Workday’s Heightened Expectations + Improved Guidance = Promising Start

Workday had a tremendous start to its 2019 fiscal year by crushing its first quarter numbers and raising guidance for the remainder of FY19.  Their stock price took a small hit the day after the earnings were announced, but don’t let that fool you — it was a result of Wall Street having even greater expectations leading up to the earnings release.  This meant that there was a premium built into the stock price prior to the earnings release and this was simply a minor correction.  Workday was very upbeat and bullish on the future based on these numbers and the improved guidance, but I also got the sense of a quiet confidence that comes from having a very good strategy and experiencing success in execution.

Impressive Earnings

Workday had a great Q1 across all of their financial measures:

• Total revenues of $618.6M, up 29% YoY
• Subscription revenues of $522M, up 30% YoY, and
• Subscription backlog revenues of $5.2B, up 31% YoY

The first quarter has historically been the weakest annual net new ACV quarter for Workday.  The fact that Q1 delivered strong top line growth and record gross margins and cash flow speaks volumes about the market demand for Workday’s solutions.  Workday now has a total of 2,200 customers and is seeing some exciting international growth, up 43%, representing 22% of total revenue.

Investing in the Future

Workday’s prioritization of continuing to invest in growing its business as opposed to margin performance means it will continue building out its product portfolio, expanding its sales reach, and hiring more people to support this growth.  These actions, as opposed to just words, demonstrate a company that believes in its future growth opportunities and is willing to make the necessary investments to realize them.

Ultimately this will be decided in the quarters and years to follow, but this type of growth in the face of heightened expectations is a very good sign for Workday.  Workday continues to build out its product portfolio with HCM, FI, Analytics, Benchmarking, and Planning.  Most customers are only using HCM, but more are starting to add FI and there is a lot of opportunity for growing attach rates by having customers expand their Workday footprint with these other solutions.

The challenge that we see for Workday is in pricing and commercial terms.  In our experience, when it comes to HCM, Workday has not lost to Oracle or SAP from a capabilities or user experience perspective.  In fact, clients that we have worked with who evaluated Workday in a competitive environment have all been extremely impressed with Workday’s solutions.  But Workday comes at a significant premium over their competitors and is still really a best-of-breed vendor in light of their limited FI customers and the nascency of its other solutions.  When Workday has lost to its competition, it has been for these reasons and not the quality of its solutions. 

Growth Drivers

Workday is gaining more traction with its FI solution and has added Workday Planning and Workday Prism Analytics to the mix.  The company believes that planning is becoming a key strategic application for CFOs and that having these capabilities for HCM and FI will be a compelling business case in closing future sales opportunities.

Workday is also starting to see more opportunities in the large enterprise market, whereas historically Workday’s customers tended to be in the small- to medium-enterprise market.  This is important because it demonstrates that Workday’s solutions are able to scale to address the needs of large enterprises and is gaining acceptance and adoption within large companies.

Renewals also present growth opportunities for Workday, and now with over 2,200 customers, there is even more opportunity to upsell the newer solutions as part of the renewal negotiation.  Workday cites a 98% customer satisfaction and reference rate, so the renewal cycle presents significant growth opportunities as Workday continues to add new solutions that enhance their core HCM and FI offerings.

2019 Guidance

Workday’s leadership is very confident in their pipeline and provided increased guidance of 28-29% growth for Q2 ‘19, with sequential improvement for Q3 around 4.5% and for Q4 around 6.5%.  In light of the prior year’s performance, these are impressive projections that also come with heightened expectations and pressure for their sales teams to deliver.

The company is experiencing both domestic and now international growth.  The international markets tend to lag behind the US so the fact that Workday is tapping into international markets now should extend the current growth cycle as those markets mature over the next decade.

The industries where Workday is performing well are also worth noting — healthcare, financial services, higher education, local government, and technology.  These are the same industries where Oracle’s ERP solutions have held a leading edge, and so it is no coincidence that Workday’s CEO Aneel Bhusri mentioned how they compete primarily against Oracle in the US. With SAP being a German company, Europe is a bit different, so they see SAP more in the European competitive landscape.

But there is more to this story, as Workday also stated that they do well in services-based economies that are outside of manufacturing and supply chain, which encompass areas where SAP has historically performed well.  What this means is that domestically over the next 3-5 years, Oracle will be Workday’s primary competition, so it is worth noting how Oracle performs in comparison to Workday where they have competing services offerings.

Stay tuned for a review of Oracle’s Q4 FY’18 earnings release very soon where I will compare the performance of the two companies where applicable.

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