Workday reported its fiscal Q3 results yesterday, once again exceeding Wall St expectations with subscription revenue of $799 million and total revenue of $938 million, up 26% on the same period a year ago. Customer numbers passed the 3,000 milestone. The company slightly lifted guidance for full year subscription revenue to above $3.085 billion, representing 29% annual growth. But guidance for next year was more cautious than analyst expectations, at 21% growth.
Nevertheless, CEO Aneel Bhusri, speaking on the earnings call late yesterday, cited grounds for optimism that its financials products might fuel additional growth in the coming year. He said he hoped they will catch up with or overtake the HCM products within the next five years. Financials currently represent around 20% of the business but are growing at a 50% annual growth rate.
Increasing the appeal of Workday financials
The CFO market is more ready to move to the cloud now than it has been in the past, he said, and adding analytics and machine learning has increased the appeal of the Workday proposition:
Just having a next-generation accounting platform or financial platform was necessary, but insufficient. The areas of planning and analytics, that's really what drives CFO decisions today, but they also realize that they do need to modernize their accounting systems from a financial transformation perspective ...
So all of a sudden now it is not just, hey, we have to modernize it from a technology platform perspective, but look at all the benefits we get from a planning perspective, from an analytics perspective, and yes, even from a core accounting perspective, what we can do in terms of machine learning, what we can do in terms of tagging, so that you can create richer analytics. All those come to play. The story is just much stronger going into this year than it ever has been.
The acquisition of Scout RFP also helps round out the proposition to the CFO, he added:
I think the last piece that has come more and more recently has been in the area of procurement and the chief procurement officer. With the pending acquisition of Scout, we're filling that one hole where we can be best-in-class in that pillar, which is increasingly important to the office of finance ...
It creates a new revenue opportunity, and down the road, it could even be a standalone revenue opportunity for spend management. But in the short-term, it makes our financial products that much more competitive.
Winning over the Fortune 500
What would make a big impact on growth would be an increasing number of Fortune 500 accounts looking for financials, he added. This would replicate Workday's experience with its HCM product, which now counts half of the Fortune 500 as customers, and added six more in Q3 alone, including Anheuser-Busch InBev, Magna International and Royal Bank of Canada. But such deals are difficult to predict with precision, he said:
The ones that move the needle and are unpredictable are the large Fortune 500 transactions. If those started coming in in bigger numbers [for financials], that would improve our opportunity for upside ...
What propelled Workday on the HCM side, where we really went through the hypergrowth era, was when the Fortune 500 market almost en masse decided to go to the cloud. It's happening now, but it's not happening at the pace that we saw in HR, that the market came at once.
Workday's GAAP operating loss for the quarter improved to $110 million (-11.8% of revenues) from $183 million (-24.5%) a year ago. Operating cash flows were $258.0 million compared to $114.3 million a year ago.
Resilience despite uncertainty
Bhusri said that his cautious optimism was not dented by wider uncertainty in the economy. Having sounded a note of caution in its Q2 results call, he felt the pipeline had shown resilience during Q3, which he thought likely to continue:
Q3 was a really important data point. We had some concerns there might be some slowdown, but we had a really good quarter and the business that we wanted to close, closed. So I'd go into Q4 optimistic.
To next year, I would say cautiously optimistic that it's going to be the same. I think the world is just getting immune to uncertainty. People are just going about their business as if it's going to continue in the right direction, and ignore the headlines in the press that would generally get us scared five or six years ago.
Workday is a company that never likes to stick its neck out financially, which probably explains why it consistently beats analyst estimates when reporting its results. Reading between the lines, I get the impression that Bhusri feels that the time has come for Workday Financials and that its momentum is now building, fueled by the addition of analytics and now sourcing. But signing those big deals takes time, and predicting which ones will fall in a given three-month window can be tricky, hence the caution.
While the short-term outlook may be cautious, the longer-term aim of catching up to, even overtaking HCM within the next five years demonstrates confident ambition. That's the context in which to evaluate the short-term forecasts.