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

Excellent. Thank you, everyone, for sticking with us all the way to day 4 of the Morgan Stanley TMT Conference. Really pleased to have with us this morning from Workday both co-CEOs, both Aneel Bhusri and Carl Eschenbach. And I believe this is your first investor conference as CEO of Workday?

As co-CEO with Aneel here at Workday, yes.

So I'm really excited to kick off the conversation. Before we do that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures.

So Aneel, to start off, I've been talking to some of my contacts at Workday. And there's an excitement that got kicked off that when Carl get hired. And I'm hearing about a buzz, and I'm hearing about people really reinvigorated about Workday with this hire. What do you think that like what did Carl catalyze? Like what is it that people are getting excited about Carl coming on board? I'm sorry to talk about you...

No, no, it's great.

Yes, I'm going to leave now, Keith.

Yes. Exactly. So I've said it before, I've been chasing Carl for 5 years. He's been on our Board for 5 years, and I knew that if we could get Carl to Workday, it would be transformational. I don't think there's a better operating executive in the entire software industry. Now I've seen them in action for 3 months is absolutely the case. I think as a founder CEO, I took it as far as I could. And coming out of COVID, we're probably a little bit tired. But Carl brings this, first of all, just in who he is, this level of energy, he calls it giddyup. He's gotten all of us to have more giddyup. But he also brings a vision for what, especially the go-to-market side will look like from where we are today to being a much bigger company. And people are just excited about that. I know it's infectious. And there's a path to building a huge company here. And for me, I'm excited. I get to go back to do the product and technology work that is more my bailiwick. And Carl's really driving the company with energy, passion and a vision for how to scale this company. And I love what he says, we can grow the top line and the bottom line. And as a founder entrepreneur, I was always focused on the top line and the bottom line to kind of took care of itself, but we have opportunities there.

Got it. And Carl, to you, I mean, you've been an investor for the past couple of years. And taking a CEO role, you're making an investment. This is how you're going to invest your time over the next 5, 10 years. What made Workday the right investment for you? And where do you see the opportunity for improvement? Because coming in as CEO, obviously, you see something that you think you can improve within the overall Workday story.

Yes. Thanks, Keith. So there were a number of reasons I decided to jump back in the game with Aneel. I was fortunate enough for 5 years to sit on the Board and serve Aneel and the Board and I had a front row seat on the business. And the thing that, first and foremost, attracted me was the value and culture system that Aneel and his co-founder, Dave built over the last 18 years and how we treat our people, how we focus on customers. They have this line inside the company. They're great and good people, but they like to kick a**. And I will tell you, I've got to witness that and that really attracted me. Also the opportunity, if I'm honest, now I can talk about Aneel, I wish he wasn't here right now, but to get to work alongside someone like Aneel, one of the best product strategies I've seen in enterprise software in my career, get to work alongside of him, I think, was a special opportunity. And then on the business, as you know, I sit on lots of boards who're coming into this role and got to see a front row of many companies. I think this business that Workday has built is really durable. And what I mean by that, when you look at the strength of its installed base of customers and the opportunity to sell back into it with all of our solutions, I think that's really, really impressive. I like the diversity of the business, Keith, diversity in who we're selling to. We have these 4 segments as I think about the business, a large enterprise business that really built the core foundation of Workday. The medium enterprise business is accelerating, which is what we call our mid-market. But then we also sell across many of different industry verticals. They've verticalized the business because we have strength in certain verticals. So that's working. And then last is there's not many companies that have actually built 2 systems of record and have the opportunity to not just sell our core product that got us to where we were the first 5 or 10 years, HCM, but now we also have this powerful FINS business that's taking off as well. So if you look at the diversity of the business, I think we have a very durable business, and it's predictable over time. And this is why I think both Aneel and I think, we see a vision well beyond $10 billion at scale. We can grow both top line and bottom line. And for me, what I think I can bring is, listen, I spent my first 30 years in an operating role. The last 7 as an investor. Actually pretty funny is similar to Aneel, he was an operator, went to Greylock and came back and obviously started Workday. And I think my operating experience, my understanding of go-to-market, my international experience building out international go-to-market strategies, I think is something I bring. And I do think about I have a growth mindset, but at the same time, I also think about how we can drive margin. And I think we have the opportunity to do both here, which is quite unique in how we run the business. So I think I can bring a lot. I've been through a couple of cycles, ups and down and had to manage through them. And depending on what happens on a go-forward basis, I think we can manage through anything we're confronted with on the economy side.

Outstanding. So let's dig into some of those opportunities. You highlighted...

I like your socks, by the way.

It's World Wildlife...

It's nice.

All my socks come from a donation to the Worldwide Life Foundation. So Carl, you highlighted international. International has been relatively flat at about 25% of revenues for the past couple of years. I know there's been some recent leadership changes there. There's some of its macro that just Europe has lagged a little bit in Cloud adoption, some of this execution. What's the opportunity in Europe? And how do you sort of jump-start that to be an increasing contribution to the overall business?

Yes. I think the statistic we share with folks is, right now, 25% of our business comes from outside the U.S., but it represents more than 50% of our opportunity or TAM. And yes, we have seen more macro headwinds in Europe, which we've called out, which is why some of our international growth has been down. But I also think the opportunity is very large, and we haven't executed well, if I can say that, with Aneel sitting here next to me. So we have made leadership changes. We brought in a new leader for our European operations as well. If you go down one level, we brought in a new leader to run the U.K., Northern Europe and the German market, the [ dark ] market. And we did the same over, if you will, Keith, in APJ, where we promoted someone from internal to lead our efforts internationally. And I think he's going to do a really good job. At the same time, while we fix the go-to-market motion, now that we have Aneel just laser being focused on the product side, I think you're going to see more localization internationalization of the product as we go into, for instance, APJ and service South Korea and Japan. And just last week, we announced an expansion of a partnership with a company called Alight, which is a payroll provider in 6 new cities across Europe. So it's both go-to-market. I see the opportunity. And on the product side, and Aneel is leading the effort on the product, and I'll lead the go-to-market side, but we should drive international growth faster than we've seen historically.

Yes, it's a little bit of a chicken and egg thing. We've got the right leadership. We didn't necessarily make the investments on the product side. So we do have some product gaps to fill, but they'll get filled pretty quickly now that we have confidence in the sales leadership internationally.

Got it. And I want to ask a high-level kind of macro question. The exposure to back office seemed to be a little bit of a drag during COVID.

I hate calling it back office. It's not back office. We'll get there...

Okay. It had a little bit of a headwind during COVID. But now it seems like there's more of a tailwind behind those types of projects today, even though the sort of underlying kind of macro conditions are weakening. Can you help us kind of understand that push and pull of what we've seen over the past couple of years?

Yes. So first of all, I really do [ bristle ] at the term back office because I think...

I'm crossing off...

The areas have changed. HR and finance were back office 20 years ago. Today, you talk to any CEO, what's in their top 5 list of priorities, talent. Every CEO will talk -- will tell you it's talent. And HR has transformed from being about payroll and benefits to being about talent and learning and employee engagement. And during COVID, that was front and center for all CEOs. They didn't know how their employees were doing. They had to train them remotely, all the things that make HR become a lot more strategic. And so that's why I think HR did quite well during COVID. I think of finance now no longer as the regulatory system that generates 10-Qs and 10-Ks. It's really the business partner. The CFO is the business partner to the CEO and running the business. And so it's about the analytics, it's about planning. And so that -- I believe both of those functions have moved to not necessarily the front office, but their strategic front office being sales, but their strategic -- and they're not viewed as back office. And I think that, that was one of the reasons why the business held up during COVID. They were still viewed as important initiatives. You wanted to engage your employees, you needed a modern HR system. But Finance was doing great going into COVID. It took a pause because those are viewed as bigger projects and ones that I think companies felt slightly uncomfortable doing with everybody being remote where we took Walmart and GE live during COVID. We were able to figure that out for HR. As we come out of COVID, finance transformation is a huge topic. I see our finance business picking up again. Salesforce was a huge win for us. That's -- it's not just another tech company. It's also a Fortune 250 scale company, and I only see good things about our finance business going forward. But the reality was during COVID, those projects were viewed as big projects and a little scary to do a finance change while at COVID, and now it's coming back.

Right. On the Q4 call, you guys talked about a small restructuring you did. I think it was about 3% of head count, which is never easy for any company to do. But you made an interesting comment that the restructuring wasn't about cost reduction. So what was the restructuring about?

Well, so I'll answer the first part of it, but then I'll turn it over to Carl. So we already had in the works a plan to basically optimize R&D. And we hired a lot during COVID. Coming out of COVID, the skills we need are just different. They're much more AI/ML skills, and we need to really build up that capability. Carl got here and said, we need to look at that across the company. And that was something that -- I don't know if you want to comment on it, it was the right time to optimize across the company.

Yes. My philosophy on this is, listen, to Aneel's point, a lot of people were hired in the last 2 years. And when we sat down at a company level and looked at cross-functioning all the requirements we had to focus on growth, we call it our SGI, strategic growth initiatives. We didn't necessarily think all of our head count was optimized against the biggest projects to drive growth. And while we were going to do some restructuring and optimizing in R&D, Aneel and I just said, why don't we look at it across the company? Because the last thing I think you want to do as a company is to multiple cuts. It just doesn't put a good feeling inside the company and people walk around on eggshell. So we did it once. The interesting thing to Aneel's comment during the earnings, we took that head count and we now have aligned it against our strategic growth initiatives in R&D, in product and technology as well as go-to-market. So all that head count is going back into either quota-carrying capacity or what Aneel's focus on the product and technology to drive innovation. So we're reinvesting it. That's why we call it more of an optimization exercise than a restructuring or a cost-saving exercise. And it's resonated well with the company to Aneel's defense, he's never done this at the company in 9 years. So it wasn't something we took lightly. But we treated our workmates on the way out very generously and ethically. And I think they left very proud of their experience at Workday.

Understanding. Understanding. Aneel, you gave me the entrée and in this conference, we cannot talk about generative AI and in all of these sessions. What does it mean to Workday? And where can the functionality and the capabilities that are enabled by generative AI and large language models, where can they enhance the Workday portfolio?

Yes. So I would, first of all, say that we shouldn't just discard traditional AI and ML. And it's funny calling it traditional AI because that's relatively new. They're solving different use cases. Traditional AI and ML, you throw a bunch of data at it. It gives you a recommendation. It's either basically automating drudgery work or it's giving you insight into a process that would take humans a decade to analyze and the machines can analyze it in minutes. That is -- that train needs to continue to go forward, and Generative AI is not going to replace that. Generative AI is really an amazing technology, and I spent some time with Sam Altman earlier this week from OpenAI, really had content, free form content. And so without giving away all of the details, I think you'll see in 6 or 7 months from us, our first wave of Generative AI use cases and either prototypes are actually in production. I'll just share one that's a simple one. Performance reviews, people hate writing performance reviews. And the way that we're using Generative AI is to look at taking an input, either a combination of maybe a Zoom -- review done over Zoom, all the data that you already track in Workday from a pharmacy perspective and then actually writing the performance report that nobody likes to write. And in our early trials, it works really well. You would think it's written by human except there's no grammar errors. I mean it's pretty flawless. We've got 30 use cases we're looking at, and we're serving our customers to figure out which are the ones that have the biggest impact. And the difference between us and the Consumer Internet is our data is absolutely clean and it's normalized. So in ChatGPT, you can ask good questions and you get some wacky answers at times because the Internet is the Wild, Wild West, so maybe it's actually getting wilder. But our data is absolutely constrained, normalized, it's clean. And as a result, we can produce pretty powerful results. Anytime you want to do something that generates content, you think in a work setting you can think about how we might use it for that. And we've got cases that I don't want to share, although I know SAP and Oracle could do it anyways, they're dinosaurs. And I do think that for vendors that didn't really make the lead to Cloud, Generative AI is going to be impossible.

Okay. No, that makes sense. And the new use cases that come out from Generative AI, I think one of the things that investors have been a little underwhelmed with when we saw traditional AI, I will call it, come into work sets like when Salesforce started talking about Einstein and Adobe started talking about Sensei. It wasn't separately monetized. It was just improving the overall platform on a go-forward basis. Do you think these use cases could be monetized separately?

I don't think they can be monetized separately. I think it changes the win rate and protects pricing. And I think both of those are really powerful. And I really think it will impact the win rate pretty substantially. But I would go back to -- we approached AI and ML differently, we -- traditional AI and ML differently. We embedded it in the core and then we build apps on top. Our 2 hottest selling apps in the world of HR are Talent Optimization and Skills Cloud. Those are both based and built on machine learning and AI. In the case of Skills Cloud, we're moving from a world of jobs and roles to a job of skills, and it takes these massive amounts of jobs and breaks it down into a set of skills. And we now track, I think, 1 billion skills. There's no way a human could do that in any reasonable amount of time, might take in 10 years. Accenture's are great case study. They did this for all the skills that Accenture has internally, and now we're going to our customers and showing what you can do. Once you break down the job to skills and you can do matching to the skills you're looking for and hiring as opposed to I want a Software Engineer, you can say I want a specific set of skills. I want 5 years of job. I want -- and that's all based on AI. So for us, that's a brand-new product that is a very expensive SKU that is really popular with our customers.

Yes. And Keith, just one thing to add is I think Aneel touched on a little bit about the competition, while people say they potentially can do AI/ML, I think we are unique. We have a multi-tenant cloud. Everything is on the same platform where our competitors have single tenant on-premise a lot. And to be able to do what Aneel is articulating really well, you need a big data set. And we have that. We have 60 million-plus users on our platform today that's curated, it's normalized and it's all on a single tenant cloud that gives us a significant advantage. We're going to be a lot more vocal about some of the things Aneel spoke about. I think we've been a little bit quiet about our capabilities, but I think you're going to see us amp up our messaging because we think we can drive a transformation in the industry around this AI/ML message better than our competition. So you'll see more from us.

Yes. And I think there was some fear about AI/ML a couple of years ago, and that fear has dissipated because if you're not using it, you're at a competitive disadvantage.

That makes sense. Got it. I want to dive into sort of HCM and then the FINS side of the equation. One of the real upside surprises for investors over the past couple of years, I think it was an Analyst Day, 2018 or 2019, you guys -- you put up a framework of the growth of the company and you put HCM as a mid-teens grower. And then you came back at the most recent Analyst Day and said, "Listen, this is [ growthier ] than what we expected, right?" And this is a 20% grower. What changed? What enabled you guys to get that confidence?

So I'd say a couple of things. Number one, everything comes from having a great product and super happy customers. Happy customers want to buy from the vendor that is their core system of record, right? And so I'd say the big changes -- 2 big changes, we began to have a more concerted effort selling into the customer base. We really didn't have that motion. We're so focused on net new and Carl has taken that to a new level. And then secondly, we came out with a whole bunch of really compelling SKUs, like Talent Optimization, like the Skills Cloud. We've got scheduling that's AI and ML-driven coming down the pike. So we've come out with a whole bunch of new modules and our win rates are super high and the price points are -- and discount rates are way better than they would be on the initial sale. So customers -- Carl said this a bunch of times during tough economic cycles, they tend to lean in with the vendors that they know are going to be around for a long time, and we benefit from that.

Right. Carl, one of the things I think that really, for me, I thought of is something that you did extremely well at VMware was, every year, we would talk to customers in on these ELA cycles. You get more customers to buy more and more products from you. And VMware has also had a really broadening solution portfolio. Is that a motion you think you could bring to Workday in terms of being able to sort of get that motion...

Yes, we already have. Aneel is laughing at me up here or with me, I hope. No doubt, like, listen, Workday, $7 billion at scale, really solid growth, great company. But I think Aneel and I would agree on the go-to-market side, there's innovation we can do. And most people think of innovation purely on technology, either organic innovation or inorganic innovation through M&A. But I actually think there are some things we can do, and we are in the process right now of looking at our go-to-market strategy, and we're going to modify some things. We're going to sell differently. An example is something you talked about, typically, at Workday, when a renewal would come up, that's when we'd add new products. Now when a customer wants to add new products, even if it's midstream of a contract, we'll open it up, restructure it, add to new products and then we'll co-term their existing footprint. So we're doing things like that. I also think on the go-to-market side, there's some unique things we do with our partner ecosystem. We have a number of partners that have literally built billion-dollar franchises on the back of implementing and installing Workday. And we're really happy for them. And we're going to continue to lean in on them in a partnership, but we're also going to start to look for reciprocity and how they can drive this to market. And another example is, last week, we announced an expansion of our partnership with Amazon and AWS where now Workday is going to be sold to the Amazon marketplace, which has never been done in the past and there's a lot of customers who have a lot of dollars to spend under contracts or frame contracts with Amazon. And now you can, for example, go use your dollars against a Workday spend and we can implement that on AWS. So there's a lot of innovation we're going to do on the go-to-market side. It started already, but it takes a while. I'm confident the teams are open to it and willing to think differently about how we go to market. And I think you'll see a number of changes over the coming 6 to 12 months, no doubt.

All right. Outstanding. On the financial side, we do a quarterly CIO survey. And we've got a question for probably 7, 8 years now of when you make your next ERP purchase, like are you going to -- do you want to do it in the Cloud or you do not want to do it in the Cloud? And it's really over the past 2 years, we've seen a flip of that. Now the majority of CIOs are saying that we want to do the next session in Cloud. Is my survey correct? Are you seeing that?

Absolutely, for a couple of reasons. Legacy vendors are not investing in the on-premise products. They haven't been touched in years, and the world is changing. So those systems are just falling further and further behind. And secondly, the Cloud is now shown to be more secure than on-premise. It's also shown to be on parity functionality-wise. And so if legacy is standing still and Cloud is moving forward, you can see where this goes. And even Oracle has kind of given up on selling on-premise. So it's Cloud versus CloudNow.

Got it.

Keith, the other thing I was just telling Aneel this morning, I spent the last 2 days in New York City with customers and prospects. And every single customer engagement had both HCM and financials in the conversation. So what we're seeing is because of the strength of our installed base, we can sell our financials back into that installed base. But as we're talking to net new customers, especially in the medium enterprise, that market segment, they're looking at going with a full platform solution from someone like Workday. So I think that's something we haven't seen in the past, and it's something we're leaning into. And on the FINS side, we talked about the optimization exercise, and I talked about quota-carrying capacity. The majority of that is going into FINS sales. So we're doubling down on both selling back into the installed base, building a larger FINS sales organization. And for net new, we're expanding dramatically as well because we see the product has come to parity and there is an openness and willingness with a CFO community who's historically been a bit conservative to start to think about that movement to the Cloud. And when they do, we get at least a seat at the table to have those conversations.

And medium enterprise for us for finance has been strong for quite a bit because the customers don't want to make multiple decisions so they buy actually finance together. And what we're seeing for -- what we're now seeing is that with wins like Salesforce and Comerica and other big banks, it's going into the Fortune 500.

An example was State of Georgia, Aneel, where we did a full platform for the whole state, which is a lot of employees.

I'll share with you my theory, right? You guys bought Adaptive Insights. And at the time you bought Adaptive Insights, a lot of investors were kind of scratching their heads like, was that the right one to buy. And it seems to me like that gave you guys more entrée into the mid-market and gave you an avenue to the mid-market. And what I've seen since then is you took Adaptive Insights, you added accounting center and then you had FINS and all 3 of those came together and that became a transformational type of FINS solution for the larger enterprises and they're starting to go up. Yes.

No, absolutely. And it also allows customers -- in the old days, if they didn't want to trade out their accounting system, that was the end of the conversation. Now we can start with, hey, do you want to start with planning, right? And if you want to go all in, we can do the plan, execute, analyze and that message really resonates. But the other thing we did with Adaptive as we took it up market. Last year, we actually landed Exxon for a planning deal across the company. And that's Fortune 500 kind of customer that Adaptive never touched before. So with our engineering effort and our sales effort, we've been able to take planning up. And I would just say without sharing the details, at some point, we will, that from a financial perspective, that acquisition has been more than a home run. It's scaled to be a very large business.

Right. One last topic I want to squeeze in here before we have to close out the session is the balance in growth and profitability. You guys have done a very nice job of steadily bringing up operating margins. Given sort of the scope of the opportunity, given sort of the tipping we're kind of seeing in financials, are you still going to be able to do that? Or do you need to sort of gear more towards the opportunity and lean a little bit more into growth?

Listen, I think the optimization example that we just articulated earlier is a perfect example of how we can continue to invest in the business, but be smarter about where those investments would go to drive growth. We think this is long term, a 20% sustainable business on our path to $20 billion -- $10 billion in revenue.

You said $20 billion.

Yes. And Aneel is going to hold me for that as it becomes my exec chair. But at the same time, continue to expand margins, which is what we announced 200 basis points last quarter. So I think we can do both. Everyone thinks one has to come at the expense of the other. And I think the operating leverage we have here at Workday and the strength of our installed base in the motion with both HCM and FINS, I think this is a very unique opportunity for a company to continue to grow at an unprecedented rate compared to others at scale.

I mean we got to 20% operating margins without really focused on -- being focused on operating margins. What we saw during COVID was when we stopped traveling and stopped hiring, I think it got as high as 23%, 24%. We realized how scalable and the business model is and how much leverage there is. And so now Carl is using those tools to tweak it.

Right. Well, unfortunately, that takes us sooner out of time. But tons of exciting stuff going on at Workday. Thank you so much for coming and joining and sharing that with us. And Carl, super excited to have you on board.

Thank you. Appreciate it.