Workday Q4 FY2017 crushed it but the market fails to understand change in disclosure metrics

Profile picture for user gonzodaddy By Den Howlett February 28, 2017
Summary:
Workday had a very good quarter but the shine was knocked off by the withdrawal of a billings forecast for the next year. This overshadowed an important milestone in the adoption of ASC 606 which changes the way companies with contracts report revenue.

Robynne Cisco2
Robynne Sisco - CFO Workday

Workday Q4 FY2017 was its best quarter ever, turning in revenue of $436.7 million up 35% from Q4 FY2016. Revenue from subscriptions was up 39% to $365.2 million while services were pegged back to growth of 16%. (Figures here.)

It only seems five minutes ago we were predicting $1 billion in annual revenue. (I predicted 2015 back in 2012 and got that one bang on.)

FY2018 will see the company join the fairly exclusive $2 billion revenue club for technology companies while having a firm eye on $4 billion at an as yet unspecified date. Workday completed FY2017 with total revenue of $1.59 billion.

Adopting ASC 606

On the earnings call, Workday talked extensively about its adoption of ASC 606, an accounting standard that impacts the manner in which companies account for revenue. While the changes of themselves only had a modest impact on Workday's results, for the longer term, disclosure improves. Tie that to Workday dropping a forecast for billings and the market went into shock, giving the stock price a 6.9% hammering as at the time of writing. What went wrong?

Workday's stock price has always been volatile but from the early days appeared to be the victim of considerable frothiness. The market had baked in expectations on the seasonal outcome but decided that the dropping of a billings forecast was a potential sign of weakness. Workday for its part is in analyst schmooze mode as it seeks to explain why it is shifting emphasis to annual contract value and cash flow as its prime metrics.

On a call with Robynne Sisco, CFO Workday, she said:

We've never really used billings as an operational metric with which to drive the business but we appreciate that the market is used to seeing that. Early adoption of ASC 606 gave us an opportunity to help analysts better understand our metrics while allowing us to learn from our own adoption. We can pass that value back to customers as they work through the changes.

I've personally never understood the financial analyst obsession with billings. There are numerous factors that can distort the figures from one quarter to another, which, to my mind, render that metric as almost meaningless. I well recall for example, successive CFOs at NetSuite cautioning heavily on that number. So to me, getting that number off the table and concentrating on metrics that have direct relevance to managing the business makes much more sense. ASC606 adoption served as the catalyst and that has to be a good thing.

And it appears to be early adoption that has caught some analysts by surprise, although the regulation has been on the books since 2014, with a start date for companies reporting for periods ending after December 15th, 2016.

Workday's Trojan Horses

What analysts have not taken into account in the discourse over earnings is that Workday now has not one but several Trojan Horses it can deploy into competitors landscapes that not only help to solve compliance issues, but also help CFOs get in front of helping operations. This from my call with Ms Sisco:

Our cloud based Financial Performance Management and Planning applications can be taken independently of the back office GL, AR and AP. We think that makes for a good competitive position given that our solutions are both modern and relatively easy to deploy when compared to the legacy on-premises solutions.

See where this is going? Try this:

We haven't seen a mass tipping point for GL moving to the cloud among large customers but when the time comes and customers can see these solutions (mentioned above) providing value then we're poised to be at the front of those conversations.

Understandably, Ms Sisco would not be drawn on when that tipping point might come. My personal view is that it is likely to be earlier rather than later because there are too many market moving dynamics in play today that require business to be incredibly agile. On-premises systems simply can't get you from here to there.

Thinking more about the analytics impact, I know from past conversations with Aneel Bhusri, CEO Workday, that his analytics vision has always been a lot broader than simply an updated legacy tool that replaces the likes of Hyperion and BOBJ. It will therefore be interesting to see how Workday fares in consuming non-financial data as a way of presenting the CFO with a more rounded picture of operational performance.

Houston - we could have a problem

There is however, the potential for a problem that is not of Workday's making. The SAP v Diageo case is reportedly emboldening SAP sales teams to look at audit as a way of driving more SAP revenue. The Diageo case highlighted an issue in a SAP/Salesforce environment but we are hearing sporadic anecdotes that Workday customers are starting to come under similar 'indirect access' scrutiny.

Tools like Workday PM and Planning will require 'indirect access' to SAP generated data, so Workday customers will need to exercise caution in the manner in which SAP data is accessed if they are not to get dinged. Nevertheless, none of that seems to be worrying Workday executives.

Politics having no impact

Neither is Brexit nor changes in the U.S. political landscape. Check this exchange:

Mark Murphy

Yes. Thank you and congratulations on a nice finish to the year. So, Aneel, in the Q3 earnings call you had commented that the first month of Q4 had started out slowly with some deal slippage and you did not include that language this time, is it fair to conclude that linearity in Q1 has started out a little more robustly or more normally, and also are the underlying issues around Brexit or whether it’s Brexit or trade and tariff et cetera, is that looking like a blip in retrospect is still out there to some extent?

Aneel Bhusri

In terms of linearity, it’s so early in the quarter, but I think that it’s back to businesses, November was just an odd month, actually second half of October and November were just odd -- an odd time period. I'm not sure of Brexit and other things have completely gone away, but they don't seem to be impacting our business right now.

In my call, Ms Sisco confirmed that Workday is not seeing any disruption to the business. That left me musing that perhaps the political changes we are seeing work in Workday's favor, because companies are anticipating the need for agility through a fresh lens. That of course is speculation. Ms Sisco prefers to reference customers:

We can reference many happy customers. That is what matters because you know those references really do make a big difference.

They certainly do and again, from experience among the admittedly cherry picked cases I have seen, Workday customers are achieving a variety of benefits well beyond operational efficiencies.

My take

When I am offered a call with a technology vendor CFO I am almost 100% certain it will be so that I can hear good news. My call with Ms Sisco continues in that vein and with good reason. Compliance may be a much maligned topic the need for both transparency in the public domain and internal visibility for decision making are top of mind.

It is always helpful to learn that a vendor is not only 'eating its own dog food' but can also show demonstrable benefit it passes back to customers. ASC 606 is the jump off point for doing that. So while Wall Street analysts might scratch their heads, Workday can only continue to surprise - in a good way.

For my part, I look forward to hearing how customers make out in the coming months.