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

Outstanding. Thank you, everyone, for joining us this afternoon. My name is Keith Weiss. I run the U.S. software research group here at Morgan Stanley. And very pleased to have us -- with us from Workday, Pete Schlampp, the Chief Strategy Officer. Before we get started, I have a brief disclosure. For important personal holdings and research disclosures, please look at the Morgan Stanley website at www.morganstanley.com/researchdisclosures. There was a safe harbor statement that Workday was going to show, but when they do show it, pay attention to that as well. So with that...

Thank you for the effort, Keith. That was good.

Excellent. So Pete, thank you again so much for joining us. A really exciting year we're coming out of for Workday, both in terms of demand ramping back and sort of better underlying fundamentals and expansion of the solution portfolio overall, a more balanced selling motion, if you will, between sort of new customers and sort of upselling into existing customers. But before we dig into all those topics, I just want to sort of give you a chance to kind of introduce yourself. I don't think a lot of investors know you specifically. Can you talk about sort of your background, and more specifically, the role of the Chief Strategy Officer at Workday and what you're focusing on?

Sure. Absolutely. Nice to see you all. Thank you for coming and listening today. So I -- my name is Pete Schlampp. I am the Chief Strategy Officer at Workday. I joined Workday 6 years ago via an acquisition. It was a company called Platfora, which was a data and analytics company. After Workday acquired Platfora, I became the General Manager of our Analytics business, which resulted in products like Prism Analytics. You may hear us talk about Prism Analytics, People Analytics, Accounting Center, which I hope we talk about a lot today because it's an important part of our business. I then transitioned over and became responsible for global product development. So all of our product development are reported to Aneel Bhusri, our CEO, and all of our products across human capital management and financial management. And then just recently, in November, took on this new role of Chief Strategy Officer. And I'll say, I think it's a really interesting time at Workday to be responsible for strategy. If you've listened to us lately, you hear us -- you've heard us talk about a goal of getting to $10 billion of revenue by our fiscal year '25, and we have a lot of opportunity to get there. And I think that my main job is to help us kind of guide the path to $10 billion. I'll say it a little bit better than that, I'll say illuminate the path to $10 billion. And why do I say that? Because what does this role mean? It's actually all of our marketing at Workday. It's strategy, it's corporate strategy, it's M&A and it's also, strangely enough, it's the user interfaces, all the design for our user interface of our products. So I get a good kind of cross-section of things. But most -- more than anything, it's really that path to $10 billion. It's making choices along the way, all these opportunities that we have, and I hope we talk about a lot of them today, with making those choices and helping us get there as fast and efficiently as possible.

Got it. Got it. I want to start out kind of high level, a little bit of sort of looking back at FY '22. It's a year that Aneel had been talking about a lot of a year of acceleration, seeing sort of the new business accelerate throughout the year that culminated in sort of a guide for FY '23 that does show that acceleration coming through on to the subscription revenue line. Can you talk to us a little bit about what's kind of driving that kind of rebound in spending acceleration? Is it sort of more of a shift of focus towards the back office? Is it a sort of a release of pent-up demand that you guys have seen? Like what's driving that broader demand environment for Workday right now?

Right. So I look at -- we had a fantastic Q4 and an even better fiscal year '22. And the I think the main headline for me, as I looked at the business, is it was really, really broad-based. I think many people think of Workday and the first thing that comes to mind is large enterprise human capital management. And that's who Workday was 5 years ago, 7 years ago, 10 years ago. What has happened in the last 5 years and really, really everything kind of came together in FY '22 was the multidimensionality of the business. It was human capital management, it was financial management, too, with wins at, for instance, U.S. Bank, Genpact, for instance, with financial management. It was large enterprise. It was medium enterprise. It was North America. It was international. And international really did contribute quite a bit as well. And I think another one that's really close to my heart, and I think it's been a really important part of the change for Workday, the reacceleration that we've seen with Workday is not only the net new business for us but also the back to base business as well. And that's been a multiyear strategy to get us to a point where we have really happy customers, as you know, we talk about all the time, but also the new products to be able to sell back into the base, and then the mature go-to-market motions to be able to do that as well. So I look at our confidence in being able to go and raise guidance as we did for FY '23 in a significant way, and I feel like it's because we look across the business and there's not these big weak spots that we're seeing, it's really -- it's quite broad-based.

Excellent. I want to start the conversation on the HCM side of the equation. And I think this is where I get the kind of most investor concerns. And the core question they're asking is on the net new side of the equation, how much greenfield is left? You guys have been a dominant vendor in HCM, particularly with large enterprises for a while now. Is there still that net new opportunity left on a go-forward basis?

Yes. So we have now more than 50% of the Fortune 500 is running Workday Human Capital Management. And when I say that, I'm -- it is core human capital management. That's the system of record for your people, right? One way to look at that is we've got 50% of the Fortune 500. The other way to look at that is we got 50% more to go. So I think -- and even if you look at Q4, a number of Fortune 500 wins in HCM, and there continue to be more in the pipeline as well. So there's continued room to go large enterprise HCM. But I think the other thing that I'd ask everybody to think about on the HCM side is core HCM is a not enormous side -- part of the total addressable market for the office of the CHRO. There are multiple other pieces of that. There's payroll. There's recruiting. There's talent optimization. There's analytics. There's -- we can go on and on and on. And what we've done as a business is we now have close to 4,000 Human Capital Management, core Human Capital Management customers. And then we have a series of products, each with large stand-alone markets for them that we are selling back to those customers. So the investments that we've made over the past few years in products like our learning products, our talent optimization, people analytics, workforce planning, our health and journeys and onboarding capabilities, those are all new products that are gaining momentum right now. So lots of opportunity left for us in the -- in what we would call the office of the CHRO market.

Got it. Got it. And then if you think about those upsell opportunities, any visibility you could give us into, one, how penetrated are we in that kind of back-to-base motion within the office of the HRCO (sic) [ CHRO ]. And of those, I think you've mentioned 5 different kind of segments. Any of your favorites, if you will? Or any sort of in terms of what has the most momentum right now?

Yes. So the way I think about this, I think about this as kind of 3 tranches of products that we've created. There's core human capital management, you've got payroll and recruiting, and those are the most mature products we have. Payroll and recruiting have the highest penetration into the customer base. You've then got the second tranche of products, I think, kind of represented by learning, for instance, which has about a medium -- I think the last time we talked about this, I think we cited 45% penetration, 40%, 45% penetration. We can get the exact number later into the customer base. And then you've got a whole host of new products. In fact, we just went GA on a new one called scheduling, which these are all products that are in the 10-ish percent penetration base into the customer base -- penetration to the customer base. All great opportunities. The other thing that we haven't talked about yet, but I -- you asked me what my favorites are, and we've adopted some products. We've acquired some products. We've made a few acquisitions recently. We acquired -- a few years ago, we acquired Adaptive Planning, which has been incredibly important for us. I'm sure we'll talk about financials in a while, let's talk about that then. This last year, we acquired a company by the name of Peakon, which is about the voice of the employee, and we also acquired a company called VNDLY. Two incredibly -- actually, all 3 of those, if you take all 3 of those, 3 products incredibly well suited for the time of as we went into COVID and the world got turned upside down, CFOs wanted to get a handle on their business. They wanted to be able to plan more. They wanted to come up with new ways to look at their business. Actually, what we saw, and we talked to you about this before, Keith, we saw in that week when -- in that month, the first month of COVID in the United States, we saw the number of plans created in Adaptive Planning increased by 30x. I think it was actually 36x what it was the previous month. And what that meant was CFOs, businesses across the customer base were saying, "Let me try this scenario. Let me try this scenario. Let me try this scenario," over and over and over again. And that hasn't changed, right? Like yes, it's come down from that absolute peak, but a huge spike in people wanting to be able to understand their business more, right? So incredibly well suited for the time. Okay. So then we go into COVID as well. And people -- then we start hitting this imperative for talent and being able to understand your talent, your employees and know how are they feeling at any given time, creating communication with your employees. So we acquired Peakon. We actually looked at our own capabilities internally, and we knew that this was an incredibly hot space, and we said we know that we're not going to be able to advance our capabilities fast enough so we went out to market and we acquired a best-in-class capability around Peakon, and that's around the voice of the employee. Perfect for the time. Finally, VNDLY. VNDLY is what's traditionally known as a vendor management system. This is about managing your workforce that is not full-time employees. You might not know -- many people don't know this, but I'll cite a statistic for you. Within the United States Fortune -- within the Fortune 500, of the workforce, 46% of the Fortune 500 workforce is what would be known as nonemployee labor. So that's temp employees, contract employees, gig, SOW work. And that is rapidly going to cross 50%. So with VNDLY, you can -- why we bought that is we saw this trend happening in the marketplace, you can manage not only your full-time employee base inside Workday as a system of record, but now also this what we would call the non-employer or the extended workforce as well. So I took longer than probably what you wanted, but my favorites are -- I guess I'll give more attention to the ones that we just brought in, but there's just a lot of opportunity across this entire portfolio.

Right. That's interesting. And I wanted to touch base on that in terms of how big of a growth driver does that emerge? Because just in the conference alone, we've talked to Qualtrics, who has employee experience. We talked to Amy Hood from Microsoft this morning, who was talking about Viva, which is their product in that space. So 2 questions on that. Like one, how big of a demand driver is that right now in terms of that focus of the corporation on employee experience and tying that into kind of retention and attracting better employees? Two, are those the people we should think about as the competitive environment there? Is it Microsoft with Viva and Qualtrics employee experience? Or is the Workday with Peakon, is that a different type of solution?

Well, I don't think that there's a topic maybe before 2 weeks ago, I'll say this. Before 2 weeks ago, I don't think there was a topic on CEOs' minds that was more important than talent, honestly. You go to any CEO and say, "What are you worried about? What are you thinking about right now?" And they're thinking about their people, how do they keep their people, how do they hire more people. And understanding the voice of the employee is absolutely critical there. The solution that -- so Peakon is different. Yes, I would consider Qualtrics a direct competitor in the best-of-breed space there, not Viva. We can get it all into an employee experience, but not worth it. But I would say the difference, of course, between what Qualtrics does is Qualtrics is a survey experience platform or a survey platform or an experience platform. Peakon is very specifically built for employees and the voice of the employee. And I'll give you an example. It's not just a survey that you get every week, but it is an anonymous survey between the employer and the employee around a set of questions that are continuously changing. And then employees can give their answer of how do I feel right now about, let's say, our return to the office strategy? And managers can go in and they can create conversations, anonymous conversations with employees right in the mobile app. It's not just a survey, it's truly creating a connection between employees and the employer. So very specific to the HR space. And I'll just -- I'll say 1 last thing, Keith, because you touched on competitive -- on competitors. Look, our business is still centered on human capital management and financial management. And our primary competitors in the space are Oracle and SAP. And you all -- I think you asked this question last week about the competitive environment, and so I'm just going to go ahead and answer it, which is our competitive numbers have been incredibly consistent, incredibly consistent. So actually, part of my job is to go in and look at that and see how we're trending. We've -- I feel really, really good about where we're at, and they've been trending positively for a while now. So feeling really good about the competitive space.

Got it. I think it's a good segue to the financials side of the equation. Can we just talk about -- I think when a lot of investors are thinking about digital transformation, the focus is much more front office. But in my conversations with you guys and Aneel, in particular, he sees more of an onus on, listen, modernization of applications is across the board, right? Coming out of COVID, there's a real impetus to make sure back office, front office, mid-office is all kind of in the cloud. Why is that? Why has it become so much more important to have that modern cloud-based financial suite in the cloud post-COVID?

For a few reasons, but I think one of my favorite anecdotes is one of our customers that went -- they went full remote, as we all did, at the beginning of COVID, and they were telling us, this is the first time that we've closed the books completely remotely. Nobody's in the office. Can we do it? And they were able to do it on Workday and they had the confidence to be able to do that on Workday. Meanwhile, you had many customers who had not moved from -- the market was, in case people don't know yet, don't know this, it was all on-premises, right? It was all on-premises ERP, sitting in a data center. And people just worried that, can I actually do it? Can we actually be -- can we function still as a company completely remotely in this new world? And so yes, I think that this need to feel like you had the security to be able to do that was a key driver. The other one is agility, and that's where things like planning come into play, right? And so that need quickly to be able to look at many different scenarios in your business, determine what the right path is, have all the data at your fingertips, truly, that is a big driver to have all your data at your fingertips. That's what's driving the market there. And I'll stop. I'll emphasize maybe a little anecdote for us for a second. So we mentioned that U.S. Bank, we just won U.S. Bank. They were a human capital management customer and they just moved over to financial management or -- we just won that, announced that in Q4. And that's our largest financial services win so far for enterprise financials. Why would they do that? So what's the driver right now to make that move? They had legacy systems across the entire bank. They had an old GL. They had an old analytics system. They did not have a single view of all of the data in 1 place. And what they wanted was they wanted -- and they thought about, can we continue to go on premises? Can we look at other solutions that are in the cloud? I won't name other competitors. But what they loved about Workday was the fact that all of the data was in a single system. And it was our product, Accounting Center. You all have heard us -- maybe you haven't, but there's a product called Accounting Center. The point of Accounting Center is to be able to aggregate all of the data from the operational systems, the front office systems, the middle office systems, bring that all into Workday, run accounting on it, roll it up into the GL into the "back office" system and then have a visibility across all of that. And that was the driver, right? That was the driver of the digital transformation was, it was data. How do we get it all in 1 system, how do I have 1 single payment class?

Yes. And we've definitely heard from our channel conversations similar to things about Accounting Center that it is a key catalyst for customers to -- it's a key innovation and sort of -- and it's not very -- back-office -- or sorry, the GL tends to be less of like innovation-driven, more of an event-driven sort of sale, but this is an innovation that's actually driving more focus on -- this is actually helping us run our business better.

Right. Accounting Center has been transformational in our financial services business. And our win rates have substantially increased in FSI because of Accounting Center. And I actually look at that as just the first industry that we're going to -- that we'll use Accounting Center for in that way. And I think you're right. So replacing a GL for the sake of replacing a GL, what do you get? You get it in the cloud, you get more reliability. That's all good, it's all goodness. But when you are able to pull all the data together and run analytics on it and have -- and hook that up to a planning system, that's innovation, that's added value, right?

It's more agility for the business.

Yes, it's more agility for the business, and that's a reason to move.

Right. can I pose like one of the bare cases I hear from investors when it comes to financials, Workday is doing well selling financials into existing HCM customers. Workday gets net new business in the mid-market. But unlike other SaaS stores that have been very successful, ServiceNow really rolling over BMC, or Salesforce rolling over Siebel, or Workday HCM rolling over PeopleSoft. You guys can't roll over Oracle or SAP the same way, right? It's so much harder to displace an Oracle and SAP than it was in the other. And that just makes the path forward for financials that much more difficult.

Well, I would say those other markets that you just mentioned, very different markets, right? Selling to a CFO, whose job it is to be conservative, is different than selling to a CIO, whose job it is to innovate all the time, right? But nonetheless, the market is moving, and it has moved. I don't think that we're ever going to look at the history of Workday's financial business and say, "Hey, there was a moment in time where there was an inflection point, it's continued momentum." And we've seen that. We saw it before COVID. There was a pause, of course, right at COVID because people were not deciding to do large transformations at that moment. But we picked right back up from where we were. And it's just a continued kind of pace of change there, of continued momentum in our financial business. And as we look forward to pipeline, it's the same thing.

Right. I wanted to touch on the change in the selling motion, if you will. If we went back 3 years ago, I think the mix would have been closer to like 80-20 in terms of 80% of the business coming from net new customers, 20% from upsell. Over the past 3 years, you guys have really expanded the back-to-base motion. The fear was that was because you had to. There wasn't a lot of net new business to be done in 2020. But it's been a lot more resilient. 2021 was another really good year of back-to-base. Can you talk to us about what structurally changed in sort of your go-to-market to even out that back-to-base versus net new? And how durable should that be on a go-forward basis?

Yes. So it is -- I want to be -- whenever I get this question, I always want to be super clear. We are -- we want to go out and make new customers all the time. It's our primary motion. That's what we're always trying to do. And that business really came back for us in FY '22. And as we look forward, we're really feeling great about that, too. But during COVID, one of the things that we did do is we learned to sell back into our very happy customers, 97% satisfaction rate. And that's -- they're asking us to sell more to them, and we started figuring that out. A couple of things happened. One is we created the portfolio of products to be able to sell back to them. So we actually developed software. In some cases, we acquired products. And then the other side is we learned how to do the go-to-market motion as well. So it's marketing back to our base. It's actually having account reps that are specifically dedicated to that. And that's something that we're actually continuing to invest even more in going forward.

I'm not like [indiscernible] the beginning of this -- you talked about $10 billion a year. I think you talked about calendar '25. Can you give the time line people [indiscernible] the target is $10 billion and 20%-plus [indiscernible]. You can repeat that before you...

I'll repeat that, okay.

[indiscernible] but 20%-plus.

Let me repeat that. So our goal is to get $10 billion by growing above 20% year-over-year until we get there. You can draw your own time line for that. Thank you, Justin. Excellent. Great question. Thank you.

I wanted to touch on M&A strategy. The -- I would say the cadence of M&A within Workday has picked up over the past couple of years. You mentioned Adaptive Insights and Peakon, VNDLY, also Scout RFP was put in there. From a kind of product strategy perspective, how are you guys thinking on kind of the buy versus build decision? Because you guys also spend a lot on R&D. And that's been one of the hallmarks of Workday is the very strong R&D focus and sort of developing a lot of organic product to make it all work together and all be part of the same data.

Yes. Our primary motion for innovation is organic and is new build, and it will continue to be that way for a while. We build a best-in-class service and we're creating barriers as we do that. It requires organic investment. As we go into new international areas from -- on the HCM side, as we build in new -- as we make -- as we go into the total addressable market, we make Workday addressable market by adding new areas within the Human Capital Management side, that all requires additional investment. Last year, we made 3 acquisitions, as I talked about. They were all great. But as I look forward, there's no quota. There's no certain number that we're going to do. There's nothing that I think about that way. It really is timing. Is it a good fit? And that's a good technology fit. It's a good market fit. It's a good culture fit. We've been really successful with the transactions that we have done. And a lot of that is because the teams are still around. So it will be a mix, but really no specific quota or a number that we're going for there.

I mean, is there any way that we could kind of characterize, the internal R&D focus tends to be more on kind of the core solutions and expanding out the applicability and the TAM of financials and HCM and maybe sort of the analytics portfolio. And then there's kind of modules around sort of those core systems that you'd be more likely to acquire? Or is it not that black and white?

Really not that black and white. And I think if you look historically at the acquisitions that we've made, a lot of them have been timing-based, fast-moving markets that we know that we're not going to be able to organically develop ourselves in a time when the market is happening. And we go out and we look at a best-in-class solution to be able to plug in. That's really what drove most of the recent acquisitions.

Got it. So we're running towards the end of our allotted time slot, but maybe to leave on one kind of final question with you. As we look forward into FY '23, calendar year '22, what are the initiatives or sort of things that you're seeing in the marketplace that you're most excited about in terms of driving the story further, helping you sort of illuminate that sort of clear illumination of the path towards $10 billion on a go-forward basis?

Yes. I think that right now, there are some really important market trends that we're looking at. You've got the talent's imperative. You've got the voice of the employee becoming more and more important. You have a move from being really a resume-based marketplace for talent to a skills-based marketplace for talent. That's a big transition. You've got what I talked about from full-time employee mix to a more nonemployee mix of the workforce. On the financial side, you've got this drive for automation within the financials business. These are all large forces that are happening outside of Workday. They're happening and they're driving our business forward. Those are kind of the external things that are happening. So I think of Workday and all our opportunities, there's 4 key categories I think of. I think of the back-to-base customer motion, which is quite large. We have -- we continue to build new products internally and we have the ability to sell them out. It is winning the office of the CFO really through an industry-focused lens. And so it's making sure that we're hitting the industries that we're going into and driving our financials business through that. It's the midsized enterprise, a large opportunity there. And the last one is international, huge open space for us to grow internationally as well.

Outstanding. Pete, thank you so much for joining us. It's been a great conversation.

Yes, it was great. Thank you, everybody.

Excellent.