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

Right. And then second on that, I'm curious if you feel that Workday's ability to use its balance sheet and being in the position that it is, is actually helping to close some of these deals that otherwise might have been pushed. And then two, on that, just wondering if you feel like you've actually been able to compete more effectively against competitors in terms of offering or being, like you said, partners to customers during this time.

Well, definitely, yes, on the second. I mean I think we've got a very [indiscernible] culture. We're very customer-centric. We start out by saying employees are #1. And if we have happy employees, that will get us happy customers. I've never come across a company with unhappy employees and happy customers. It just doesn't work that way. So you got to start with the employees. We take great care of them. We're taking great care of them through COVID. And they've really stepped up [indiscernible] customers during this difficult time, especially those customers who truly are on the front lines, the essential workers. And that gets around. When you're buying a new HR financial system that you're going to be [ burning ] for the next decade, you want to make sure you're working with a company who has a set of values that align with yours and that's going to take care of you during good times and bad. So that's definitely helped us quite a bit. So what was -- sorry, what was the first part? The first part...

Oh, just being able to -- so being able to [indiscernible] right. And then some deal that might have been pushed, like actually being able to like close because of some of like the flexibility that you're offering.

Probably happened a handful of times but probably didn't move the needle that much. But in those handful of situations, it was definitely very helpful to probably close a customer that wasn't feeling financially secure to do it without some help from our balance sheet.

Right. And then on the competitive front, one thing that I wonder is, in this environment -- so with Workday and you guys, obviously, you have a big -- like we talked about HCM installed base and you're getting there with financials. So do you think it all -- being in your position, where, okay, with something like Adaptive Insights or what you're doing with Scout RFP, even say in some instances, if you provide 80% of the functionality of some of like the niche vendors that are really focused on that, do you feel like that this situation is almost like put you guys in a better position where you can just say, hey, listen, we -- you're an HCM customer, you're already a financials customer. Why don't you just add this on during this time? We'll -- we obviously partner with you guys closely. We provide you flexibility. Like, do you think that has been a dynamic to your guys benefit at all? Or no?

I think some of it has been. I think in order to compete, we have to be best-in-class in core HR and finance; and on the HR side, in learning and recruiting in other areas. I would say that there is a chunk of the market around procurement that wants best-in-class procurement. And at this point, we can't compete head on with Coupa. They've got the full suite. As I've said, they're doing a great job. But there's another chunk of customers that say, hey, we want an integrated suite from one vendor. And what you have works for me. I might not need the contract piece or I might not need the contingent piece or I'm okay with partners. And for those, we end up having an opportunity to sell the full suite; where a couple of years ago, we might not have been able to do that. And I think it's both the strength of the suite as well as the pandemic customers saying, let's just simplify things. Workday is going to be around for a long time. We trust them. We're already an HR customer. Their procurement stuff is very good. Maybe it's not best-in-class, but it's good enough for what we need.

Got it. No, that makes a ton of sense. So moving on -- so on the margin improvement, that's been really, really strong, and it was nice to see margins above 20% for the first time last quarter. But as we look ahead, curious how sticky you feel some of the savings that you guys have realized might have been. So as we look into next year, are there some savings that you think that you'll still be able to realize whether that's relying less on travel or events that you have in the past? And when you think about like hiring and investment and how much has been pushed into FY '22, wondering if there's any comments you can provide on that as well.

Sure. So I think the over-performance on the margin side just show the underlying power of the business model. Candidly, when COVID hit, we went into a hiring freeze. Obviously, we weren't traveling because of COVID. So we got the double benefit there. We definitely want to start hiring again. And we're continuing to focus on innovation and we also think that we're probably under-resourced on the sales side and the marketing side. So you can see us make further investments there. So I wouldn't assume that we're going to stay at this margin level for next year. I think it was a onetime thing, but it shows the power of the underlying model. As it relates to savings, I think you're absolutely right. There are savings. There's no question about it. There are so many things that I ask myself, why did I use to travel to that? And we're all asking ourselves. If there is a silver lining, we've learned how to do implementations with everybody remote, and they've been flawless. We've taken a Fortune 5 company live without anybody on-site right now, and it's one of the biggest companies in the world. And if you'd ask me, could we do that before the pandemic? I would have said no way, there's no way we could do that. We have to have people on-site. So going forward, especially on the services side, which is a huge travel, I think customers will expect [indiscernible] from us and more by Zoom and only focusing on important meetings. The sales side is the one that time will tell. We'll see if customers expect us to show up in person again. I think we can do a lot more sales work over Zoom and Web Meeting and all the other technologies that are out there. Webex is -- I love using Webex now. Cisco is a great customer. Zoom is a great customer. I love these technologies. And they're really holding up under fire. And I think we'll do a lot more of the sales work, but not all of it. We'd like to go back and be with our customers in person. In terms of events, time will tell there, too. I definitely think for our annual user conference, we'd like to get back to in-person event. But for the vast majority of seminars, I think you can do those all on Zoom. So yes, I think it is more -- that cost saving is more permanent, and I think there'll be some savings on office as well.

Got it. Yes. Understood. And then when you -- so you talked a lot about implementation times, right? And being able -- you've mentioned it a couple of times on this call already, but just being able to implement customers a lot quicker and even, in some cases, than maybe you have in the past. So could you talk about, I guess, what you guys have done really to drive -- like have you seen, I guess, average implementation times actually get shorter? And if so, what have you really done to drive that in this type of environment? I'd be curious what you guys have seen.

So we built a set of tools for the medium enterprise to implement the products quickly. There are some pre-configured components. There's some shortening of the process. And what we've seen during the pandemic is we've been able to take those tools to the upmarket, to the large customers as well. And in many ways, we're replaying the playbook that we had in 2008 and 2009 where people were not looking to make investments that didn't pay off for 18 months. I mean they had to pay off within a year. And we can do HR, financial implementations in 6 to 9 months, which is why I bristle at times at the comparison to ERP. I mean ERP, to me, has only negative connotations. And Workday is a cloud HR and finance company, decidedly not ERP. A lot of the analyst reports that were written were about all the lengthy ERP cycles. And I said, yes, but that's not Workday. We're getting these things up and running. People may still decide to delay, but it won't be because it's a 3 [indiscernible] implementation. And I think dusting off that playbook from '08, '09 and then it's been fascinating to see the learnings from the medium enterprise applies to large companies and large companies realizing, hey, maybe we don't need that unique feature and to configure everything to the nth degree. Let's just get it up and running, and we can tweak it later.

Got it. No, that makes sense. So maybe now we can talk about public sector and federal because I think that, that was something that -- it was interesting because I think you've heard it from a couple of other SaaS vendors also that they had strength within public sector as well. So -- and that was definitely something that was clear on your guys' last earnings call. So can you maybe talk about the source of some of that strength in the quarter? And I know you spoke about being excited longer term about that opportunity in the federal market. So I guess, just in terms of sizing, too, maybe you could talk about what that opportunity could look like and where you guys stand today in terms of penetration.

So if you look at the -- if you define the public sector as -- and the way we do, the public sector is state and local government, higher education and federal government. The first 2, state and local government, [indiscernible] for a decade. My co-founder, Dave, was a big proponent of the higher education world. And so we actually even have a student system that many large universities are beginning to use. So that market continued to be healthy. Large universities are continuing to move into the cloud. State of Oklahoma moving to the cloud. The states have been generally less willing to move into the cloud. And we see that there's more of an interest to modernize and really get to an agile environment. And so I think a lot -- you'll see a lot of the states and local municipalities move. The new one for us is federal, and we had a federal agency that became a Workday customer, a fairly sizable one for both HR and financials. And as part of it, we have to go through the FedRAMP process, which is also important to our defense contractor customers. And by going through the FedRAMP process begins to open up the entire federal market, which is sizeable. And just going back to my days at PeopleSoft, some of the biggest customers we had were federal agencies like the Department of Defense, like the Treasury. These are massive organizations. Many of them are still running PeopleSoft. And they're now beginning to -- the federal government has a mandate to really embrace the cloud. And I'd also say the federal government, given their ability to print money, always has money. So it's -- the reason we haven't gone there is one, FedRAMP is a lot of work. And two, historically, federal government, different than state and local and higher end, had requirements that were very different from commercial requirements. But those are beginning to close in on the commercial requirements as the federal government thinks more about themselves as a big business. And that means that we don't have to make a massive product investment to open up that market.

Yes. No, that's interesting. I think that, that definitely going forward, could be an interesting like growth opportunity for you guys because I've even heard and I'm sure -- and this is kind of leading into my next question. But in terms of like deal sizes, there's definitely a lot of like big, chunky federal deals out there. So just curious, when you compare that, when you compare some of these like federal deals to commercial, like anything interesting that you could call out? And as you look ahead, these could be like big, big wins or how would you characterize that?

It's still early. But if you think about -- let's take a large university like the Ohio State University. They're a happy Workday customer. They'll typically have -- these schools can have anywhere from 50,000 to 100,000 students and that many employees. So it's a huge -- it's a Fortune 500 enterprise. And that's the way I would think about those higher education institutions. And some of the federal agencies size-wise are Fortune 5 or Fortune 50 depending on the organization. Walmart is a customer of ours. I think they're probably the biggest company in the world. But there are federal agencies that are pretty close to the size of Walmart. So I think that's the way to think about it is that -- it's another wave of Fortune 50, Fortune 100, Fortune 500 accounts that will be accessible to Workday. And the deal sizes will be pretty similar. And states are like that, too.

Yes. No, it's pretty incredible, too, because I think even to what we were talking about on the HCM side earlier, okay, if you just look at Fortune 50, but you're not looking at a lot of like the private companies and you're kind of missing that whole picture where you can get a lot of those bigger, chunkier deals still in the pipeline.

Yes. I know in the States, in particular, I think at the time of Oracle taking over PeopleSoft, 30 of the 50 states where PeopleSoft customers for HR and finance. It's a full suite. And most of them have not moved. Some have moved, but most are still on-premise. So those are 30 -- 30 to 50 Fortune 100 organizations.

Yes. That's really interesting. So my last question before we open it up, I know that there's a few questions maybe sitting in the queue. [Operator Instructions] So before we open it up, I know on the 1Q earnings call, you guys talked about higher-than-normal deal pushouts, which makes sense in this type of environment, of course, particularly in impacted industries and that you were seeing those deals typically being pushed out a quarter or 2. But I'm not sure that we got an update on that on the last earnings call. So just curious, when you look at like those deals that were pushed, do you feel like many of those have closed? I mean you talked about a little bit of that earlier, hey, maybe the strength that we saw in 2Q was some of this pushout that we might have seen. Or do you feel like there's still a number of those that are still outstanding and have yet to close?

There's still a number that are outstanding and yet to close. But I would [indiscernible] sum the market up by saying the companies and our customers that are -- in industries that are doing okay or thriving in the pandemic, they're continuing to buy. And it's not that different than the pre-pandemic environment. Then there are those industries that have been really hit hard. I mentioned those earlier: transportation, hospitality, they're not doing much of anything. And so you can think of Workday as following in those trends similarly. I don't know what the exact numbers are, 80%, 90% of the businesses are doing fine, and 90% of our pipeline is doing fine. And for those -- we have -- for our retailer customers, they're seeing some of the highest volumes we've seen. We're doing some transaction volumes on a daily basis that look like Christmas. And we know they're going into Christmas, but it's crazy, whether it's a Home Depot or a Whole Foods or Walmart or Lowe's or any -- or Target, they're just doing [indiscernible]. I am in awe of how many of these retailers transition themselves to curbside pickup and really built up their e-commerce capabilities. And they're doing well. And I'm not sure people [indiscernible]. And so they continue to be in the market. We've made it -- a huge retailer in Q2 that we were talking to for 5 years that just wouldn't [ pull the trigger ]. And frankly, the pandemic was the reason they pulled the trigger. They saw their competitors on Workday doing well, and they thought it's just too difficult to work with these legacy systems.

Yes. It's pretty incredible. That's awesome. So maybe let's move -- we'll move to the audience and some of the questions that they have entered in the last remaining few minutes that we have. So one participant asked just for an update on the current competitive dynamic and especially with -- in relation to, I think, SAP, with now SAP being able to be deployed on AWS and on Azure, if that's changed the dynamic at all or if you've seen, I guess, just any changes overall in terms of the competitive landscape.

Really, if I were to say anything, we tend to see Oracle in most large HR and most large [indiscernible] transactions. We see less and less of SAP. And I think part of it is S/4HANA to me is not a native cloud application. It's still a single [indiscernible] cloud. And S4 comes after R/3. And I think they have a nice database, but it's not cloud. It wasn't [indiscernible] can run in a single environment on someone else's cloud. Yes, but that's not the power of the cloud. You look at the vendors that are truly native to cloud, whether it's Amazon with AWS or Google or Salesforce or Workday, and we're all [ deploying ] native cloud solutions. And SAP is just -- I think just host -- just using it as a hosted solution model, which I don't think is really what the cloud is all about. I would just say, I don't underestimate Oracle or SAP. On the other hand, I don't spend a lot of time thinking about that. I think we [ can't lose sight of ] what's important and what's important is taking care of our customers and making sure we're on the cutting edge of innovation. And when I look to innovation, I definitely look to the consumer companies. They're always on the cutting edge, whether it's Google or Amazon or Microsoft, Facebook, Netflix. That's where a lot of the [indiscernible] coming from Apple. But learn from them and apply it to the enterprise, and I don't really have a lot of time looking at what SAP or Oracle are doing.

Got it. And then the next question that's from the audience is just do you think that HCM departments have seen their budgets grow in 2020 and 2021 because of the importance of employee health in this crazy time and amidst the current environment?

I think budgets for HCM will grow. I don't know if it will be for HR systems. Time will tell. But there's no question that whether it's mental health or physical health, those new areas are being taken care of in most cases by the CHRO, one of the Chief People Officer. Many companies are now hiring Chief Medical Officer, and that's usually someone working for the CHRO. I think we're all taking on more ownership of the health and well-being of our employees. So that will definitely increase [ the area ]. And there may be some systems opportunities for Workday down the road. We definitely see [indiscernible] as a newer emerging category for HR that we could offer something to our customers. And our customers are asking us about.

Got it. And then maybe a [indiscernible] financial side, I guess, for legacy systems. And this environment definitely made people realize, okay, when we have these on-premise legacy systems, it's hard to do the financial close process right or other aspects. So could you maybe talk about it? It sounds like that this may have been a catalyst for an acceleration, right, in terms of migrating these workloads to the cloud. Maybe some of this happens upon like IT budget normalization. But when you speak with customers and when you look at the pipeline, is there like a time frame where you're thinking, okay, this is -- whether that be like next year or middle of next year or is there like, I guess, just in terms of a trajectory of really adopting these core accounting systems? Are you seeing anything or hearing anything based on your conversations?

Well, up until the pandemic, core accounting was growing at 40% to 50% a year. So we were very happy with that, especially at the scale of [ business ]. It's definitely not growing at that rate because our -- overall, our growth rate is not what it was post -- pre-pandemic. Hopefully, it will bounce back up. When you talk to customers, and I think we have amazing core accounting products, the problems that they're usually trying to solve are much more about the planning. I need the right plan up front, and then I want to analyze the data on the back end. And so core accounting is definitely a really important piece. But before we had the planning and Prism Analytics piece, it was necessary but insufficient. And when I sit down with CFOs, and we're doing a lot of Zoom calls with CFOs who just want to get smart about the cloud, they assume we've got the accounting right. They just said, like, you did it at PeopleSoft. You know the system. Frankly, my core accounting is working fine, anyways. What I really need is a real close look between planning, analysis. When I changed the plan, I want it reflected in the transactional system. I don't want to have to spend time getting that transactional data into an analytic engine to the analysis. I've just got to be a lot nimbler. I need to let that analysis then drive my plan and do it in a closed loop. And that's a great validation for our plan, execute, analyze model. And we're just doubling down on that. And really, it is those strategic areas of planning and analysis that are really at the forefront for the CFO today.

That's awesome. Well, we're coming up against the time. So Aneel, thank you so much for all the insights that you shared. I know the investors on the line sure learned a lot. I learned a lot. So really appreciate you joining us today.

Thank you, Taylor. And for everybody out there, thanks for joining and be safe and stay healthy.

Yes, likewise. Okay. Bye everyone on the line.