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

Hey, guys. Welcome to our next session. I'm really happy to have Carl here. We go back many years, actually.

Raimo, it's great to be here. Thank you for having us.

It's -- and it's -- I need to be careful not to ask German questions.

Yes, yes.

After all those years, but...

It was a long run there for sure.

The one question I always had, and I'm sorry, it's not a Workday-specific question. Well, maybe it is actually over time like or will be. You're running now an application software company, and before you were on the infrastructure side. Like how -- what's the similarities? What's the differences that now that you're kind of running it, like you're realizing, "Oh, shoot, this is slightly different," or you didn't think about it differently?

That's a great question. So I actually think there's differences, yet there's a lot of similarities, and people probably wouldn't necessarily think about the similarities, but I'll articulate them. On the difference side, listen, we are selling an application, and that application touches a lot of users. In our case, over 65 million users run our platform across HCM and finance. It's a very large set of data that you can gain access to. So you're really engaged with the user community a lot more than if you're selling infrastructure like VMware, you're not engaging and you're facing off and creating employee experience for someone. So there is some differences. Now that being said, what I'd recognize now a year into the role, there is a lot more in common than there is in differences. What I mean by that is Workday, I think, is unique in that we're both an application and we're a platform. We're an infrastructure player. So when we go in and we speak to customers, historically, if you're selling infrastructure, you're selling to the CIO, the office of the CIO. In applications, in our case, most of the time, you were selling to the office of the CFO or the office of the CHRO. Now we're selling to the office of the CIO as well because we see the CIO as a buyer or an influencer, whether it's a financial ERP replacement or it's an HCM replacement. An example was here in San Francisco back in September, we had our Rising user conference. And we had more people from the office of the CIO than we did from the office of the CHRO or the office of the CFO. So it's -- there's a lot of similarities. But I think what is super unique about Workday is there are very few software companies that can call themselves both an application and a platform. And I think that's what exactly we are.

Yes. And then another -- sorry, and it's only tangentially related to Workday, but like Aneel has been trying to get you to come from the Board and be more on the executive side for many years. Like what trick did he use to get you? Or like what excited you to kind of come back into the executive role?

Yes. I get asked this question quite a lot, as you could imagine, Raimo. So listen, I was on the Board for 5 years, so I was able to have a firsthand view into the company, the culture, the value system which is really important to me. I've known Aneel for many years outside of being on the Board, just being in the industry for, I guess, both of us as long as we have been now. And when I finally made a decision along with my wife because she was part of the decision to jump back into an operating role after an amazing journey at Sequoia for 6 years, I looked around the market and tried to really do an analysis where I thought I had the best fit, my background, my experience, which company probably align to my values and my culture expectations. And that led me to make the decision to jump back into an operating role and join Workday. And here we are 1 year later. It's hard to believe it's been already a year for earnings calls later. The time has gone fast, and that decision was probably every one of these decisions, I call them crucible decisions in your life, right? This one was one when I left VMware to join Sequoia was another. I look at this, and I couldn't be more excited and pleased with the decision. I feel quite blessed to be part of such an iconic durable software company like Workday.

Yes. No, I kind of mentioned and then...

Aneel says he got me at a weak moment. He was after me for 5 years. He caught me in a weak moment and I said yes. And I don't know if it was a weak moment. I think of it as a moment of strength, where I said, "Yes, let's go do this. I'm ready to jump back in for one more run."

It must be exciting as well, yes. And then now we're kind of doing more Workday questions, so I need to all kind of point out that if you think about the safe harbor statement, you need to kind of look it up on their web page. I'm not going to read it out. So like now the Workday questions are coming. Like -- but more high level, Carl, for you, like Workday has been one of, I call it, the top 3, like the Salesforces, ServiceNow on the Workday, like the SaaS winners that really scaled up and created like some good strong businesses. For you as the CEO coming in now, like you want to leave your mark. This is kind of what you want to stand for, for the correlation era of Workday. What are the things that are on your mind around that one?

Yes. So one of the priorities for me is to make sure I preserve, protect and extend the incredible value system that Workday has had from the founders, David and Aneel, set out 18 years ago. They had 6 core values. It's something I've leaned into, what I said earlier, it attracted me to the company. I want to make sure I preserve and protect them as long as I'm here. I want to make sure I have a mission and a goal to make sure that when I leave Workday, I leave it in a better place than when I entered. And I think I can do that because of my experience, my experience operating at scale with some of my prior companies, understanding international markets, understanding the finance organization having stepped into the CFO role for a while at VMware as a public company, understanding go-to-market. And I just think if you combine that, understanding scale, but understanding what a growth mindset means as well. If you combine those two, I think we can grow at scale. We can continue to find operating leverage in the business. We have expanded our operating margins quite significantly this year, and we said we'll be up over this year, next year. So I just think it's the operating experience in everything that I've amassed over the years in selling to the C-suite, like I really enjoy selling to the C-suite. That's what we do all day long here at Workday. And I think it's something that I can have a big impact and influence on. I also would say, those 6 years on my hiatus from the first 30 of operating to 6 years in the venture community with Sequoia, which was just another amazing journey. I got to sit on some of the fastest-growing boards of our generation, whether it's Snowflake or Palo Alto Networks or Zoom or UIPath or I can go on and on. I'd front-row seat to just better understand how to operate at a pace and scale in hypergrowth mode. So if I can bring that mindset and that growth mindset, yet driving operating leverage in the business to a company like Workday, we can build a durable business for quite a long time and expand margins. And I think that's the impact that I can bring to Workday. And hopefully, the first year is playing out and we're seeing that in the business, but we're also maintaining and preserving the amazing culture that I got to join.

Good. Okay. And then I want to spend most of my -- the next 20 minutes then on growth. But like one question I wanted to kind of sneak in, first is like there is growth and there's margins, and you mentioned already you had good margin next year. You kind of said you would kind of have margin expansion going forward. But how do you think about that balance of growth margin -- of growth in margins?

Yes. So I think just a couple of months ago at our Financial Analyst Day at our user conference, we talked about this durable 3-year model that we've built, growing the business top line on subscription revenue from 17% to 19%, being able to maintain that here over the next few years while expanding margin. And I think that's through operating leverage is through alternative routes to market. So I do truly believe, I said from the day I was fortunate enough to join the company, I think most people think if you're going to go for growth, it comes at the expense of operating margin. And I don't think that's the case at Workday. I think we can continue to grow even at scale at the same pace and expand operating margins at the same time. We have a lot of resources. We have a lot of headcount. We're being creative in thinking about alternate routes to market, which gives us operating leverage. So I truly believe we can do both at the same time. While most don't think that, that's an equation that works, I respectfully disagree. And I think we proved it this year. And our guidance as we think about FY '25 also would reflect the same thing. And I also think about operating margin as something that's a choice, right?

Yes.

When it comes to operating margin, it is a choice. And what I mean by that, we can choose to really drive operating margin up significantly or we can be smart about it and use our operating cash to go and drive growth, right? So I think about expanding margins. And also, as long as we continue to see opportunities like we see around our financial platform, our international build-out; in many other areas, investment that we're making, I think we're going to moderate our operating margin growth and we're going to continue to grow the top line at the same pace we are today, which is a pretty good equation. If we see something different, the choice might be moved more towards operating margin. But right now, I see enough growth opportunity. We're going to invest in the business.

Yes. And that's a good message for shareholders then. Yes, yes. Let's double-click on the two big growth engines, which is HR and finance. And let's start with HR. Like how do you think about the growth opportunity there? And I think I just want to start with like, I think there seems to be still a lot of big accounts out there because I think we at Barclays, we only started the journey with you guys kind of a few quarters ago. Like when you came in there, how did you -- and looked at this again with a fresh pair of eyes, like how do you think about growth in HR?

Yes. So it's interesting, as I reflect on making a decision to join Workday, one of the things in speaking to a couple of people about the opportunity, everyone was always like HCM, that market, right? It's very mature. There isn't a lot of growth left. And when I started to do my own analysis, now that I'm obviously inside the company, not just in a Board capacity but in an operating role, when you look at the opportunity around HCM, it still exists. Let me just give you some numbers that I just share with people just to show that there is a true TAM out there that we can go after, and not just gaining market share but grow the business around HCM. Today, we have about 50% of the Fortune 500 companies using Workday. We have about 25% of the Global 2000 using Workday. Now I'm always a person who thinks there's opportunity everywhere, so I got to be careful. But that to me says in the Global 2000, there's still 1,750 customers left. If you look at it in the Fortune 500, there's another 250 there, that's 2,000 customers who aren't Workday customers on HCM today. And that's just a population of 2,500 customers. If you look at how we go to market, we go to market in industry verticals. So what's not in there? Health care, education is not in there, state and local government, right? They're all markets that are really large that aren't part of the first equation I gave you. And then the other side of it is we've moved down-market and we sell into the medium enterprise, and that is a very rich market for us to sell into HCM. That being said, that business is doing well, but we are really leaning into the Financials business, investing heavily on go-to-market, on product innovation, internationalization to grow the Financials business. And ultimately, what we want to see, right, in the Financials is a newer business so it's growing slightly faster. But ultimately, what we want to do is we want to sell a full platform into the market, where we're not talking about HCM, we're not talking about Financials, we're talking about the Workday enterprise digital backbone supporting your two most important resources, your people and your finance and they're one and the same. And so it's HCM opportunity, it's FINS opportunity, but the real opportunity we're seeing now is our ability to sell a full platform into a customer at any given time on new logos and then selling Financials back into that HCM customer base.

Yes. And then I have to say like since you joined and look, you know I'm German, so I like -- if you mentioned Europe, but I have heard Europe more and international expansion a lot more. Like what's the status quo? When you walked in there and looked at it and VMware was obviously like very global as well, what did you see that where for like, okay, we can do more here?

So it started with some of the basics. 75% of the revenue for Workday comes from the U.S. When we say international, we mean Canada, all of Europe, Asia Pacific and then South America. So 75% of the business...

[ Immature ].

Yes, is U.S., 25% is international. Yet when you look at the TAM, right, the addressable opportunity is actually more than 50% is outside of the U.S. So we made a decision, right, that we are going to invest pretty heavily in the international market opportunity. Quite frankly, it started with people. We have a new President of all of Europe, and she's done an amazing job bringing great talent in. When you hire great talent at the top, they bring great talent with them. We have a new leader in the U.K.-Ireland market. We have a new leader for the Northern Nordics. We have a new leader in DACH Germany, your home area. We have a new leader in Southern Europe. So they are firing on all cylinders. And for the last 3 quarters, the consistency and predictability that they brought to the business is something we're really excited about. We're doing the same now in APJ. We have some work to do there. We just hired a new leader. We hired -- we have a President. We hired Simon, who was the President of Adobe APJ, and now he's joined us to run that market with us. We just announced him on the last earnings call. And then the other thing we're doing as we go international is we're not trying to do it organically through our own sales force and hiring one rep at a time. It doesn't scale. So we're leaning into the partners a lot. We're leaning into building out our ecosystem. We're leaning into global payroll providers like ADP, like Alight. We sat on stage. I was fortunate enough to sit on stage with Maria, the CEO of ADP. No one would have thought Workday and ADP would have sat together. And then we realize we have such overlapping customers, right, especially on a global basis for global payroll. Why are we partnering and doing more to bring our customers more value? So we're leaning into partners, too. So internationally, it's a big investment area. It starts with people. We're going to innovate on the product side, and we're going to build out our partner ecosystem to drive the growth.

And then is there anything more on the product side that you need to work on, like payroll vary like country by country, and it may convert...

It's a very challenging market, yes. I think just in general, with our product, think about something like Financials, right? If you go into Germany or you go into France, the requirement and the regulatory things people have to meet on the finance side is different by country. So we have to continue to internationalize and localize our Financials product, for example, as we go into those markets. We've got to build data centers in markets, right? So we now have built on top of AWS in Germany, in Singapore and Australia. So we are internationalizing the product by being in country and in market with our cloud providers. So there's a lot that still has to take place with the products, but I think we're doing quite well in addressing a lot of the requirements we need globally.

Yes. Okay. And then last question on HCM before going to Financials, and it's a hedge fund question, so I apologize in advance. But the -- if you look at the lower end of the HCM market, there were some of them that reported Q3 results, they had some issues with kind of -- it's more like the early parts of the cycle like hiring slowdown, which basically mean was a problem for those [ tenant ]. Did you see anything on the enterprise side there? Or was there anything -- any change to the bond environment there?

No. I think they're in slightly a different market. They're quite a bit down-market from us, and a lot of that is payroll. It's a payroll business. And for the most part, they have some HCM capabilities, but it's mostly payroll. And as the economy pulled back and we felt a little headwind, people are hiring less. So I think it has more of a direct impact on them. For us, we like to think about our value proposition only starting to resonate that much more when the macro is like we're facing today. We say the macro isn't any better than what it was 2 or 3 quarters ago, it's not any worse. We see scrutiny on most deals, especially big transformational deals like Workday is selling into. But I couldn't be more proud of our sales force. We know how to navigate the market. We understand the steps to close. And our value proposition is aligning with the C-suite. Talent and the war for talent and driving productivity through reskilling and upskilling your workforce is a C-suite discussion, right? Total cost of ownership, it's a value play. Most people don't think of Workday as someone that we can talk about a total cost of ownership play. But what's happened over the last 5 to 10 years, people have been buying best-of-breed solutions. And now they're looking to cut costs. And one way to do that is to consolidate onto a platform. So we're seeing a lot of consolidation of these best-of-breed solutions out there to best of suite or onto our platform. And it's a total cost of ownership play. It's a very simple sales motion that we have. And if you can save people money and give them a better experience and drive down our operating costs and model, it's a great outcome. And then I do think, listen, we can't leave this conversation without mentioning AI. I think AI is another C-suite initiative. While people maybe aren't implementing it today, they're trying to think about how to leverage it to drive productivity gains, and that plays directly into what we're doing as we think about it either from a Financials perspective and automating the hell out of the Financials platform or we're thinking about it around HCM and how we can drive better productivity with the existing resources you have. So our value proposition is resonating, and it's different than the people you mentioned.

Yes. And then I mean as we are on AI, the one thing -- the more work you do, the more you realize you need clean data, you need to get a good dataset. Your system of record like for 2 big parts of the organization, like does that help you kind of to be like a foundational part of what's going on there?

I'm biased, but I think the bias in this case is real. Our data is a moat compared to our competition. It's a unified, highly curated data model with 65 million users on top of it, processing 500 billion transactions a year. People talk about large language models. They're off the Internet, they're training. We're training for AI and gen AI off of our own data. And I think the output of your AI is only as good as your data strategy. And we have a very powerful data moat that no one else has. Our competitors, they have some on-premise. They have some in the cloud. They have some on single tenant. They have some on multi-tenant. We have a platform where all customers are highly curated, running on the same dataset, being in the same data model that we're training off of. We have what I describe as an enterprise large language model that differentiates us from everyone out there in the market. And I will tell you, both existing customers when they think about AI and when we're in new competitive deals, that is a big differentiator of us versus everyone else.

Where are you on the productization like on kind of coming up with products around that and how you monetize? And that's kind of the other big question. And one of your SaaS competitors was on stage earlier, but the price increases we hear there are kind of staggering, which I'm not quite sure in reality you get that through. How do you think about that?

So a couple of things. So first, right, we think AI and the earlier version machine learning, right, should be built into the system, not bolted on. For a decade, we've been doing AI and machine learning on that dataset because we're fortunate to have that dataset. As it relates to how you're going to monetize it, I think, quite frankly, Raimo, we've taken quite a different approach. So first, we already have over 40 different use cases in the market around AI and gen AI. What we haven't done is we haven't rushed to market and said, we're going to charge you, Mr. Customer, a 30% increase for the Workday Copilot, right? I mean we just haven't done it. We've been very thoughtful about how we think about pricing. We haven't rolled out a whole bunch of uplifts or any SKUs specifically around gen AI. Some of our products like Talent Optimization, our Skills Cloud are built leveraging AI. We sell some of them, but we're going to be a little bit more measured as to how we talk to our customers about charging them for all of these uplifts from AI or gen AI. We believe our customers are entitled. They pay us an annual subscription fee. We have an innovation index that they pay us each year to help us drive innovation. And we think it's important that we give back to them a lot of what we're doing in AI and gen AI. That being said, if we have a new product and we have a number of them that we announced at Rising we roll out to market, we probably will charge for them, but it's only if we think it's a fair value for our customers. And then the last thing is, I think we're one of the most trustworthy companies out there in software and our customers really do love us. I don't say that just because I'm sitting here, they really do love us and they trust us. And we want to be careful we don't have the have and have-nots, right? All right, you can get this, but give me 30% uplift, right? And then the last thing is not you, but as soon as you start to mention this, all of a sudden, The Street starts to say, "Where is that 30% uplift you're getting for all of that?" No one's really shown that yet. So we're going to be metered, and now we do it.

Yes, yes. It's funny you say that because every time I go into the field that you talk about Workday is like the good people. It was like you go to HR, let's say it's the good people.

Yes. We want to add value to our customers. And by the way, that dialogue I just articulated to you, I think we're monetizing AI, gen AI and our dataset another way. And that's through our competitive win rates, right?

Yes, exactly, yes.

Our competitive win rates against our competition continue to creep up. Another really solid quarter in Q3 against our big competitors. And I think we just have a different approach of how we engage and how we think about pricing our products and making sure our customers are extracting as much value as they can from their Workday platform.

I wanted to shift gear, the last few minutes, I want to talk about Financials. We haven't talked enough about it. There's a real -- it seems to be like the way you talk about it. But I was also at Moscone and I saw the [ buzz ] there. It sounds like an early Salesforce conference, and we were kind of very established. Is there like a fundamental change to help people think about Financials now? Or like it does feel different than like over the last 10 years when everyone was asking is there inflection point, but it just feel like it's slowly coming together.

I appreciate the recognition that you saw at Rising. It was something I think a lot of people recognize, it wasn't just an HCM conference, it was HCM and cloud ERP or enterprise platform conference. And I think it's for probably 3 reasons. The first is we have leaned into this market. One of the biggest investments we made in the last 9 months has built out a rather significant and we're still in the process of adding more capacity on the go-to-market side for quota-carrying reps around Financials. We have leaned into it. This sales force only gets paid on selling Financials, whether it's the core platform or it's things like planning or Adaptive Planning product. So we have a dedicated sales force and our core sellers also get paid for selling Financials, obviously. And we're seeing this really unique dynamic because the Financials sales teams only get paid for selling Financials. There's this really interesting interworking inside the company where they're pushing the core reps to make sure they're going out and selling Financials as well, which is why one of the fastest-growing parts of our business is around full platform sales, not HCM, not FINS both simultaneously. So we're leaning into it. Pipeline is looking good. Our win rates are going up. I think, number one, it's our investment in us talking about it aggressively in the market that we're in this business and we have a great product, and we are going to lean into this opportunity. The second is different from HCM, only 25% of Financials or ERP workloads move to the cloud.

Yes, there's a lot there.

We're still in the early days. We're in an inflection point of moving people's financials to the cloud. And for good reasons, a lot of CFOs and financial leaders are a bit more conservative. They don't want to do that. So I think our investment is pushing hard on the market, our partners coming along and building services around it, which you saw at Rising. And the fact that our customers or our target customers are finally moving to the cloud is coming together, and it's all working in our favor. And the last one is working in our favor, which is probably weird to say about a competitor or competitors. Our competitors are also out there talking to their customers about end of lifing a lot of things that are on-premise, you have to move to the cloud. And when they do that, it's one of the best marketing events that happened for us in quite a while, because we now have a seat at the table every time someone looks to move their financials on the cloud, we're going to be in those competitive deals and our competitive win rates are up, and we're winning more than we're losing. So we're thankful that there's this migration happening both from a customer perspective and our competitors forcing people to migrate.

Yes. Yes, yes. that's like that's all our German friends. Yes, okay, yes.

I'm not sure. Germans, probably so.

Yes. Yes, yes. I can mention that here. Carl, I think our time is up. So I really enjoyed our conversation, like great to have your back. Thank you.

No, it's great to be here. Thank you for having us, and thank you, everyone, for your interest in Workday. Thank you.

Thank you. Thank you.