Workday’s Bhusri points to Aon milestone as fiscal 2019 gets off to a strong start

A strong start to fiscal 2019 for Workday. Revenues were up 28.9% year on year to $618.6 million. Subscription revenues increased by 30.6% year on year to $522.1 million.  Operating loss was $71.3 million.

New customers during the quarter included, for HCM, Inter IKEA Services, Tyson Shared Services, Unisys Corporation and “a Fortune 100 pharmaceutical company”, while go-lives included 21st Century Fox, F. Hoffmann-La Roche Limited, Ingram Micro and PricewaterhouseCoopers. For Financial Management, new customers included Sprouts Farmers Market, Rivera and Race Truck Petroleum.

CEO Aneel Bhusri says that bringing customers on board and getting them live remains the key focus for Workday, pointing to Aon as a case in point. Aon became an HCM customer back in 2013:

Since that time, has added additional products including Workday Financial Management. Aon is now live on financial management in 28 countries, including Australia, Canada, Mexico, New Zealand and the U.S.

He adds that Aon is a “big milestone” as “a complex global financial services company, proving that Workday is a strong platform”. The success there should lead to more opportunities:

The first wave of larger financial services opportunities, I think, will still be in the U.S., U.S.-based multi-nationals, but we are beginning to see the pipeline emerge in markets that are natural markets, like the UK, like Australia, like Canada, which are more similar to the US. And, over time, you'll see the large multi-nationals in the rest the world emerge as well. That’s the pattern that we're seeing and I very much expect to continue to see over the next 12 to 18 months.

Drivers

Bhusri sees the drivers for customer adoption of financials in terms that are not, as some other CEOs have suggested of late, tied to a booming U.S. economy:

I think, frankly, what's driving CFOs is more a focus on operational efficiency first and where the legacy systems are falling down, but, more importantly, now moving towards analysis and prediction as to trying to get ahead of the curve with these faster and faster business cycles.

And there are conservative ones, to be sure I think they have been more cautious than the HR or the sales worlds, but they are coming around. I think what people are realizing is that, if you're on the legacy system, those systems are not changing. The vendors that sell those legacy systems aren't adding new capabilities there. So, those systems are falling behind.

And at some point, you don't have a choice. I think that's really what's changed the mindset of the CFO. It's now a matter of when, not if. And so, they're looking for the capabilities that would give them business advantage rather than just updating the platform technology wise, and that's why Planning and Prism Analytics have been so powerful for us.

For all that, he still takes a conservative view on financials take-up, referencing the comparison with HCM:

If I were to guess, looking at all the data in terms of adoption rates, I think we're probably five years behind where HR was in terms of adoption and maybe even a year or two later. So, when I go back to five years, five, six years ago, cloud HR amongst large companies was beginning to take off. Our first big customer was Flextronics in 2008. By 2011/2012, it was becoming more mainstream. And that's the time we went public in 2012.

It feels about that in terms of the number of companies coming to market and the pace of growth of the pipeline, which bodes well. I've been saying about four, five years behind the last couple of years, but the data has moved around quarter-to-quarter. I think now we've got trendlines that say it's probably five years behind, and maybe slightly further behind outside the U.S., but it's growing nicely and now it's a consistent business, which is a big change in the last couple of years.

Platform

Elsewhere, Workday’s platform play is attracting customer attention, says Bhusri, even though “we’re trying to keep it out of the sales cycle”. He explains:

We are showing our customers and prospects the evolution of the Workday cloud platform, where it was a year ago and where it is today. And we made tremendous progress.

I think where it's getting more exciting is as we're working through the pricing models, and they're going to be very fair to the customers, probably some combination of access fee and then a usage model. You can see how that scales into a nice business over time.

I also think that there are good partners in our ecosystem. We've got a great partnership with Salesforce. There are some companies within the broader ecosystem that frankly are burning our compute cycles and we have somewhat of a free rider problem. This is not the indirect access issue. They're burning our compute cycles that we're paying for.

And with the Workday Cloud Platform, we will rework some of the partnership dynamics, so at least it's a fair model for us. As a system of record, we have so many different systems hitting our system and we just need to make sure that it's in the best interest of Workday, our customers and our shareholders.

As is by now de rigeur for enterprise tech vendors, there’s a machine learning/AI element on display, although Bhusri characteristically avoids the hype cycle temptations here:

We've had some machine learning capabilities for now multiple years in areas like retention risk and talent scorecard and customer collections...I think there's a lot around machine learning. We're providing the technology for our customers to use. They're still getting comfortable with it.

The tech vendors are out selling and marketing it, probably ahead of where customers are in terms of using it. But it's picking up and it's definitely a differentiator because I think many customers have plans to use it in the next 12 to 18 months once they get their data and processes in order and a big part of that is getting clean data going forward. In some cases, they're coming off of systems where they don't have clean data. So, it takes a while to up-ramp it.

My take

It’s a very positive aspect of Workday’s corporate DNA that there’s a reluctance to jump on the hype bandwagon and instead a pragmatic disposition to proceed steadily with deliverable product and demonstrable proof points, most notably long-standing and expanding customer relationships. This is a very solid start to fiscal 2019 and sets the course for the rest of the year.