Workday ends FY 2018 on a roll but Wall St frets over billings

Cloud HCM and financials vendor Workday exuded confidence for future growth as it posted better-than-expected Q4 2018 results last night. Nevertheless, its stock price slipped in after-hours trading as Wall St analysts mulled uncertain variability in future billings — a metric that Workday argues, with some justification, is tangential to its core numbers in a recurring-revenue business model.

The big picture was strong growth in FY 2018 of 36% to $2.1 billion total revenue, of which $1.8 billion was subscription revenue. Non-GAAP profit continued to improve although the company still posts a GAAP loss after accounting for share-based compensation. Alongside continued growth in its core HCM product, revenue for the financials product grew almost 50% while revenue from outside the US across all products grew 53%. For the current financial year, Robynne Sisco, co-president and CFO, projects a similar trajectory:

As we look ahead, our market position continues to strengthen giving us increasing confidence in the durability of growth over time. For fiscal 2019, we estimate that subscription revenues will be $2.265 to $2.280 billion or growth of 27-28%, which would put Workday on pace to be one of the fastest SaaS companies to surpass $2 billion in subscription revenue.

So far, so good, but Wall St still wants to obsess about Workday's future billings number, which as Sisco wearily pointed out to analysts on the earnings call, is tangential to the actual revenue recognized:

[It's] a metric that's very, very difficult to predict. And it becomes less meaningful to our model and our focus on long-term revenue growth on a subscription basis.

One factor in that uncertainty is the impact of a growing number of sales to very large enterprises, where as CEO Aneel Bhusri indicated on last quarter's earnings call, Workday is happy to offer billing flexibility to help close a deal.

Cloud financials growth

This quarter saw HCM deals closed with, among others, Banco Santander, Chevron USA, General Electric, Home Depot, PNC Bank and Telstra, while new financials customers include American Family Mutual Insurance and Quicken Loans. One new Fortune 100 signing that can't be named is taking both, and sets a new benchmark for Workday, says Bhusri:

I'd say it's best described as in the food business, and its volumes are almost an order of magnitude higher in some areas than anything we've taken on in the past. And that's relative to the Aons and JB Hunts of the world, which are already in really high volumes.

So, our view is this one really, from a scalability perspective, demonstrates that we can scale to Fortune 100 size companies even in sectors that are not necessarily a target sector for us. This is more of a traditional ERP-oriented company that decided to go with the full platform from Workday.

With 58 new customers for financials, "Q4 was our best quarter ever for this product line," says Bhusri. Planning also did well, with 60 customers signing up. There's a new eagerness among CFOs to look at cloud financials, in part because cloud is now seen as mainstream and the Workday product is now regarded as mature, says Bhusri, but also because they want to transform their role:

Finance organizations are trying to transform themselves into being better business partners to the business, and that involves being better at planning and being better at analytics ... Where just a new accounting system wasn't enough to drive change, the whole vision that we're able to present gives the CFO and their team a way to really transform the CFO organization.

Workday market factors

The competitive landscape is favorable as there are really only two major players, he believes:

SAP does not have a cloud financial offering. That's just not our perspective. That is the analysts' perspective. There's nothing to evaluate against. So most of the opportunities for cloud financials come down to us and Oracle. And it's a plenty big market for both of us.

Looking ahead to the future, Bhusri said that verticals would become more of a focus for Workday, which already has strategies in place for education and government, healthcare, financial services and technology, with retail now emerging.

I think what you should expect from Workday over the next 12 to 18 months is we will become more industry-oriented from our go-to-market messaging, our go-to-market organization, and our products beginning to reflect some of that industry-specific capabilities that our customers want.

As on previous calls, Bhusri again called out customer referenceability as a continuing and precious Workday asset:

Customer success and proof points really matter, especially in those large Fortune 100 situations, where frankly cost is not the driver. They just cannot afford to have a failed project. It's a huge investment. They usually have a burning platform issue or a major transformation they want to get done. And they call around to the different vendors, customers, and ours are really happy.

A couple of years ago, it was still early enough where it was hard to compare, but now it's very clear that Workday has the happiest customers, and I think that continues to drive success for us. And that's our golden goose. We've got to protect it.

My take

Wall Street's focus on billings numbers is more quaint than quant. It reflects a continuing failure to fully understand the recurring revenue model of a SaaS business and thus I empathize with Workday's frustration at the continued focus on this metric.

But in the grand order of things, the share price dip is only of relevance if you were planning to sell WDAY this week. As of this morning, the price is still up 50% since a year ago. There were three themes in the earnings call that should give confidence to customers and other stakeholders:

• Continued strong growth that owes much to Workday's customer satisfaction metrics and its emphasis on referenceability.
• A continuing expansion of the product platform to embrace financials and planning/analytics alongside HCM.
• A proposition that emphasizes a new, more business focused role for CFOs and indeed CHROs.

Areas of interest that didn't get so much attention included Workday's investments in AI, the impact of recent management changes, and the development of the Workday Cloud Platform, which Bhusri says won't be launching as a finished offering at least until Workday Rising later this year. All of these strands underline the importance for Workday to keep evolving, as Brian Sommer wrote last year. But for now, there are grounds for cautious optimism. I'll leave the last word to Bhusri:

I always get a little nervous when everybody is so optimistic, but I would say right now that there's optimism to be had really across the globe ...

So I think people are looking at this environment as, 'Hey, business is good. Let's get on with getting ready for the future, and looking at how we're going to be more competitive' against their own set of competitors.