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

Hey there. Good afternoon, good morning on the West Coast. Thanks, everyone, for joining us for day 1 of the Wells Fargo TMT Summit. I'm Michael Turrin software analyst here at Wells. We're pleased to be hosting 3 days of great content across software and technology. Our next keynote speaker, we're particularly excited about. This is with Robynne Sisco, now Co-President, remaining CFO, at least until February. We'll talk about that. She's been with Workday since 2012, including as CFO since 2016. I'll start off with some questions. If anyone has anything they'd like for me to ask, feel free to shoot an e-mail my way. Thats [email protected]. I'll do my best to sprinkle those into the conversation as well. I promised Justin and the team that I would mention that we've shown you Workday's safe harbor statement, which does apply to this conversation and the presentation ahead. So there's that. And with that, Robynne, thank you for joining us. Appreciate you joining and sticking with us through that intro.

Thank you, Michael. I'm happy to be here today. Thanks for having me.

Excellent. Well, you've given -- so we're pleased, I'm pleased to be formally covering Workday here. You've given us a lot of content to chew through recently. So we'll start there, and we can start with Q3 results, which happened just a few weeks ago. I'll let you start with just highlights, financial takeaways, how you would characterize in Q3 relative to what you've seen more recently and from a historical perspective, and then we can walk through some of the moving pieces there as well.

Yes, absolutely. So Michael, as you'll recall, we came into this year confident that we would be able to reaccelerate our net new bookings growth after, honestly, one of our toughest years last year. So we were excited for that prospect. We have a lot of conviction around that. And we've not only seen that happen, but it's happened even faster than we had thought possible. So our goal coming into the year was to accelerate net new ACV growth or net new bookings growth and flatten the declining sub revenue growth curve and stabilize it throughout this year. And we've been pleased to actually overachieve and get subscription revenue reacceleration this year as well. And Q3 was just a continuation of the trend we've been seeing. And some of the specific things I'll call out are really strong close rates. We started talking about this at the end of last year. But when we look at our pipeline and the percent of that pipeline that we're able to close, we just saw an uptick in close rates end of last year. We weren't sure if that would continue through this year, and it really has. So that's been a real pleasant surprise for us that, that trend continued. We've seen strength across both net new and installed base. Now our headwinds last year post COVID or in the thick of COVID, were really on the net new side, a lot of companies positive big projects. And what allowed us to get pretty decent results in spite of that was that sales back into our base, with new SKUs that we had. But this year, we're seeing strength across both of those sales motions. So that's been helpful and both have reaccelerated. We've also seen good strength across various geographies, whether that be international versus the U.S., large enterprise versus medium enterprise, really strong there. Q3 was a call-out quarter for medium enterprise and for EMEA, but we're really seeing strong performance across all of our levers there, which is great. And also seeing strength across HCM and FINS, and so we've been able to reaccelerate both of those product categories, which -- and both are contributing to the accelerated growth this year. So that was really great to see. Demand is really high across our core products and the broader suite. And all of these have driven to the sub revenue reacceleration that I talked about and enabled us to provide an initial view of 20% subscription revenue for next year, which we're really excited to give. As you know, it's our goal to grow 20% or higher all the way up to the path to $10 billion in revenue. And so we're off to a great start on that front.

That's a great answer. You went with where I was going to go next, which is, in some ways, Workday's bigger shift to term, right? You saw some impacts over the course of the past year. These are big services, big implementations, Global 2000 focus. And so making that turn back, it might take some time, but it would seem like the fruits that you're able to bear have some durability behind them as well. And so you mentioned you provided an initial outlook for fiscal '23. Can you just talk about the durability, some of the visibility that you have and just the momentum you'd expect to carry forward from some of what you just laid out?

Yes. So we're seeing a whole shift in the market. And frankly, COVID has really turned, I'd say, attitudes about HCM and financial systems in a really different light, where historically, we've -- they've been viewed as more tactical, right? You need to track your people, you need to be able to pay them. You need to process transactions on the financial side and pay suppliers. And now it really has shifted and companies are really realizing that HCM and FINS systems, if you do them right and you have the right technology, can be strategic and are strategic to their business. And 2 main fronts of that, not surprising. One is CEOs are more concerned nowadays than ever about their people. How do I engage my employees? How do I retain them? How do I recruit new employees? How do I make sure that they feel like they've got good careers here at my company. And so what we provide on the HCM side in terms of not just the core system, but our learning module, recruiting module, Peakon, which is really a whole different way for employers to engage with their employees and really listen to them and get ahead of any issues that might be out there has really moved up on the priority list for CEO. And so that's part of what's driving our reacceleration. On the FINS side, it's similar shift but really driven by different priorities. Companies really realize that their financial systems were holding them back during a really difficult time during the pandemic when they actually needed to plan more frequently and faster. They needed real-time data because they need to make faster decisions. They needed to be able to turn their businesses on a dime, whether that be refocus to a different business model, focus more on one division than another. And the systems can actually support that. They didn't have the analytics. They needed to track metrics. So our world started changing so fast, and companies that were on these legacy systems really weren't prepared for it. And so even the priority on replacing FINS has really gone from, "Well, I'm going to do it when I have to, because it's just transaction tracking," to "I need a modern finance system to help me run my business better, and I need analytics, and I need planning and I need real-time information." And so we've really -- we're kind of in the sweet spot right now where we're really well positioned in this new world to deliver that kind of value. And we don't see this trend stopping anytime soon. Financials in particular, was slower to move to the cloud than HCM. So the penetration on that front is even lower. A lot of companies still haven't moved yet but are thinking about moving, but it will take some time. We're really starting to now see the large companies think and talk about that shift, which is super exciting.

Employee empowerment, good for HCM and Workday. I mean, there's a lot of good things happening there. So given that, there was also some transition mentioned, and you will be kind of stepping aside from the CFO role. Workday always does a great job of internal promotion. And so Barbara spent some time within the company. But can you talk about just the transition of the why now and how your focus areas shift as you move into Co-President from CFO?

Yes, absolutely. So we spend a lot of time on succession planning at Workday. We think it's really, really important. And as you mentioned, Michael, we put an emphasis on internally growing our talent. We think that if you -- and there are times where you need to go outside for executive talent, but there's always a risk there that it's not a culture fit, that the person is -- maybe can't do the job in the way that you'd hope they could. And so we spend a lot of time grooming people internally. Barbara joined the company 7 years ago, but she and I worked together at VMware, so I've known her for 12 years. She is a superstar. And it was very evident to everybody at Workday, including the Board early on, that she was the next best CFO candidate here at Workday. And so we've really spent the last several years grooming her to take this on, moving her around into different areas of the company. Not only has she done multiple roles in finance, but we actually moved her over to the product organization for 2 years, and she was the General Manager of Financials. That gave a really interesting different perspective that's going to be really useful as she takes on this role. And so this has been a planned succession for quite some time. The why now, frankly, Michael, is that she's ready. She's ready. And by the time I hand it over on our new fiscal year start, I will have been doing the role for almost 6 years. And so I'm ready to move on to focus on different things as well and excited to really focus on my Co-President hat. So I still have an organization that's actually the same organization underneath me, including Barbara in finance and some other parts of the company that I manage today. But stepping out of the formal CFO role will give me a lot more time to spend in other areas. And one of the things that I'm really excited about is getting to spend more time with customers and prospects, specifically talking about Workday Financials. It's an area of passion of mine. I've been involved in our sales cycles and with our customers ever since I started over 9 years ago. But my time has been very limited in the number of -- the amount of engagement, right, the number of sales cycles that I can be involved in because I kind of have to stop when quarter-end hits and then start back up again. So really excited to partner with Doug Robinson, my Co-CFO -- I mean President. Sorry.

President We've got it. We've got it.

Yes. And really spent time with him and our marketing folks on how do we better build our pipeline, how do we make sure that we're educating the world, particularly outside of the U.S. of what our financial systems can do where we're less known. So it's an exciting journey for me now.

I have a feeling you're going to be great on that. The passion around Workday Financials come through pretty clearly. So we wish you the best luck in that role, but obviously, looking forward to staying in touch with you throughout. I mean, it makes a lot of sense, from my perspective, to spend time just talking about the longer-term vision around Workday, too, and you laid a lot out at the Analyst Day around the path towards $10 billion. And so I was hoping you just step through a few of those key areas in some more detail. And I think the first one and one that you've spent some time emphasizing and just broadening out the portfolio around is selling into the existing base and adding new products. Can we just start there? We're seeing a bit of a shift in the land of expand. Is it more product that's driving that? Or how would you characterize that move for investors?

It's a few things, Michael. We've been making significant investments in the go-to-market and the back-to-base team for probably 3 years now. We've been talking about that. And we really didn't have that motion before. We were mostly in land grab mode and really focused on the net new logos. And so the timing was really good for us to really start focusing on the customer base, and we've seen such success there in selling more to our customers, not just on renewal because prior, we were just doing it on the renewal. Now we're having conversations with them throughout their contract life. And so we've had a lot of success there and even seeing renewal rates improve as a result of that as well. So expanding that team has been something we've been doing for quite some time, and we'll continue to do, and it's really paid off. So part of it was go-to-market investment. The other investment that you're spot on with is the innovation, right? So we have had more new products come to market in the last few years than we have in a long time. And part of those are organic, and then some of them are coming through M&A. And so we just have this cannon shot of innovation plus M&A, which give us more to sell, and so that really helps to build the back-to-base motion and with the traction that we're seeing there, but it's also had an impact on our net new sales. So we've been increasing the amount of the initial sale to customer because they're attaching more SKUs because we have more things to talk to them about on that initial sale. So double benefits from that. Lots of our SKUs are less than 10% penetrated right now into our customer base because they're just so new. And so we're really looking forward to seeing those grow into bigger pieces of our growth story. And I would include in those things like Xtend and Accounting Center, great traction early on. Peakon but that still are pretty small, but we see huge possibilities for. And then we still have some SKUs that are coming out that we haven't even started selling at such as VNDLY, the acquisition we just announced; the scheduling product that's going to be coming out; German and Australia payroll. So we continue to add to the bag on this front, and it's really driving the momentum that we're seeing. We shared at Analyst Day that it's about 40% of our net new business now that's back to base sale versus net new logos. And I wouldn't be surprised to see that continue to shift as we mature and we have higher number of customers to sell to.

Great. We touched on the financial side, too, and you referenced a few things and just the introduction just around there's more appetite, more readiness. Many haven't moved to cloud, but now there's just more awareness and that's building. As part of the target, I think you laid out the potential for the financials business to keep a 30% growth profile into the future. So maybe you can talk more about the financial side and how you think about the mix? It seems like financials is growing faster. I think you've said 70-30 as the potential mix. But I'm surprised it's not even potentially higher given all that's happening there. So maybe you can just kind of help us just think through the puts and takes there.

Yes, absolutely. Yes, we do believe we can grow that 30% and maybe even higher than that. We'll see how the market continues on that front, but we're super excited about the possibilities there. I think the one thing to keep in mind is our HCM revenue base is so big. And with a subscription model, it's going to take quite some time for FINS even though it's at a higher growth rate than HCM to actually shift that mix, and therefore, you're not quite seeing the mix shift as fast as you would think. When we look at our net new bookings, though, that mix shift really will shift faster. It will just take some time to build into the subscription revenue model. So we're super excited about that. And we think we're really well positioned. The breadth of our FINS portfolio has expanded, and so we now have more comprehensive offerings. And with financials, and like HCM, industry really matters. And so when we think about bringing industry solutions to the market, such as supply chain management for health care or students for higher education, those become really important and can even really drive the HCM and FINS and FINS sales when we have those industry solutions. So that's been really key to us as well, and we feel really good about how we're doing on that front and the other way our product portfolio has expanded to allow us to really have complete solutions across a lot of our key industries. And that 30% growth on a $1 billion base business is pretty good. And one of the other things that's actually working against us interestingly enough in this revenue shift is that HCM has accelerated more than we thought it would, too. So that strong growth is going to also a little bit hinder the mix shift with financials, but we feel really good about where we are and where we're going.

The proverbial [indiscernible] when the core was accelerating. You'll take that any day.

Exactly.

The other key element of the growth vectors that you laid out as international. I mean it's still strikingly small as a percent of the overall base currently. But obviously, bigger aspirations. Some of the penetration rates you laid out are very low, and so it looks like there's tremendous opportunity ahead. But is there anything from either a product or a go-to-market perspective that you feel you unlocked that makes the international more accessible? Or what helps you drive that mix in the future?

Yes, we've been investing against international for several years now. And I think we've been a little surprised that it hasn't taken off faster. It's sometimes really difficult to predict when the market is going to move. And there are some international countries like the U.K. and the Netherlands that have moved faster, and we've had very large customers, HCM primarily, in both of those markets for many, many years. And then there are others like Japan that really haven't even started. Most of the other countries are somewhere in between those 2, but it's been hard to really predict when those markets will shift. And clearly, that shift to the cloud for both HCM and FINS has been lagging behind the U.S., which is why still so much of our business is U.S.-driven. I think we're starting to see EMEA come back. We had a really great quarter with EMEA in Q3. It was a real standout for us. And so we're starting to see the signs that our investments are starting to pay off and that we can see higher growth there in international front as well than in the U.S., which we have seen for quite some time, but we really have high expectations that, that growth rate is going to go even higher, and we're going to continue to invest behind that. From a product perspective, we were built from the very beginning to be global. And this is one of the lessons that Dave and Aneel learned at PeopleSoft is you have to start building for being global at the core, it's really hard to take a U.S.-centric product. And then build it out to be international compliant, and so they really built it from the very beginning. And we have so many large U.S. multinational companies that are operating in other countries all over the world, over 175 countries. And so we really have the basis to be really, really successful in international. There are obviously localizations that we have done and will continue to do as we expand into new markets, but we feel really well positioned. We're less known out there, so we've been looking at the last few years on brand investments to make sure that we're really developing the brand outside of the U.S. particularly in the space because outside of the U.S., we still are largely known as an HCM company, but the FINS market there is just as big as the HCM, actually is even bigger. So we still have some investments to make on that front. But we do expect international to be a significant contributor going forward.

I mean we've spent a significant amount of time talking about growth. So it makes a lot of sense that the prioritization might look more towards growth than margin, at least initially than maybe it has previously. You gave an answer for next year that I think we were expecting to hear from many software companies. We haven't gotten the answer from many yet, but you talked about, yes, there's a path to 25% margin for Workday. But next year, I would expect margins to come down because of a few different factors. And so in categorizing those for investors, how much of that is just continuing to invest into some of the opportunities that we've just laid out versus just, "Hey, there were some expense tailwinds, some temporary benefits that we saw over the course of the past year that just won't be the same in next year?" Maybe just the margin puts and takes from your perspective would be great.

Yes. There's really 3 things that I would call out. One, we pretty much stopped hiring last year. A lot of companies did that. And in hindsight, we shouldn't have, but hindsight though is 2020. So we really shut down our recruiting engine, and we realized late last year from what we saw with the pipeline builds that we were going to accelerate growth this year and that we needed to hire behind that. And so we started in Q4, particularly in the sales organization and then in the product organization to start ramping recruiting back up. And it took us longer than we expected, frankly, to be able to really ramp that hiring engine. So when we came into the year, we had higher aspirations, and we still have a line of sight in achieving our 2,500 additional hiring, but it's been really back-end-loaded. And so we have not seen the full expense of all those, hopefully, 2,500 people that we're hiring this year, and we will get the full year of expense of those people next year, plus we're going to continue to hire even more. So that's a big driver for the margin decline from this year to next year. The second thing is, as you mentioned, Michael, there are some just COVID-related costs that came out of our model that we have full expectations and are planning to layer back in, travel. So we still haven't traveled much this year. We expect to start traveling again, probably not to the extent we did before, but we do expect to travel again. We expect to have live events again. Our Rising customer event has always been such an important event for us and for our customers. And it's a prospect event, too. We want to get back to doing that in person. We have a live partner event. We have sales kickoff. So we've planned for all of that. We saved money in our back to -- our office cost because we didn't have anybody in the office. So we are planning for all of those savings to go away next year and hoping that things get more back to normal on that front. So that was significant as well. And the third thing that I'll mention is -- and we announced this in the Q2 earnings call, talked about it more in this last call is we have implemented a company-wide cash bonus program. And so historically, the only employees that were on variable cash compensation plans at Workday were the sales and services organizations. Nobody else was on them. And we were able to get away with that because we were very generous on stock. People still wanted to come work here. In this competitive market, you can't get away with that anymore. It was always our intent to eventually layer in a bonus program across the company and now feels like the right time to do that. And this will primarily impact our R&D organization, which is about half the company, as well as the G&A organization. And the cost of this is 300 basis points. And so that's also a big part of the decline. We had -- we realized a 1/4 of that impact this year. And so the delta will be a little less than that in terms of year-over-year because we implemented it this Q4, but it's a really important program for us, and we're excited to be able to do that for our employees and believe that it will help with, not only retention, but recruiting as well.

Yes. I mean those all seem like very sensible areas of spend, and Workday has always been focused on employees and culture, so that all makes a lot of sense too. A question came in via e-mail. It's a very CFO-centric question, so I'll shoot it your way. It's on share count, and you've seen a rising share count over the past couple of years. Any thoughts on buybacks as part of the capital allocation program? Or just how you sort of view the capital allocation framework?

Yes. We have a discussion every year at the Board about this, and it has always been our recommendation and continues to be a recommendation to not do a buyback. And so we are really focused our investment dollars on the top line growth. And I think we've made that pretty clear through a lot of the margin discussions that we will always prioritize top line growth over earnings per share or over margins. And so we really believe we're in a amazing position right now to land grab and to be a very, very large company. And we want to make sure that we invest behind that and that as far as I can see into the near future, that will continue to be our priority for cash is to reinvest it back in the business and in the top line growth.

Yes. I mean I knew time would fly, but we have time for maybe one more, and I'll ask -- I'll close with that, you probably touched on a few different ways throughout the course of the conversation. But you've been with Workday for a number of years. You're transitioning out of the CFO role but staying on as President. And so when you think about the multiyear vision, what keeps you excited about Workday and not necessarily thinking about just fiscal '23, but well beyond the multiyear path? What keeps you excited? And what should investors be focused on as part of that multiyear journey?

Yes. Michael, I have to say that I don't think I've ever been more excited to be at Workday. I mean it really just feels like we have this perfect convergence of things like the market movement, where our product is at maturity, the SKUs that we have to really take advantage of what's going on out in the world. We're just really, really well positioned. And I think that, like a lot of companies, we've had some growing pains in the past. We've been growing so fast for so long. We had some growing pains. And if there was -- there have been several silver linings for us with COVID. One of them we've talked about and we believe has turned the market into a tailwind for us, but it also led us really take a hard look at how we were running our business, what we were focused on. We spent a lot of time over the last year looking at what are our biggest opportunities? How fast do we think we can grow? What investments do we need to make behind that? What can we do organically? And what should we maybe do through M&A? And we've really aligned the entire company behind this 20%-plus growth initiative. And I feel like we're more aligned than we have been in a long time, which is not an easy thing to do when a company gets to be our size. And so I'm just super excited about all of the possibilities in front of us and the growth that we're going to continue to see even at this size. And I touched on this before. One of the reasons -- well, I didn't touch on this part. One of the reasons I joined Workday years ago was because I had a chance to see the FINS product. It was very early days back then. And I really believe and I still believe that Workday was going to change the way finance people like me did their jobs, like forever. And so for me, it's so exciting to see the FINS momentum actually occurring because for the last 9 years, I've been waiting for it, like why doesn't everybody see what I see about how we're going to actually change the way businesses run and can run in the future. And so this is just such a great time for FINS. And having really grown up with the company and been here since we were 1,400 employees and $200 million in revenue, just seeing it finally take off and having the opportunity to spend a good chunk of my time in that space is really gets me charged every day.

I'm glad you went back to the financials. It's clear that you've recognized there's a need for new tools. Workday can provide the solutions, and it just kind of completes the circle of the conversation. So this was great, Robynne. I'll have to step through. I appreciate your time. We know it's valuable and the participation. I appreciate everyone for tuning in here as well. This is fantastic.

Thanks for having me, Michael. Take care.

Pleasure.