Workday Q3 FY2018 - solid with a raise in projections for the full year

Den Howlett Profile picture for user gonzodaddy November 29, 2017
Another great quarter for Workday, buoyed by a combination of acceleration in the financials related products and an emphasis on happy customers.

When I met Aneel Bhusri, CEO Workday at Workday Rising Barcelona, much of our conversation was focused on topics you can wrap up in one word - happiness. Bhusri absolutely believes that if you do right by the customer then everything else falls into place.

Workday's Q3 FY2018 results and the leadership commentary around that provides clear confirmation that Bhusri's obsession with building the best culture possible that delivers happy customers is paying off now and will do so long into the future.

Before getting into that, it's worth noting that once again, the company sets expectations and then beats. I've lost count how many times that's happened but we are now looking at a $2 billion-plus revenue engine going into 2018-19, albeit with modest non-GAAP profit.

More important to me, the manner in which Workday communicates plans is very easy to understand. Check this analysis for the future offered by Robynne Sisco, Workday's CFO:

We remain confident in our ability to sustain strong long-term revenue growth, given the secular market trends towards cloud adoption and our established leadership position. The strength we have seen in our top line growth today in fiscal 2018 has been driven by three primary factors: first, acceleration of cloud adoption, especially in the large enterprise market; second, continued high customer satisfaction, resulting in strong renewals and up-sell opportunities; and third, improved linearity resulting in more revenue recognized on deals signed within the year and the quarter.

As we plan for next year, we expect to maintain similar linearity to FY eighteen. With that as context, we are currently planning for FY 2019 subscription revenue of approximately $2.25 billion. We continue to expect pronounced seasonality towards Q4 with our Q1 being the seasonally slowest in terms of net new bookings. We’d expect subscription revenue in Q1 of FY 2019 to grow approximately 5% sequential from Q4.

We continue to prioritize growth and have made and will continue to make significant investments in product this year and beyond that will limit the pace of margin expansion in FY 2019. With that investment context, we are currently planning for FY 2019 non-GAAP operating margins of 10%.

Usually on earnings calls, there is much discussion (and often repeated questions) about the makeup of numbers, trends and so on but Workday calls don't go like that. Instead, I see more interest in product mix with answers that leave listeners in no doubt what's going on, what the company knows and what it doesn't. Consider Bhusri's answer about the evolution of AI into Workday products:

I think, if you have a true multi-tenant cloud architecture like Workday, where every customer is on exactly the same version and the data model is harmonized across every customer, you can then take advantage of all the machine learning and artificial intelligence that’s being built both open source and what we’re doing and apply those algorithms against the data.

So for us, I think, it’s a natural evolution into this era of intelligent applications. I think, if you’re a legacy company that’s different than Workday and you’ve got on-premise and cloud and single tenant and multi-tenant, I don’t know how you harmonize that data and actually leverage the machine learning and artificial intelligence capabilities across your customer base. I think, that’s – it’s much harder for those players.

Or what about cash and contract length? At one time, Workday was keen to get multi-year deals as a way of safeguarding future revenue predictability along with getting a greater share of upfront cash. That's changed but more interesting to me, Workday is not afraid to talk about cash, the only metric that really matters in business. Bhusri again:

In terms of the kind of business we’re doing, Chano (global head of sales) runs a very tight ship. We’re doing very clean healthy business. The big difference is that, we’re not optimizing for cash upfront and that – and it’s – it might be surprising, but there are a lot of very big companies that are very concerned about the cash outlays for these projects as opposed to the expense.

And frankly, these are AAA credit rating companies focused on cash. I don’t really care if we get it a year today, or a year later, or even two years later, given interest rates there’s not much we’re losing for it. If I can get a longer-term contract at better pricing out, we’ll do that every day of the week.

And just as a checkpoint, Workday is holding more than $3 billion in cash plus securities.

On competition, it's equally clear that Bhusri loves the current environment:

I think, it’s a big positive when all the vendors in a given marketplace are talking about a shift to the cloud. It creates demand. This is a huge market. Financials market is twice the size of the HR market. As it flips over, there’s the – there’s a ton of market opportunity for, I’d say, for more than one. And I think, we’re very well-positioned to get our fair share.

The biggest thing that we’re all in this market looking for is the signs that this market is beginning to tip from on-premise to cloud. Yes, so anything that promotes, that is a good thing.

One interesting note on the competition. On the call, the company made mention of Oracle at the high end and NetSuite in the mid-market. As far as Workday is concerned, they are the only competitors they consistently see in deals.

Having said all that, how does the topic of happiness play into this equation. One analyst and right at the end of the call asked about business drivers. Here was Bhusri's response:

I’d say, if there’s anything that really is continuing to drive, the success is becoming clearer and clearer over time, it’s our customer satisfaction.

When you get to the – especially when you get to the large companies, in many cases, we’re the only proven solution at – if you have 50,000 or 100,000 employees, there’s – you look at all the proof points of successful customers, they’re almost always Workday customers. And it’s creating somewhat of a network effect, where customers are talking to other customers, hey, if you’re going to go down this path and you want to have a successful project and no one wants to have an unsuccessful project, Workday is the safe choice.

And I think that’s bearing out more this year than it did last year and kudos to the product organization and the services organization, our QA organization, our support organization for keeping these customers happy and for having products that truly scale. But this last quarter, Coca-Cola, just another example of a very large company who’s going – who went into production and very happy and happy customers get you more happy customers.

(My emphasis added.)

My take

This was a very crisp and clear earnings call that didn't leave me reaching for the spreadsheet to go fumbling around the numbers in an effort to make sense of what is communicated.  I've come to expect that but what struck me most is that analysts were left in no doubt that Workday is focused on execution rather than hyperbole or competition thrashing. It's not Workday's style, it's a simple message and one that resonates well.

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