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Workday delivers solid Q1 on strong momentum, but customer buying decisions are taking longer

Stuart Lauchlan Profile picture for user slauchlan May 24, 2024
Summary:
Full platform deals are more complex with more stakeholders, says CEO Carl Eschenbach.

workday
(Workday )

Workday turned in a strong set of Q1 numbers yesterday, but the firm’s stock took a tumble on Wall Street as investor short-termism took against forward-looking subscription revenue forecasts.

For the quarter, Workday reported net income of $107 million and revenue of $1.9 billion, up 18% year-on-year. Subscription revenues were $1.815 billion, up 18.8% on the comparable period last year. But the firm reduced its fiscal 2025 subscription revenue guidance for the year.

CEO Carl Eschenbach pointed to a slowdown in the purchasing decision-making process: 

Our first quarter is always our seasonally slowest. We had clear areas of outperformance including healthcare, public sector, and continued strength in financials and full platform wins. But we also closed fewer large deals than last Q1, notably in EMEA. When purchase decisions are being made, our win rates remain strong, but within the quarter, we experienced increased deal scrutiny as compared to prior quarters. And we are seeing customers committing to lower headcount levels on renewals compared to what we had expected. We expect these dynamics to persist in the near term, which is reflected in our revised FY 2025 subscription revenue guidance. 

This has been a shift in Q1, he explained: 

For the last year, year and a half, we haven't seen any material change to the macro, meaning we haven't seen any additional scrutiny one way or the other. In fact, it's been rather consistent. But this quarter, we did. We did see a bit more scrutiny, specifically on large deals and net new deals. And that wasn't just something in the US It was truly around the world we saw that.

I would also say that some of that may be because we're talking to our customers about full platform deals. We're no longer just talking about HCM deals. And when we sell full platform, particularly in the large enterprise market, we are selling to multiple buyers. We're selling to the CHRO. We're selling to the CIO and the CFO, which makes it a little bit more of a complex deal for us, which makes some of these sales cycles a bit longer.

But he added:

What's really important to know is none of the larger opportunities that didn't close in Q1 moved out of our pipeline. When a customer makes a decision to go to a big transformation of a platform like Workday and HCM or Financials, it's not if they're going to do it, it’s when they're going to do it. And all of these remain in our pipeline, which is what gives us confidence on the guide going forward.

Customers

Other stats of note from the post-results analyst call included:

  • New Financials customers and full platform customers both increased more than 20% year-on-year.

  • More than 90% of the firm’s 2,000 FINS customers are now leveraging the power of its HCM platform as well.

  • New full platform HCM and FINS customers include Baptist Health, Covenant Health Systems, the City of Milwaukee, and Owning Group.

  • New HCM customers included ALS Group USA, Carhartt, and “one of the largest P&C insurers in the world”.

  • Go-lives in the quarter included ASDA, Electrolux, Topgolf, County of Richland, Apex Group, and LVHN.

Eschenbach picked out a new relationship with the US Defense Intelligence Agency (DIA) as a particular highlight from the quarter:

The DIA is the key intelligence agency for national defense in the United States. Workday will support the DIA on its mission to rapidly accelerate recruitment and onboarding efforts and create a diverse, trusted, and agile workforce. With Workday, they'll be able to identify, integrate, and direct skills and expertise to solve emerging intelligence problems when and where they are most needed. Not only is this a significant new win, but more importantly, it unlocks an incredible market opportunity for Workday in the Federal government and we expect it to increase our pipeline over the coming quarters.

He noted that attendance at Workday’s Federal Forum event in Washington this week  drew a record crowd of government decision and policy makers from more than 70 agencies,  a 100% increase on last year’s event. This is indicative of the firm’s momentum in public sector, he said:

In addition to the DIA, we continued to excel in state and local government, closing full platform wins with the cities of North Las Vegas, Milwaukee and Palm Bay and Monroe and Washington counties. And in education, we had a record number of Workday Student go-lives in Q1 and now have taken 20 new customers live so far this year, including Iowa State University, University of Arkansas System and Wake Forest University.

UK

Outside of the US, Workday recently announced that it plans to invest £550 million over three years to expand its UK operation.  Eschenbach added:

We also announced that in early 2025, our customers will be able to access our core HCM Financials and adapt the planning solutions locally on the AWS Cloud in the UK. Not only are we enabling compliance with data residency requirements, we're also boosting performance and helping businesses scale for the future. So as you can see, we're continuing to invest for our growth, and I'm energized by how we'll be able to empower more UK organizations with the power of our platform.

My take

While we can't control the macro, we are focusing on what's in our control, and that is innovation, scaling our go-to-market engine and partner ecosystem and delivering customer value.

A pragmatic perspective in the face of a blatant over-reaction from short-termist investors.

Onwards!

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