Workday is Hitting its Stride: FY18 Q4 Earnings Analysis

Workday had a great Q4 and fiscal year and it expects the momentum to continue into 2019 and beyond. From the earnings transcript and the financial numbers, it appears Workday is truly firing on all cylinders.  Most interesting is the tone in which Workday communicates – confident, but not arrogant or pretentious.  Workday comes across as a company that is experiencing success, is bullish on the future, but remains focused on the task at hand.

Billings Beat Street by 10%

Workday had a great quarter across all of their financial measures.  But billings are one of the key metrics for Cloud vendors and crushing Wall Street’s expectations by 10% is a huge win — and the reason for Workday’s share price hike.

• Total revenues for Q4 were $582M, up 32% YoY; and for the full fiscal year were $2.1B, up 36% YoY.
• Over 84% of Workday’s revenue comes from subscriptions, with the rest from professional services.
• Workday is building out an ecosystem of partners to provide implementation services, so subscription revenue is the main revenue driver with billings a key business metric of success.
• As long as Workday continues to grow billings, their stock price will continue to rise as the market realizes there is a Cloud ‘land-grab’ going on.

Customer Wins

Workday has over 2,100 total customers, with 175 for HCM and 2 for FI in the Fortune 500.  It added 58 new FI customers in Q4, which represents a growth rate of 45% YoY and brings their total FI customers to 450.  Additionally, 70% of HCM customers and 60% of FI customers are now in production.

Clearly, HCM is still the primary product line for Workday, but they are now also making great strides with their financial management products. Workday stated that from a Cloud ERP offering, their only real competitor is Oracle in providing a fully integrated solution.  Oracle has also cited Workday as their primary competitor in this space. What this means for customers considering migrating to a Cloud ERP solution is that pitting Oracle and Workday head-to-head will drive the greatest amount of leverage. 

Employee Satisfaction

Workday was listed #7 on Fortune’s List of the 100 Best Companies to Work for in the U.S. and #2 in Ireland, their European headquarters.  Total employees also grew to 8,200, with 1,600 new hires in 2018.

Workday has talked extensively about their culture since its inception and its goal of providing a great place to work, in order to attract the best talent and provide the best services to its customers.  These types of awards and employee growth rates demonstrate that success, which is a key differentiator for their business.

Since Workday has touted their employee satisfaction values, this will be a material metric for the company to maintain as they continue to grow.  This may be easier in the early stages of hyper-growth, where everyone is excited and the workforce is still relatively manageable but can be difficult to maintain through the growing pains that will come as the business continues to scale to that of a large provider.

2019 Guidance

Workday’s leadership is very confident in their pipeline and provided guidance of 27-28% growth for FY19, with 29% growth in Q1.  Considering the tremendous quarter and year Workday just had, these are aggressive numbers and provide pressure on their sales teams to close deals.

Workday believes its customer success and proof points will allow them to continue to close deals and improve win rates.  Its win rate in the mid-market, which represents its bread-and-butter business, is roughly 50% and trending up. It is positive to hear Workday speak confidently about their future, and not act cocky, unlike some of its competition.  Nonetheless, these types of comments shine a spotlight that Wall Street will be analyzing, adding pressure to Workday to deliver.

Workday has a great story and vision and the results are demonstrating that it’s a winning one.  Their critical challenge now is consistency – can they consistently keep the growth story going with new customer wins, maintaining high renewal rates, and getting customers to adopt new solutions that Workday is rolling out, such as Prism Analytics and their new Cloud Platform?

An interesting phrase that came up twice during the earnings call was their priority on not only new customer acquisitions but on “long-term contract economics.”  They failed to provide any detail on what this meant, but from what we have seen in the market, we believe it means future price increases and less payment term flexibility come renewal time.

Customers that are considering Workday, or any Cloud solution, have one opportunity to get it right and establish a commercial construct baseline that will serve as a precedent for renewals and future footprint expansion. Even though Workday is experiencing success, the pressure on it to continue this momentum into 2019 provides great negotiation leverage for their customers that have a sound evaluation and negotiation strategy and approach.

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