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Not the end of the world as Workday turns in strong Q3 numbers in a world of caution

Stuart Lauchlan Profile picture for user slauchlan November 30, 2022
Summary:
Caution is the word among CEOs, but the mission-critical nature of Workday's offerings is paying off.

Bhusri Fernandez
(Bhusri and Fernandez)

Workday had a strong Q3 to see out the year, with revenues up 20.5% year-on-year to hit $1.6 billion, with an operating loss of $26.3 million. Subscription revenues were up 22.3% year-on-year to $!.43 billion.

Co-CEO Aneel Bhusri said that the results were indicative of the robustness of Workday’s business model:

There is no question that the macro-environment presents increased uncertainty. But as we've said before, we are well-positioned in this type of environment because our cloud Finance and HR solutions are truly mission-critical.

They’re also increasingly catching the eye of IT management as well as HR and Finance leaders, he added:

While we've traditionally targeted the offices as CHRO and CFO, we have placed increased focus recently on the office of the CIO, which presents another growth opportunity for us.

Overall, he suggested, while the economic climate is turbulent, the mood is not as downbeat as in previous financial downturns:

I spend a lot of time with other CEOs and this is not 2008, 2009. No one sees the world coming to an end like they did at that time. I think, right now, we're in a world of caution, where no one's quite sure what's going to happen, but things don't feel really bad. But caution and stopping can sometimes look the same and so it's kind of hard to predict right now.

Every CEO I talk to is still relatively feeling positive about their business, but worried about the economic underpinnings of what the Fed is doing and the potential recession. And so I think the word that I keep coming back to is, everybody is cautious. But this is not an end-of-the-world scenario, not at least yet, like 2008, 2009.

Workday’s diverse customer base also provides a buffer, he added:

We're pretty diversified across all the industries and some have held up better than others. When I look at what's happening in Silicon Valley, we definitely have a bunch of tech companies, but we're not exposed to tech the way maybe a newer company might be, where they’ve got a huge amount of exposure to just tech companies. Our tech companies tend to be the mature large company. So, I don't think there's any particular sector that's held us up. I would say financial services is strong, though. The one beneficiary of rising interest rates is the financial services sector and they continue to grow, and we have a very strong presence there.

Modernize

Organizations recognize the need to modernize their HR and Finance systems in the current climate, argued co-CEO Chano Fernandez:

The executives that I speak with have different viewpoints on what the macro-economic climate will look like in the year ahead. But one thing they agree on is that change is constant and it's nearly impossible to navigate with legacy systems.

Second, there is a clear desire to consolidate and prioritize spend across an organization's more strategic technology vendors. Given our positioning as the backbone of digital business across HR and finance, this trend has led to more and more companies going all in with Workday as they look to harness the power of their data across the enterprise.

New HR wins in the quarter included Intermountain Health, SGS and Texas Roadhouse, while go-lives included Best Buy, Canadian Tire Corporation and the State of Oklahoma. In Finance, new logos included Cincinnati Children's Hospital Medical Center, EZCorp and Thomas Jefferson University, while go-lives featured City of Baltimore and Medical University of South Carolina.

Fernandez added:

Our customer base momentum is being driven by our broad portfolio. Solutions such as Journeys, Help and Talent Optimization, for example, are seeing strong adoption as customers look to support Employee Experience. While our scheduling, time tracking and payroll solutions are all resonating as customers increasingly focus on labor optimization and other products, such as Planning, Extend, Accounting Center, VNDLY and our Spend Management solutions, all contributed to this quarter's strength across the customer base.

The healthcare vertical is proving particularly fruitful, with Workday now reporting $0.5 billion in Annual Recurring Revenue from the sector. Fernandez explained:

By far, the two largest costs for healthcare organizations are labor and materials. And by leveraging our full suite of HCM, Finance and supply chain solutions, they are able to help optimize spend across these critical areas. In fact, all of our larger Q3 healthcare wins were full suite, and including Workday's supply chain management. 

My take

As we move into our fourth quarter, the environment remains uncertain, which has led to increased scrutiny and the lengthening of certain sales cycles, particularly with the net new opportunities.

An pragmatic undertone of forward caution from Fernandez given the turbulent macro-economic conditions around the world, but Q3 has undoubtedly been a solid success again for the firm. And as Bhusri argues:

I think the value proposition of our products works in a downturn just as it does in a good market, just like we did in 2008, 2009 and every other downturn.

Onwards.

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