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

[Audio Gap] at Wolfe Research. I am extremely excited to be joined by management from Workday, Terrance and Justin Furby. They have forced me to show this slide, which I will now spend the next 10 minutes reading very slowly and carefully. It is the safe harbor statement. But all joking aside, it is important. So it is here. And with that, I want to, a, just guys, say thank you for joining. And b, ask maybe Terrance just introduce yourself kind of your role at Workday. There's a small product called FINS, I think, you work on. So it would be just great to just hear your intro for a few minutes.

No, that's great. Thanks for having us, Alex. My name is Terrance Wampler, and I am responsible for our financial product development here at Workday. I joined about 2.5 years ago. Our current CFO, Barbara Larson, actually recruited me out of Oracle to come over here because she was running product at the time. And she's since gone back to her finance roots to kind of be the CFO here. I had been at Oracle for 25 years building out financial software there. I found coming to Workday at an exciting time just because how we're trying to grow the business and the markets that they're going after and some of the interesting technology that they have here. So I'm excited to be here, and I look forward to having a good chat with you.

That is super interesting. And by the way, for all the investors on this call, I did not know Terrance's background. So now I have a whole list of new questions that are coming to my mind now that I know exactly what your pedigree is, Terrance.

But let's start with -- again, I'm going to keep it boring to start, and then we're going to get edgier as we go. The first question I've asked everybody on these calls, how is the current demand environment?

Well, from my perspective, I think we see really strong demand. So -- and I think that's reflected. We had a really great Q4. I think you saw that reflected in some of the nice financials deals that we saw. We feel like we have a really strong pipe for FY '23 coming up. And one of the things that's nice for us is it's really broad-based. So that means we've got a lot of pipe in our medium enterprise components. And we also have some large enterprise components. One of the things that's interesting for us is it's also broad based across multiple services. So financial services, professional services, health care, we see a really strong demand. And an interesting thing for us is industries that tend to be laggards of technology uptake, like government, we're starting to see large state governments here in the United States and even U.K. central government coming to market with big RFPs wanting to do platform deals and do other stuff. So we see good demand for folks wanting to be able to do their financial transformation. We're pretty excited about what that looks like.

Perfect. And now my second boring question is what was the impact on the business from COVID, particularly, let's keep it even on the FINS side. And then as we are coming out of COVID, investors, when -- any front office software company I cover, investors are worried about the pull forward, and every back office software company that I cover, everybody is like, "Oh, back office is back, it's going to be great." So just level set what was the impact from COVID, and now that hopefully, we're on the other side of it, kind of how that -- how you see it?

Yes. From my perspective, COVID dampened things a little bit, but it wasn't dramatic. What I mean by that is we still grew the business in financials, and we still grew pretty well. I will say that most of our business growth started early in the COVID cycle in the middle enterprise, so that kind of stayed alive. And those medium enterprise businesses were trying to figure out how they could take opportunity in a COVID environment. We did see some slowdown in the large enterprises as they sort of hit pause and said, "Hey, maybe right now isn't the perfect time to do a transformation." And they started to look at other stuff. And so we had impact, it dampened it, but I don't think it stopped it completely. And as we're coming out of COVID, we are, I guess, skeptically optimistic because we do see this good demand coming, and we do see some of these laggard industries coming to market with these public RFPs. So we do -- we are optimistic. A little bit skeptical because we want to see the growth actually happen, but we're confident.

I'm going to push just on that to frame the guidance now as being skeptically optimistic. But Terrance, so let me ask then the third question, which is for investors, it's seemingly out of the frying pan of COVID into the fires of quite literal war and recession fears. When you think about the impact of a recession, of inflation on Workday, the Workday business, particularly on the financials side, what's the right way for investors to kind of process that? Because I will tell you, for myself, when I think about front office versus back office, front office budgets seemed like they're easier to change and particularly scale down in times of distress. But back office, we just came out of an environment where they were effectively paused or frozen for many large enterprises. They just started to thaw. It feels like it would take more to incrementally change those budgetary decisions than at least what we've seen thus far. But again, I don't want to lead the witness.

Yes. No, that's fair.

Even more than I did.

Yes. No, that's great. And I'll have Justin chime in, just from a corporate perspective, here about what's happening, too. But from a financials perspective, what were kind of -- what we're seeing with -- well, let me put it this way. Our strategy is to redefine how work is done, right, whether that's employees, whether that's in financials, et cetera. And coming into an inflationary or recessionary environment is part of one of the changes that's going to happen. One of the things that we talked about with customers all the time during COVID was the fact that you needed to be more agile and you needed to have better business models and you needed to be able to be prepared for the next big event. We didn't know it was going to be something as heinous as war and inflation, and we didn't know it would be so soon. But we've been predicting that. And so we have a product set like our planning solution or our analytics solution or being able to go do sourcing that if somebody is not in a position to go attack a full transformation right away, we're putting them in a position to be more agile. And we're also talking to customers who, even though this is coming, they're looking at it as a business opportunity to go replace those. Now I can't give like a forecast about what I think the whole economy is going to do, that would just be a personal opinion. But I can say that one of the messaging that we've been coming out of COVID with is around this agility, and we feel like we're well positioned for that. Justin, I don't know if you want to add something to that?

No. I mean I think you hit it well. I think we come into this year, Alex, with a lot of momentum and across a lot of areas, financials being certainly one of those. And we're certainly cognizant of what's going on and watchful of that. But it is hard to predict what the outcome is. I think we do feel really good, though, as we think about the business and the momentum going forward, not just this year, but as Terrance pointed out, there's a lot of really important drivers for the next several years in our business.

Got it. Well, just a clarification question, Justin, for you. As I look at my kind of large cap and mega cap comp set, it actually looks like Workday outside of Intuit, which is not applicable, has one of the lowest exposures to Europe as part of the business. Now there's also separation with Europe and EMEA and obviously, APAC. Can you level set, to the extent that you've talked about, what is the revenue exposure in Europe for the business?

Yes. I mean all we've really shared, Alex, is 25% of our business is international. That includes Canada, which is a decent-sized business for us. That includes APJ, markets like Australia and New Zealand, which are a decent-sized business. We certainly have significant and growing presence in EMEA. So U.K. is a big market for us, France, Germany, the Nordics. But we do probably look a little different than others in terms of what our actual European businesses. Now that said, like that is an important growth driver for us, right? So when you think about the multiyear view, Europe is certainly a key part of the international markets. But it maybe is lower than some of the other companies you might look at.

Perfect. Terrance, there are so many questions I want to ask you. But one of them being the recent acquisition of one of your competitors, partners, not necessarily peers, as you mentioned that in one of your answers, you've said that, look, one of the reasons we're well positioned is because we're not just offering a full-scale transformation. We can give customers the ability to go at their pace and start their journey where they want to. With respect to your pipeline for planning, for analytics, in the context of one of the main players of this market getting acquired, what is that, like just real time, on-the-ground changes that, that causes or influences, to the extent that you can comment, obviously, would be, I think, really interesting.

Yes. Well, our reaction to the acquisition was more that we felt like there were some investors that went into the company to actually force that -- their hands to do something there. We're a little bit interested to see what Thoma Bravo is going to do with that solution in terms of how they're going to package it up. So we're kind of reading that. But our reaction is we know exactly what our sweet spot is around planning and analytics. We know what our pipe looks like in the industries we want to take on and the market segments of large enterprise and medium enterprise where we see good fit. And we are actively doing business development. In fact, one of the things that we have for FY '23 is we created a specialized sales force to go sell planning and sourcing and analytics as well as Peakon to basically be that lightweight transformation entity that we have. So we're pretty excited to see that there are people out there that want to buy assets that are in the category where we think we have good growth potential. And it doesn't really affect us competitively. But we are interested to see what the future brings in terms of how they plan to spin that back out.

Perfect. The other element, and I'll poke fun at this, but also -- actually, before I go there, I'll ask one more boring question. The final boring question is, as you think about -- and this is maybe for you, Terrance and for Justin, the most misunderstood aspect of the Workday story throughout your investor conversations and dialogues, what would that be?

Yes. I mean, I'll take a first crack at it, but Justin will have a more corporate view. I'll give you the financial piece. I don't think people recognize that we actually have the breadth and depth of a financial solution that we have. So when we talk about go-to-market, we talk about going to market for buying centers. So we talk about the office of the CHRO. We talk about the office of the CFO. We even talk about the office of CIO. And the office of the CIO is becoming even more important to us as we go into financial sales around industries because there's a lot more integration, there's more extension, more things like that, that happen. And so one of the things that I think happens is people don't appreciate the breadth and depth of the financial solution that we have. If we think about personas within a buying center, so within the office of the CFO, you might have a controller as a function. You might have financial planning and analysis. You might have the treasurer. You have revenue management. You have procurement, including strategic sourcing. And we have solutions for all of those areas. And in addition to that, we even then have industry-specific capabilities like brands and student and accounting center and to basically -- health care, we have inventory management. And so the idea is I don't think people fully appreciate the breadth and depth of the solutions for the buying center that we're trying to go after. We've been quietly assembling this and winning deals and getting references. And I think people underestimate where we are with that. Justin, I don't know...

Yes. I mean I would kind of follow on that same theme. I mean from a broader lens, I think we talk a lot about the CHRO and the CFO, and I think a lot of times, investors have this core HR, core FINS view of the landscape. But as Terrance just said, there's a lot underneath there and a lot of pretty big revenue items that sit outside of that. When you think about areas like planning and spend management and analytics and some of the talent management and recruiting, payroll, like these are significant businesses in and of themselves. And I think the fact that we have that kind of foundational core system of record, core [ kind of ] capital, core financials, that puts us in a great position, and we've obviously been spending more time talking about our customer base motion, but we have this unbelievable position when we have that foundation to go and expand significantly beyond the customer base. And so it's been a couple -- a multiyear journey for us, but I think there's still, in a lot of ways, we're just getting started with that opportunity.

Got it. All right. Now let's spice your question, Terrance. So I will say, just affectionately, the notion of financials and large deals and the word inflection has been almost like a trigger word for investors and Workday almost for the last, I want to say, 5 years. We are finally -- we have a financials guy on our conference call with 85 investors where we're talking about FINS differently, both in the quarter that has -- that closed in Q4 and the pipeline that's going forward. Are we inflecting on financials in terms of the positive? And if yes, and/or if no, what is driving that now? What has changed? Like what has culminated, either from a product development perspective, from a sales and efficiency or go-to-market perspective, like what is the critical mass that has put us at this point in time right now for Workday?

No, it's a very fair question. And I like the word inflection. I think what you'll find for a buying center like the office of the CFO that there is no major inflection point. And I think the last major inflection point we had was Y2K. And I think since then, there could have been a great recession, there was a pandemic. We now may -- there's potential war time and stuff. I think that CFOs are looking more for continual improvement as they go forward. I think that mindset has changed. And I don't think you're going to see a rush to market per se. And I think it's going to very much vary by industry and also market segment in terms of size, and then there will even be a geographic component to that in terms of how things happen. I think what we are seeing is really good momentum with big deals starting to close with a pipe that we're really happy with because of technical innovation, right? So one of the things that's super exciting today is technical innovation around user experience. It could just be that you get to work in an environment where you're used to working in, right? So it could be that you're in Slack, you're in Excel, you're in -- wherever. And you can access these enterprise applications or the data in those applications really easily. It could be stuff around machine learning that's helping do automation or process or even do recommendations of things, right, around planning. It could be around what we call an intelligent data core or reporting capabilities, analytics, the ability to scale those analytics and take big volumes of data. So I think what's happened is over the last, as you said, 5 years, there's been this when is financials going to inflect? I think the answer is it won't be a onetime inflection. I think it will be a continual growth and expansion that varies by industry, and it's being fueled by the technical innovation that enables that process change underneath it. Like, I'll share with you guys, one of the visions that we talk about is the ability to unlock, for every CFO, the ability for them to unlock the potential of their people, their processes and their data. And so what we mean by that is CFOs are responsible for advising the business on where to go, right? They want to be an adviser. They want to sit in the boardroom, they want to help generate new business models and do that sort of stuff, but they're caught or stuck kind of being a transaction operator today. Now when they want to -- as a transaction operator, that means they aren't unlocking the potential of these great resources they have, they can be analysts that help do stuff and be advisers. They're not unlocking the potential of the data that will help them tell the story or make better business decisions, and they sure aren't unlocking processes. In other words, sometimes those processes are holding them back. So I think what you're seeing is there's finally proof that these advanced technologies are changing those things such that people can take advantage of them. And I think that's what's unlocking the market, if anything. Justin, I don't know if you have something you want to add.

No, that was infinitely better than what I tell investors all the time. So we'll leave it there.

Okay.

Terrance, is there anything that like -- I want to dig in a little bit. If you think about the top 2 or 3 kind of growth drivers that are making that momentum -- that are unlocking that momentum, is there anything incremental functionality that you just offered that you saw unlocking specific demand? Is there anything else that you would call out here?

Yes. I mean -- so again, it's going to vary by market segment and industry in terms of what the company needs, right, to move forward. So we can start with you guys are familiar with we released accounting center, right? It's been out in the market a little bit over a year now. And we're having great momentum with that. And the reason we're having great momentum with that is it's solving a complicated business problem for companies. And what it's solving is many companies like in financial services industry, but this can be in health care, it can be in retail. What happens is they have systems that manage their revenue operations that tend to be high-volume kind of dumb systems. And the reason they're dumb is because they're trying to get throughput. So think about a point-of-sale system or think about like a loan system at a bank, or think about a patient revenue system at a hospital. And they have high volume and they're trying to get those transactions processed, but they have problems doing analysis, reporting, accounting for it, understanding it, and then they have regulatory requirements on top of it. So if we can provide a solution that gives them like a virtual sub-ledger, that is a technology that combines some of that process automation, some of that intelligent data core as well as it merges those front office applications with back office processing in an elegant way, and they get real value out of that. So that's an example where we've seen good momentum. The second area that we're seeing momentum is around our planning solution and the ability to use machine learning or AI to be able to do predictive planning so that you can build lots of scenarios and do lots of other components. And what happens is we think about it like a cycle. So if I can get better quality data through better process automation into my environment and then I can feed that into my plan and then I can do more predictive planning, and I can use tools like machine learning to look for anomalies or make predictions, we see good momentum there. So when we can walk into a customer or a prospect and we talk to them about, hey, what we want to do is help you plan a better future, not just make you operate more efficiently, that resonates with them. Because now they're thinking about margin profitability, expansion, business model improvement. And that's one of the keys that we've seen for success when we talk about this buying center in the office of the CFO.

You came from Oracle. They know a thing or 2 about financials and even in the cloud nowadays, what was like the -- you've got to work on, I'll call it, fixing the Workday or innovating the Workday product portfolio in FINS. What was like the biggest kind of first thing that you wanted -- that you needed to fix or that you needed to do? And now as you're sitting here about 2 years later, and I'm sure you have friends in that org, where do you feel like you are now ahead of them?

Yes. Those are 2 great questions. So the first question -- the first statement was when I first arrived at Workday, I felt like our #1 priority was to be able to scale the financial applications. So on the HCM side, we have some of the largest customers in the world, and you guys know the names. And that's very large loads. But you can imagine that running a large number of employees concurrently is a different technical problem than having to run very large transaction volumes with a relatively heavy concurrent load also, right? There are different processes and different functions as they run. So the technical architecture that Workday had built up was optimized towards that concurrent usage of all those employees. Imagine 1 million people logging in to get benefits on the last day that benefit eligibility is there, right? That's the easy use case for investors to understand. On the financial side, they have made tremendous progress with their phenomenal -- with the phenomenal in-memory technology that we have here, but we needed to go a step further. And so the technology teams absolutely have stepped up and they have made it possible for us to scale. And I'll give you a data point, which is we just had Fannie Mae and go live on our financial solution, and they loaded 350 million transactions into their system from their loan and environment into the system to process, and they did it with no issues and now can report on all that data and all the accounting that it generates from that. So that was our first goal, and that has unlocked a lot of capabilities for us. Because when you do that, it's not just about throughput or processing, now imagine you have to know how to display that to a user, you have to manage the data, you have to keep it secure, there's lots of stuff. And the teams have done an amazing job building that out. That's the first thing. Now from a competitive perspective, where I think we are against my old shop specifically is I think we have differentiation in how we approach some of the process problems and user experience. But [indiscernible] that is we have kind of built in process flows, we have predefined capabilities, and we have a... [Technical Difficulty]

Just as he was getting to the good stuff.

Hold on a second. I can see if he can rejoin.

To get customers live much more quickly, and we have the ability to add capabilities and features much faster. And we sold...

We lost you for a second on the better than Oracle part.

Terrance, you cut out. Do you want to just restart that last thread...

Oh, I did? I didn't know I cut out. Oh my goodness.

Yes, you're okay. It just froze for a second...

So where I talk about from the old shop where I think we have a difference is, it's in how you do it. It's not a specific feature or capability. So in other words, when we go back to that message about unlocking the potential of people and processes, we've taken that into our design consideration in terms of how we design our solutions, right? So when we talk about the ability to go configure stuff and make it easy or to be able to change on-the-fly or to be able to extend the solution or to be able to add components, either a partner through our platform or ourselves and do it really fast, we feel great about that. Like I can give you a simple example, which is we have a requirement to be able to go do planning in health care. So we could go to our partner, Huron. And on top of our planning solution, they built a health care planning component solution to go to market really fast. Banks need financial funds transfer pricing, right, as a capability. So we basically have the ability for PwC to help us go and build that out. And these guys do these kind of solutions in 2 and 3 months. And so those are examples of we have this architecture that lets us configure and extend the solution to go really fast, where we see new opportunities. And that's what we think our difference is.

Perfect. I want to ask a quick question to sneak in, and then I'll ask one from the audience. Payments, both on the payroll side of the house, on the procurement side of the house, on the AP treasury management side of the house, how do you think about -- is that an important part? Is that a future part of the Workday portfolio that you see your customers potentially benefiting from? Back in the olden days when that was a big deal in the markets for some of the companies I cover, it would always be a question I kind of threw to Justin, and he would kind of say, not much. So I figured I'll throw one at you.

No, I have a slightly different perspective because there is some disruption that's going to happen in that marketplace, right? So I won't bore everybody in blockchain and distributed finance, but I will hit on it a little bit. First, let me make the statement that says, one of the things that we've done architecturally at Workday is all payment processing is done through our settlement solution, and that happens to be in our area in our CFO. That means payroll, that means procurement, that means treasury, everything goes through our settlements engine. And so we do about 38 million payments a month on behalf of customers, they process through this. So it's really high-volume stuff that we're talking about. What we are seeing is trends, so you can imagine payday loans as the old architecture, but especially when we talk to customers that have frontline workers, and those frontline workers basically need a mechanism to get money before payday. And rather than having that employee have a bad experience financially and go get a payday loan, why can't the company pay for that and do stuff? So we're looking at innovative solutions with our customers and even in our own to figure out great ways to do that to help employees be able to get money in advance. We talk about the ability to get on different networks, and today, different things. So you might have blockchains and other stuff. We are working with customers and partners to figure out how to engage with some of those distributed finance solutions so that when we have digital assets, imagine a treasurer in the future is going to have a combination of regular assets as well as digital assets, and they'll want to know how to track and manage those. So we're building out solutions and capabilities for that. And then the ability to do more streamlined payments on these networks because, remember, governments are going to come out with digital currencies as well. And so we do see disruption happening in that industry. And therefore, we do see technical solutions that are available today from us as well as some ideas that we have about how to really participate and help customers and financial service organizations with that problem.

Perfect. I know we're over time, but I promise to always ask at least one question from the audience. Can you talk to the opportunity in procurement business spend? How often do you see Coupa? And how do you differentiate your solution versus theirs?

Yes. So it's important to note that in terms of a go-to-market motion, right, Coupa is going to go and sell stand-alone procurement. And it's predominantly indirect procurement. They're not doing manufacturing, that sort of stuff. And they want to go sell that stand-alone on top of an existing financial system, right? And they want to go try to replace it. That is not our strategy with our spend management solution. Our spend management solution is designed to work with our financial solution to transform finance. Now one component of that spend solution is our sourcing solution, and we do sell that stand-alone. We don't see Coupa that often in those stand-alone sourcing deals because they will frequently try to expand it to a full, indirect procurement component. Because we're not actively going after a full stack indirect procurement, we don't see Coupa that often. And in fact, I would say, if we see Coupa in one of those deals, one of us is probably in the wrong place, like it's either a sourcing deal that they're trying to expand, which isn't probably going to be very successful for them, or we're going in somewhere and competing on a thing that we don't feel is the right way to go. We'd like to see a more integrated flow for that customer, and we'll try to help them out with that thing.

Are you more of a partner than a competitor?

I wouldn't say we're a partner at all. So I don't -- we don't tend to partner with them. Meaning we have joint customers that have either acquired Coupa before we came in with financials or otherwise. But I see them as a competitor. They just are not a direct competitor because of our go-to-market function.

Understood. Well, Terrance, this is fantastic. It's probably one of the funnest firesides that I've had. So I hope everybody enjoyed it. Justin, thank you for making Terrance available. And everybody, thank you for joining in general. And you'll all find a survey in your inbox. Please fill it out, 30 seconds for management.

Thank you, Alex. It was really, really great.

Thanks, everyone.