our relationships with the largest companies in the world, and so we're able to have those conversations. And so we really accelerated what their organic growth path would have looked like by taking their amazing product and putting it through our great sales channel into the large enterprise space, and we've seen really good adoption so far. We're really pleased with our win rates in that area. And it has, to your point, Matt, helped us make a smaller sale upfront where pre-Adaptive, if you didn't want to replace your core HR or your core financial system, there really wasn't a conversation we could have with these companies. Now we can go in and sell the planning, which not as big of a lift to put in. Companies can get up and running and live in weeks and months, depending on how complex they want to get and start getting value out of the product. Then we could start building that relationship, right, so that we know that we're going to have a seat at the table with these companies when they do decide it's time for them to replace the financial system or their HR system. And so far, we've seen great traction with not only being able to sell Adaptive to Workday customers and with Workday SKUs as a part of the initial sale, but also taking those Adaptive relationships and leveraging those to make sure that we're getting a seat at the table when there's a financial or HCM deal in place. And so that's been really successful. We bought Scout in December. Scout is a strategic sourcing tool, and that's another great way for us to go sell into the office of finance with a highly strategic product that has really fast time to value. You can put in, in a matter of days, and start building that relationship with the office of finance. And so it's early days with Scout. We've just finished our first quarter with them in Q1. But so far, it's looking a lot like the Adaptive path. And so we're super, super excited about what we're going to see there. And the great news is Scout already sold into the large enterprise. So most of their customer base was already large enterprise customers, and so they've already got that reputation of having a product that can really scale.

Right. And have those planning and Scout with procurement, those sort of faster time to value type products, have those been performing better in this environment?

Yes, they have. And I would add to that category, our sales back into our base, right? So we talked about over 50% net new ACV growth in Q1 with sales back to our base. Because when we sell back to our base, it's not -- it's a shorter sales cycle because we already have a contract. We don't -- we have a relationship. We don't have to have a lot of the conversations you have to have with a net new customer around security, around privacy, around data center operations and SLAs. And when you add on SKUs to a customer that already has HCM or financials, they're much faster implementations. And so we're seeing great success there. I do think that the investments we've made in the back to customer base selling motion over the last few years have started to pay off. And I do believe, to your point, Matt, that in times like this that are tougher, customers are looking for faster, quicker projects. And so we've had great success there. The other area that we're finding we still have really good momentum, really strong momentum is in the medium enterprise, which is kind of interesting because it feels like the smaller companies, a lot of them are being more impacted by the COVID situation, but we saw really strong sales through our medium enterprise go-to-market motion. And those customers tend to buy full platform, right? They don't want best-of-breed solutions necessarily. They want a single platform to do everything, and they want to put it in, and they want to put it in fast. And this is where, I believe, some of the programs that we've put in place with for that space have started to really pay off. We've got a deployment program called Launch. It's a fixed fee deployment, limited scope. And the philosophy there is get Workday in full platform, get it in fast, and then you can continue to evolve the way you use the product and continue to adopt more features and functionality as you go forward. And we're really shortening the time of these implementations, and that's really, really resonating with the shorter time to value.

Yes, that makes a lot of sense. Let's talk about HCM a little bit. And I think a lot of times because of the success you guys have had in the HCM market, there's sort of this perception out there that you're close to fully penetrated, but I think that's far from the case. So maybe just help us understand how far along you are in the HCM journey and where the remaining opportunities are.

Yes. I mean we certainly are far more penetrated in HCM, particularly in the U.S. than in FINS just because the market of HCM migrating to the cloud is far more mature. We have about 45% of the Fortune 500. But what that tells me is there's 55 left, right? Because even though we have lost some deals up there, it remains to be seen if our competitors can actually get them live. So we've had deals come back to us over time because they struggled to get live on our competitors solutions. So we still believe we've got opportunity even up in the Fortune 500 ranks, where we've already got a pretty strong position. And then when you look at below the Fortune 500 large enterprise, there's still a lot of market out there even in the U.S., and there's still a lot of medium enterprise market out there in the U.S. So we think that we still have a lot of opportunity in the U.S. Our growth is slowing because what we are seeing is a fairly consistent number of projects coming to market in the U.S., not an acceleration of the number of projects coming to market each year in the U.S. As we go outside of the U.S., our penetration is far lower. We've got about 20% of the Global 2000, and we're just really starting to see traction in medium enterprise of the U.S., where we've taken as much program I was talking about before and pushed it out into the international markets, and we think that's going to really help there. So international continues to be a huge area of expansion for us. FINS is going to be a big growth area. And then a lot of those analytics products, too. Prism, which is our analytics product, is growing really, really fast. It's smaller dollars, but it's growing really fast. So that's going to be a more significant growth driver for us over time as that scales. Adaptive is doing really well. We have high hopes for Scout. And we've got some new products coming out that we're going to start to sell. Accounting center, which was critical to our win at Sallie Mae, which was a great win for us because they weren't a customer at all. They don't have HCM. This is a financials-only product. And so I think that really talks to the reputation that we're building with our financials product that it's not just happy HCM customers that are buying us, it's -- we really have a highly competitive product that can serve Fortune 100 companies out there in the marketplace.

Yes. Great. We hit on some areas of what you're seeing from the pandemic in terms of your business. But maybe let's just sort of go over. If we look at maybe some of the larger, more transformative deals, what's going on there with them in your pipeline? Have deals fallen out? Are they just getting delayed? And then I think another important thing with Workday to understand that's maybe a little bit different than some of the other HCM or payroll providers is how do employment levels within your customer base impact the revenue you receive?

Yes. So we have seen deals slip. 2/3 of the deals that we've seen slip are in the industries that have been most impacted. Health care, travel, hotel, right, the ones that you would expect. And that's really, as you would expect, a function of these companies just trying to navigate through these times, and they just don't have the appetite for a large system project right now. Those deals, often they've slipped a couple of quarters. Sometimes they've slipped into next year. And frankly, some of them have just said, "I don't know when we're going to get back to this," right? "We will, but we're not sure when." So we did a scrub on our pipeline. There are a lot of companies that are moving forward. It's been interesting that some companies haven't really been impacted that much. Others are doing really, really well. We have some customers that are using our system to an extent that we've never seen before because their volumes are going through the roof because they're actually benefiting from this situation, whether there -- it be some of the big retailers or whether it be some of the companies that are transporting these goods that were all ordering online and having delivered to our house. And so we are continuing to sell new business in the large enterprise. We are continuing to pick off deployments with those customers. I mean it really has been a mixed bag, right? So some delays, and some moving forward. And we think that Q2 and Q3 are going to be tough. From what we see in the pipeline today, it looks like Q4 might start to see a recovery just based on what we're seeing in the pipeline. The customers are saying, "By Q4, I'm going to pick this back up." Again, time will tell. But that's really the largest impacts that we're seeing. It's not just sales back in the customer base. It's really these larger companies that are that are delaying. And I'm sorry, Matt, you had a second part to your question.

Yes. Just how do the employment levels within your customers impact the revenue you receive?

Yes. So we have base worker counts in all of our contracts, and our customers commit to those base worker counts so that they can get discounts, volume discounts up to that level. And then once a year, if the customer reports higher level of workers, we get more money. They can go back down to that base level, but their fees don't -- they can't go below that base level for the term of the contract, which most of our contracts are 3 to 7 years. So we've got downside protection. We may see some companies reporting lower counts still at or above the base level. So we may see some revenue leakage from that. And then renewals is when a company will have the ability to reset those base levels upon renewal. If they believe that they're going to be permanently lower, then they'll reset those base levels lower, but they'll pay more. So that will be partly offset by low -- them not getting as big of discounts because they're not committing to the same levels. But if they believe they're going to rehire those workers back, they will actually likely commit to those same worker counts. Because in the end, if they hire those people back, they're going to end up paying as more because they'll be paying it at a higher rate. So we do have some exposure to declining worker count levels. But overall, it's going to be an effect that we feel over time is going to be limited.

Yes. I think we got time for one more. So I think I'll wrap up with -- we discussed Scout and Adaptive, and it seems like you're pretty happy with the way both of those acquisitions are turning. So how do you think about acquisitions going forward? Are there specific areas that you're looking to add functionality? And how do you sort of go through the build versus buy process on those?

Yes. So we're constantly scanning the landscape for what's out there. A lot of companies have been pretty expensive over the past year, and this may change that and maybe some opportunities for us. I think if you see us do more acquisitions, they'll look a lot like Adaptive and Scout, where there'll be really products that are complementary to the Workday SKUs with very little, if any, overlap with Workday functionality, companies that have modern technology that are pure SaaS and that have great company cultures that we think we're going to -- will be a good fit with Workday. So that's been our recipe for success for these 2, and we're going to repeat that. We will look at build versus buying decisions constantly, whether that's for a specific technology that needs to get embedded or whether that's for a whole product like Adaptive and Scout were. But we'll see how that evolves, but I would think -- I would expect that it'd look a lot like Adaptive or Scout to the extent we do future M&A.

And with that, I think we're about out of time. So thanks a lot, Robynne, for joining us here today. Really appreciate it. And thanks, everyone else on the call.

Thank you, Matt.