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

Hello, everyone. Welcome to the fourth annual Wells Fargo TMT Summit. My name is Phil Winslow. I'm the software analyst here at Wells Fargo. Very excited to be hosting Workday today, Robynne Sisco, Chief Financial Officer. But before we get going, we do have a safe harbor slide that we need to show you. Operator, if you could bring that up on the screen. All right. I think that's enough, that's time to read that. And so Robynne, thank you for joining us today. I know it's a busy time of the year. So thank you for taking the time to join us.

Absolutely, Phil. Happy to be here. Thanks for having me.

Now Robynne, we're 10 months plus now into the COVID-19 pandemic. And we believe CIOs have been forced to reevaluate their strategies, whereby no cloud is officially a no go, or at least that's a line that we've been using. It's the one liner, so to speak. I think that, obviously, clearly implies not just a cloud infrastructure and cloud platforms, but you have modernization of applications, digitization of workflows. Can you talk about Workday's journey through 2020? How have you responded? What are you hearing from customers?

Yes. So as you know, Phil, flexibility and agility have always been incredibly important aspect of the cloud. And for us specifically and the products that we've built, that's been a big part of our value proposition. And we believe this pandemic will actually force companies to rethink and reprioritize their cloud strategies and, frankly, move them up in the priority as well. And so our existing customers are a great example of the power of the cloud. We've seen how critical that we are in helping them to navigate their business through these times, whether it's using our planning solution to dynamically adjust their financial and workforce plans or seamlessly close their books remotely, redeploying critical people and resources with agility, with Skills Cloud and other such use cases. So we've really seen them use our products in ways that we haven't and in volumes that we haven't before as we help them through this pandemic. So really has proven out the value proposition. At the same time, we've heard from a lot of prospects in the market who've talked about the challenges they have faced with on-premise systems in this environment. So it really is changing the way companies think about a cloud-first strategy. In terms of our own business, like our customers, we had to pivot as well, right? Now we were fortunate we were already all cloud. We already used a lot of great collaboration tools. We are on our own systems, as you can imagine. And so for us, it was really a seamless adjustment into this COVID environment. And we've been able to, right, develop our products remotely. We've been able to sell remotely. And I think one of the things we're most proud of, Phil, is we've been able to do our deployments of our products completely remotely. So we had a lot of in-flight deployments, as you can imagine, that we were able to not miss a beat, bring those customers live. We had over 190 go-lives in Q3, including Walmart and some of the largest customers that we have. And so we've really shown the power of having a cloud technology and how you can deploy it remotely and how critical it is for companies to have during uncertain times like these.

Yes. Just -- I want to drill down on that in a minute and think about how are customers and prospects for that matter, thinking about Workday relative to some other mission-critical systems in terms of prioritization spend. And maybe that's even too high level because Workday, we used to just think about HCM, but Workday is obviously broader now. So kind of Workday, but also your expanded product portfolio.

Yes. That's right. And we have seen ourselves move up in the priority list. Where we've seen a lot of success, Phil, is in our back-to-base sales. So existing Workday customers when they add something on, right, it's a faster sales cycle. It's an easier deployment in general. The one exception to that would be if they're going through a core FINS deployment. And so our history with them has really shown them the value in times like this. And so we've been able to have great success with over 50% net new ACV growth in our back-to-base sales over the last 4 quarters, and that's been really, really successful during these COVID times. And like I mentioned before, I think our products are more key than ever, right? And so companies -- both customers and prospects are looking to us to do more frequent planning, right, which you have to do in times of uncertainty. So we've seen great traction with our Adaptive Planning product. It's more important than ever for companies to engage with their employees, right? They want to understand the employee sentiment. They want to monitor how their employees are doing during these unusual times, and our HCM systems and some of our analytics really allow them to do that. We're investing in -- like our VIBE Central product, which is allowing our customers to actually track diversity and belonging, which are also more important now than ever. We're using Skills Cloud. They're using our Skills Cloud to redeploy resources, right? All of us companies have some folks that their job really doesn't exist for some period of time. For us, it's all of the receptionists in all of our offices around globally. And through Skills Cloud, we are able to identify what other skills do those people have and redeploy them on projects. And we're seeing a lot of use in that with our customers as well and very high interest from our prospects. And then the last thing I'll mention, Phil, is strategic sourcing, right? And when times are uncertain, it's even more important for companies to make sure that every dollar that they spend, they're getting the most value out of. And our Scout strategic sourcing product is really helping them. And we're seeing great traction with that product, particularly up in the large enterprise, even with non-Workday customers.

Yes. Yes. And I mean, just to give you a sense, too, about sort of prioritization and sort of the need for Workday, I had a conversation with our CIO of HR this June. And obviously, we're -- and Wells Fargo, it was announced on your Q4 call actually, has purchased Workday and is rolling it out. And he said, "Man, I just wish we had done this sooner." That's, yes, the sort of as an HR technology professional sort of having sort of seen what could be done, but what we're having to live with was some legacy systems. And sort of like, "Man, I wish we'd made this decision sooner." And I'm pretty sure that Wells Fargo is not the only customer prospect that has said that over the past year.

That's right. And as you know, your company is continuing its deployment, right? And we're doing it fully remote, and we expect to bring you up live on time and, hopefully, even under budget since we -- nobody's traveling.

And that's actually -- it's a great point because that actually leads me to my next question, which is the go-lives that you mentioned on the Q3 call, I was, a, surprised by call it, just the number; but just the size of some of those names that you talked about, like Walmart and obviously, Wells Fargo, too. You just mentioned the continued rollout here. What have you learned in terms of the ability to roll this out sort of without kind of people sort of on-premise, lack of a better term. And how have the learnings and -- but also just sort of the deliverables they've been able to provide customers influence, call it, the conversations you have with prospects in terms of the pipeline?

Yes. We did have, I would say, some early hesitations from prospects on launching a project that these large -- these are projects that are obviously large, launching a large project when they're not in the office, when they're fully remote. And I think what we've been able to demonstrate over the last several quarters is that we can sell remotely, and we can deploy remotely. And we can bring large, complicated, complex customers up and running on HCM, on FINS, even in remote environment. And us having those proof points has really helped shut down that conversation. So I think part of it's on our side and our ability to prove that it works. On the customers and prospects side, right, I think they're learning that they can do things remotely as well, right? We've all kind of settled into this new world. We certainly hope that we're not working remotely forever. But we've realized that we can get things done. And most of our prospects that we've been talking to, they just want to go back to business as usual, right? They want to get the things done that they had set out to do at the beginning of the year, which included an HCM deployment or a core FINS deployment or maybe a planning deployment. They want to get back at it and really start working towards their goals. And now they have the confidence internally that they can do their part remotely as well. And so the things that we've historically done on-site like design sessions, right, we're using technology like Zoom and others to do those remotely. And it really has worked just as well. I think we will go back to some in-person meetings in the post-COVID world when it's safe to do so. We're going to let our customers and our prospects guide us on that. But I think we've all kind of just settled into a world where you have to do things remotely, and you just can't hold up the evolution of your business. And so we're kind of past those early hesitations, Phil. And we're really starting to see good traction with a lot of new customers, many who we've announced on our call, who want to move things forward, even though we know we're going to be remote for some time. And they will be doing potentially their entire deployment remote, and they're very comfortable with that now.

Super interesting. Speaking of large, complex deployments, financials, the -- I think one of the things that surprised a lot of investors is how resilient actually financials have been in sort of the backdrop of the pandemic. Wondering if you could help sort of unpack the success that you've been seeing this year. And can you talk through about some of the innovations that you -- are being made to strengthen your positioning there?

Yes. So if I go back a couple of years, Phil, the conversations that I would have with CFOs were very different than they are today. A few years ago, they were still struggling, a lot of them particularly in the large enterprise, to determine whether they were comfortable with putting their financial systems in the cloud. And it was still really a question of if. And now those debates are over, and I think they will -- they've been over for a while and the pandemic is really just underscoring that, that there is absolutely no reason not to put your financial system into the cloud. And so then it became a question of when, right? When am I going to be ready? When is it going to reach the top of my priority list? And I do think that the customers that we are winning today on FINS were ones that -- where a financial cloud deployment had already made it to the top of their list, right? It became the most important thing for them, and they're continuing on that journey. What we're seeing building in the pipe now for next year and beyond are companies that are moving this up on their priority list because they've realized through this pandemic that they have to move it to the cloud as soon as possible because they have been holding their business back. And they have not been able to be as agile as they need to be during these uncertain times, and they have been able to support the business with the flexibility and the agility and the information and the data that the business needs to run during times like this. And so I believe, and I think we all believe at Workday, that COVID will be a tailwind for us, particularly in the FINS market. It was already starting to shift. We are already starting to see large enterprise deals in the pipeline in our win column. And now we think that it's just going to accelerate that. Now I will say, though, that there are still some industries that are completely closed off to us right now. Those that were hardest hit by the pandemic, we're not seeing much in our pipeline. And those will have a lag, we believe, in terms of when they move financials to the cloud. Because they're just trying to survive right now, and they have to get through that. But for most of the industries, we are starting to see really strong pipeline build in large enterprise and FINS, which is the continuation of the trend we were seeing before. But we certainly hope and believe that, that could accelerate once we get past the pandemic.

Yes. Now in putting HCM and Financials together from a platform perspective, one of the things that we've been wondering about, wanted to get your thoughts on is the idea of the keyword being sort of accelerated. If accelerated was a color that's sort of the lens to view the world through -- is the joke I've been using. But accelerate to me means you don't have sort of time or money. So you're going to look at something that's integrated to accelerate that, so that time to deployment, maybe even make it sort of cost less, to your point, if it's already pre-integrated. What -- how do you think about the impact of, call it, not just FINS or HCM, but from platform deals?

So I'm sorry, Phil. I'm not quite understanding your question. Can you give...

Sorry. I mean just like instead of selling you HCM deal, okay, we needed to modernize our HR applications, our HR workflows. You modernize our financials workflow applications, system of record. But the idea is like, hey, if we're seeing acceleration of modernization, okay, these 2 things could be -- potentially need to work together, HR and core financials. But will somebody look for a single vendor increasingly so for these deployments? In other words, healthier for your platform business versus maybe in the past, they were still made relatively, call it, individually.

Yes. So I think in the large enterprise, we are already starting to see that, Phil. Now as you know, in the medium enterprise, we've always sold a lot of platform deals in that space. When it came to the large enterprise, what we generally saw was an HCM customer, company buying HCM, deploying that and then coming back later to see FINS. And we certainly still do see that. But when we look at the sales opportunities -- and I'm involved in almost all of the large enterprise financial sales opportunities here at Workday. When I look at those and what's in our pipeline, we are starting to see more platform deals up in the large enterprise space. And in fact, in the last month, I've had multiple conversations with very, very large companies that want a full platform from a single vendor. And I think that this is one of the areas where we will get a COVID tailwind where a company who maybe thought, well, I'm just going to deploy HCM. And then a few years later, we'll do FINS or vice versa, that they may come back into the market realizing that it's better for them just to do the whole thing at once, right? And that the synergies you get in a single platform across HCM and Financials from a single supplier in a single deployment, which may be phased but really is thought through as a single deployment, that the benefits there are just massive. And so we are starting to see that. And I hope that as we build -- continue to build pipe for next year, we're going to see more of that.

Great. Let's talk about industry verticals. You mentioned, obviously, some are sort of closed off to anybody right now in terms of major deployments. But if I think about Workday, you've also been sort of growing sort of -- or strengthening your positioning within certain verticals with new innovations. Why don't you talk through just your vertical industry strategy?

Yes. So we've always really focused on the industries that are people-centric, right, the services organizations. Because when you're people-centric, we believe that's where you really get the best synergies in a full HCM-Financials platform. And we're well positioned to serve that base. So technology, financial services, health care, higher education, business services, a lot of those have been industries we've gone after for quite some time. I think -- and have really focused on building out specific features and functions for those industries, whether it be a student system for higher ed, whether it be grants management for higher ed and government, those types of things. I think the biggest industry innovation that we've pushed out recently has been Accounting Center, which we built for the financial services industry, that will allow them to take their operational banking or insurance systems and pull those detailed, level transactions into Accounting Center, do accounting rules on top of them. It will put them right into Workday FINS, and they can do all of their analytics at a very granular level of detail on those transactions, whether it be looking at the profitability of an insurance policy or something like that or a bank offering. And so that value proposition is massive. And that has allowed us to win some of the really large banks that we've been announcing lately, most recently, Fifth Third Bank. And so we're really excited about that. And the interesting thing about Accounting Center is that we're finding use cases for it that we never anticipated when we first designed and built it. And so I personally believe that it's going to have application across all industries, and it's really going to help us sell FINS into all industries. Because most industries, even ones we haven't verticalized yet, whether it be retail or transportation, right, they have other systems that they use that are operational systems that they're going to want to analyze, that they're going to want to be able to do accounting on top of and put -- pull into their financial system. And we're finding even different use cases. Like one of the things that we're using it for internally which, again, was a use case we never thought of when we built it, is we're pulling in hedging data from all of the hedging program that we do with various banks all over the world. We're pulling in all that data and applying these accounting rules to it. And it's allowing us to automate the reconciliation between our financial system and all of our hedges out there around the world. And we have hundreds of them. And so I think that we're going to continue to see new and interesting use cases for Accounting Center. So we're super excited about that, and we'll continue our journey towards verticalizing in new spaces.

That's very cool. Now those are the best products, when they can do things that you hadn't even thought of. Those are the best ones. The...

Yes.

I mean obviously, there are a lot of things to be excited about here. I mean accelerated modernization of HCM, financials, more platform deals, a quick lead to more verticals. Let's talk about investments to sort of capitalize on these accelerating trends. On the last call, you talked about your accelerating investments the finish of this year and into next fiscal year. How should we think about sort of resource allocation? And what priorities would you call out?

Yes. So really, 2 top priorities resulting in 3 types of investments. So #1 is build the pipeline, right, and get ourselves ready to execute on that pipeline. I've said already a few times, we expect a post-COVID tailwind. We're already seeing strong pipeline build for next year, so we're optimistic. And so we want to invest in that right now. So we are doing a couple of things. We're focused on hiring in our sales organization to make sure that we have the people to execute on those opportunities as they come. This is going to be focused in a couple of areas. One is international, which is still one of our big growth opportunities. The markets are less mature there. We've got, for example, almost 50% of the Fortune 500 here in the U.S. as customers. We have 20% of the Global 2000, so less mature market, massive opportunity. So we'll continue to invest overseas in our sales organization. We're going to continue to add into our customer base team as we keep pushing out these new, amazing products that we think that that's continuing to be a great opportunity for us to sell back into our base and to have more to sell. So we're going to be investing in that group as well. And then we're starting to build other teams that will open up our TAM. We announced a few quarters ago that we had won our first federal deal and that we were working towards federal certification. And so we're starting to hire into the federal space, and that will become a vertical for us. But we need to build the sales motion around that, and so we're starting that right now. The other area of investment around pipeline build is on the marketing side, and these are largely nonheadcount investments. So we're going to do a lot of brand marketing. We're going to do a lot of advertising. We're going to do demand-gen programs. We've already started that, but we think that now is the time for us to really make sure that we are identifying all the opportunities out there and building pipeline. And so we've got a big push for that in Q4 because there's still time for us to build core HCM and FINS pipeline for next year and beyond. And so we are focused on that, and we'll continue to invest in that in Q3 -- in Q4 heavily as well as through next year. And then the last area of investment for us, which is around hiring, is R&D. So we've talked for a while about how you're going to start to see R&D spend coming down as a percent of revenue. And we've certainly seen that this year because of some of the cost savings that we've realized this year. And you won't see it go back up to the over 30% levels that we've had before, but we do have a lot we want to do. We still have early products that we need to mature. We've got a lot of work to do on the product to be ready for the federal space. So we've got important initiatives happening, that we want to continue to ramp hiring, and we started that in Q3. You saw us end the headcount in Q3 higher than Q2, which had not happened the quarter before. A lot of that was back-end loaded, but we've got the machine ramped now and working the recruiting machine. And so we'll continue to hire and invest in R&D because we've just got so much that we want to do that's going to create more opportunity for growth.

Yes. Yes, I want to combine your last statement, R&D, with some of the names you mentioned before, Scout, Adaptive. Can you walk us through sort of M&A buy versus build? What is the process you use internally at Workday? And just maybe walk us through the process. And then what are sort of the focus areas that you think about sort of what Workday wants to be reached going forward?

Yes. So when we think about M&A, the way that process start is we think about what are the things that our customers need from us that we're not delivering to them today. And that could be a specific feature. It could be a whole new product. It could be that we're seeing some of our customers buy things from other suppliers that we think, well, they should be buying those things from us if we had a SKU, right? There would be natural synergies there. So we identified the gaps that we may have and opportunities that we have to sell into our existing customer base. But we want those opportunities to be strategic, which means that they have to tie in well with our value proposition of HCM and FINS and our other products. They have to be able to be sold through our existing sales motion and our existing sales organization. We don't want to buy revenue just for revenue's sake and have all of these disparate organizations and systems. And so that's really key. Then when we take a look at should we build it or should we buy it, we take a look at all of the companies that are out there. We actually prefer to buy if we can find the right targets because it accelerates our time to market. But we have a really high bar when we start looking at customers. We not only make sure that -- or companies that their products are the strategic fit that our customers need and want. But we look at their culture, right? Is there a strong culture fit? Because we don't believe you can actually have a successful integration and a successful M&A without a strong cultural alignment. So we look at that very closely. And we look at their technology very closely. We still believe in the Power of One and the value that one user experience, one data model, one security model brings to our customer base. And so we have to make sure that the technology that we're acquiring will allow us to, over time, bring that technology into the Power of One and give our customers the experience that they have come to expect from us. So we have really high bars from M&A, but we are constantly out there scanning the landscape. And we do prefer to buy where we can find a company that meets all that criteria because we can bring things to market for our customers even faster. And so we were honestly hoping, Phil, when the pandemic first hit that this could bring prices down and give an opportunity for us to buy. Because price, obviously, is always a consideration. That certainly hasn't happened.

Yes. It's gone the other way. Yes, it's...

Yes. Yes, so that's become another hurdle for us, but we do have companies that we're looking at and we'll continue to look at. And you shouldn't be surprised if we do more acquisitions that look -- would look a lot like a Scout or an Adaptive.

Yes. No, on the valuation side, we have this what was called a peacock rat valuation versus growth over 10 years and with all these data points. And this year definitely, call it, bent the curve higher, and no pun intended, for a COVID year. But yes, I mean, it's like -- I think a lot of people were surprised that valuation's down, particularly in private markets. Okay. So your last question is here. I mean our time is going fast. We have like 5 minutes left, but I had 2 questions. Let's say we're sitting here together on stage, not virtually in Vegas. What do you want to look back on next December and say, "Hey, Phil, these were the priorities, and we knocked these things out over the past 12 months."

Yes. So that's a great question. I would say 2 things: First, we are -- we have always prioritized our employees first, right? That's one of our core values. And I hope that we can look back and say, "We did everything we could as a company to support our employees through these challenging times." Because these are challenging times, and we've tried really hard to support them. As you know, in Q1, we gave them all an extra 2 weeks' pay because some of them were facing financial challenges. We've enhanced a lot of our benefits to help give them a more reimbursed in-home care days for dependents. We've prefunded their HSA accounts, right? So we've tried to do a lot of things. We brought in a virtual health care provider, so people can get advice from home if they're not feeling well. And so we've tried to do a lot to support them. And it's been challenging for all of us, right, to work in this environment and try to stay emotionally healthy when there's so much in this world to worry about. So I hope that we can look back and say, "We did our best for our employees. We helped them through this. And they've been loyal back and stayed with us because of what we've done." So that's number one. The second, I think, is we've been -- like most companies, we've had to really balance how do we make sure that we stay financially healthy while we do what's right for our customers and while we try to position ourselves well for coming out of this. And I think we're doing a good job so far. And as we just talked about, we're starting to invest to capitalize on that future opportunity. Only time will tell if we were too slow or too fast on that investment. But I hope we will look back and say, "You know what, we invested at the right time. We invested in the right amounts. We were able to maintain solid execution, maintain business health throughout these times while positioning ourselves really, really well to take advantage of what we believe will be a post-COVID tailwind." And so I think we're on track to those so far, but we still live in a really uncertain world. And to your point, Phil, hindsight will tell us whether we're right or not. And I look forward to being on stage with you in a year and talking about how these investments that we're making now pay off.

Yes. I'll write those down for the follow-up. I already got a question ready for next year for the -- and then, okay, let's fast forward. Last question from me before time's up here. But let's fast forward another 4 years. So we're now in 2025, if you believe it. But what do you think you can look back -- would look back on and say, you know what, this trend was more transformative than I expected back in 2020, or this technology or trend happened faster than I expected 5 years ago?

Yes. That is a great question. I think that one of the things that I'm hoping we'll see is that the machine learning that we're starting to see being embedded, and we're certainly doing it in our products, is more powerful than we ever thought, right, and brings more automation than we ever thought and makes companies smarter than we ever thought, right? And we're really just scratching the surface on this. And the way we're embedding it in our own products in things like anomaly detection, right, will help us close books faster and make sure that our numbers are more accurate and all of those great things. But I really believe that it's going to help -- it's going to change the way companies make decisions. And that's the holy grail, is can you make better, faster, more informed decisions than you ever have. And so that's the one thing that I hope in 5 years, we're looking back and saying, kind of like with Accounting Center, right, "Boy, this has uses that we've never even imagined," right? And then we build some things in and that we saw then that technology used in new ways, right, and not just across our products, but across our lives and our businesses. And so that's my hope, and I'll look forward to being on stage with you in 5 years and all.

Probably. Because I've got things scripted. I've got a backlog now. And so awesome. Well, I appreciate the time. That 30 minutes went super fast. But Robynne, thank you. Like I said, it's a busy time of the year, and I always appreciate you making time for us.

Thank you, Phil, and thanks, everyone, for joining us. Take care. Stay safe out there.

Good.