Workday beats Wall Street Q4 expectations, looks to a return to stronger growth as economy improves

Aneel Bhusri, Carl Eschenbach

It’s a reflection of the times that Workday yesterday turned in earnings that topped Wall Street expectations, but saw the share price slip on the basis of a forecasted short-term slowing down of growth due to the current macro-economic climate. 

For Q4, Workday turned in revenue of $1.65 billion, up 19.6% from $1.38 billion in the comparable year-ago quarter, with a net income loss of $125.7 million. Subscription revenue was up 21.7% year-on-year to $1.5 billion for Q4 and 22.5% for the full year, hitting $5.5 billion. Overall full year revenue was up 21% to $6.22 billion with a net income loss of $366.8 million. 

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

• In Q4, Workday passed the 10,000 customers mark. 
• More than 4,750 are core HCM and Financials customers. 
• 629 billion transactions were processed during fiscal year 2023, up 42% year-on-year. 
• Nearly half of all live Workday HCM customers are leveraging Workday Skills Cloud.
• Q4 saw the signing of seven new Fortune 500 customers and 11 new Global 2000 customers. 
• New logos include Allstate, Camping World, Cracker Barrel, Delaware North Companies, Mercedes-Benz Group, Whataburger, Fidelity National Title, Panda Restaurant Group, and the State of Georgia.

Uncertain climate

The macro-economic climate remains tough, but co-CEO Carl Eschenbach said: 

Despite a macro environment that remains uncertain and that no one is immune from, we drove strong close rates in Q4 and built a healthy pipeline for the year ahead. Our team was prepared to respond to the extra scrutiny we knew would come with deals in this environment. And because of that, we are heading into our new fiscal year in a position of strength…While we continue to see certain sales cycles, primarily net new opportunities, taking longer than normal to close, our FY 2024 subscription revenue guidance prudently factors this in. And we are positioning the business to return to 20% plus subscription revenue growth when the environment improves, while simultaneously delivering margin expansion. 

So that’s the promise, what’s the plan to achieve it? Now 60 days into his role as co-CEO, Eschenbach has a vision: 

As far as what we're seeing in the environment to think about getting back to a 20% growth, we see plenty of opportunity to continue to invest in the business, both on the go-to-market side with additional sales capacity in quota-carrying reps, as well as continued investment in product and technology…We see continued opportunity in our international business, both in EMEA and in APJ. Today, we have only 25% of our business coming from our international operation, yet it represents greater than 50% of our TAM [Total Addressable Market]. So we see a really big opportunity there.

Expect additional focus on the finance market as well:

We also think we're going to double down even further on our FINS opportunity, both to sell back into our customer base, as well into net new. We see this as a rich opportunity. We did a nice job in Q4 selling back into our HCM base with our FINS solution, and we think that's something we can do a lot more of.

The appetite for Workday’s core offerings remains strong, he added: 

Companies continue to prioritize both HCM and their Financials in driving a digital transformation. Everyone is looking to get more value out of both their people and their financial systems, and I think we're at the core of that. So while it is true [that] customers are re-prioritizing where they're going to make their investments,  I think we move to the top of that list because we do drive true digital transformation, which is a term we've all talked about for probably the last five or 10 years, but it's in the midst of happening right now.

He concluded: 

It's interesting because with scarcity, all of a sudden, customers get clarity. And it's clear that we're in the middle of the opportunity here, unlike we've seen before to help them drive their digital transformation to focus on both their people and their financial systems.

Go-to-market

In an organizational development, co-President Doug Robinson, an 11 year Workday veteran, has now been given full responsibility for all go-to-market functions. He argued: 

I personally still think it's a very uncertain environment. It doesn't feel like the economy is falling off a cliff anymore. I don't think it ever really did feel like it was falling off a cliff, but there's conflicting signs as to whether the Fed is going to continue to slow down the economy and get inflation under control, and that continues to be a challenge. So I think it's still pretty much the same it's been for the last couple of quarters. I definitely don't see it getting better anytime soon, but maybe not getting worse. 

This sort of environment has implications for buying decisions. Robinson suggested:  

You see CEOs increasingly turn back to, ‘How do I reskill, retain and get the company positioned for the jobs of tomorrow?’. And so it shows up, and it is showing up, I think, in those seven Fortune 500 wins, some familiar themes there, those 11 Global 2000 [wins], really driving the FINS side of it. There's talk at the CEO level about re-inventing the entire business model. Of course, Workday doesn't re-invent business models, but we give you an agile, enabling technology for you to be able to make those changes to your business over time.

As to what signs Workday will be looking as an indication that things are getting better, Robinson points to sales cycle duration among the net new prospects: 

We track that, as you might guess, by industry, by size of company, by geography. When we see that start to come down, I think we'll be in a position to go up and over 20% [subscription growth]. What we're seeing right now is solid pipeline build. So we're pleased with the pipeline build, but we're still dealing with some of those elongated cycles in the net new space.

My take

While the macro-environment continues to be unpredictable, Workday's value proposition is only getting stronger as more organizations turn to us to help them adapt and manage their two most important resources, their people and their finances. 

Eschenbach’s fellow co-CEO Aneel Bhusri still sees progress towards $10 billion revenue. No reason to doubt that, even if the pace may be slower for the short term. 

Onwards!