Workday, Inc. (WDAY) Management Presents at Morgan Stanley 2021 TMT Conference (Transcript)

Workday, Inc. (NASDAQ:WDAY) Morgan Stanley 2021 TMT Conference March 1, 2021 3:30 PM ET

Company Participants

Aneel Bhusri - Co-CEO

Chano Fernandez - Co-CEO

Conference Call Participants

Keith Weiss - Morgan Stanley

Keith Weiss

Good afternoon Welcome to day one of the Morgan Stanley TMT Conference 2021 Virtual Version. My name is Keith Weiss. I run the U.S. Software Equity Research Group, and I'm really pleased to have with us from Workday Co-CEOs. We have both Aneel Bhusri; as well as Chano Fernandez from Workday.

Before we get started, if you look on the second slide, you will see a safe harbor statement from Workday. I'd advise you to please read that because all of the discussion will be under the safe harbor. And from the Morgan Stanley side of the equation, please see our website, www.morganstanley.com/researchdisclosures for important research disclosures from our side of the equation.

So with that out of the way, thank you, gentlemen, for joining us this afternoon, in this afternoon, your time as well. Really pleased to have both of you today. We normally don't get to have Workday at our TMT Conference. We've aligned with your sales kickoff pretty well for the past couple of years, so really thrilled that the timing worked out this year for multiple reasons.

One, just to get to see your phase; two, I think it's a really interesting and exciting time for Workday as we head into calendar '21, as we get this crisis behind us. And frankly, you guys sounded really excited about calendar '21. On the Q4 conference call that you guys hosted last week.

Question-and-Answer Session

Q - Keith Weiss

So maybe, Chano, we could start with you and just with the open question of, what are you guys so excited about for calendar year '21?

Chano Fernandez

Thank you, Keith, and it's great being here with you today. So thank you for inviting us. Well, clearly, we had a great wrap up to the year. We had a very solid Q4. We added many new customers we've mentioned some of those like the Nikes, the ABBs and many others of this world. Some interesting ones as well on financials, core financials, like --, Fortune 500 company, so that really was great in terms, and we had a much better year than we would have hoped for when the pandemic started back in April.

But we also finished very strong forward looking indicators, right, particularly pipeline. We had our best quarter ever in terms of pipeline generation across all the three regions, so basically, U.S., Europe and APA and many different verticals as well. So, that in terms of it's giving us confidence that when we see on the other side of COVID, on the other side of the pandemic, there will be a reacceleration for digital transformation for companies.

And clearly, we see ourselves at the center and the backbone of the digital transformation for companies when it comes to manage their people and their money, right? So that's all very exciting. So maybe just I want to say a big thank you to all of the work of the employees for the fantastic work they've done this past year to really pull out outstanding results.

Keith Weiss

Got it. Got it. And I wanted to talk and dig into those opportunities on in the discussion. Before we go there, though, I do want to do a review of FY '21 or calendar year '20, and talk a little bit about what worked during the year? And what was harder to get done given the crisis and given sort of the changing dynamics around how you had to go to market and the sales cycles. Because I know stuff like the up-sell motion, that seemed to really kick in the gear and work really well. Maybe getting some of the more like larger strategic new situations off the ground, that seemed to be a little bit more difficult. Is that the basic kind of lines of how we should think about how FY '21 rolled across?

Chano Fernandez

I think that's a good way to think about it, Keith. I mean, clearly, the the installed base was very, very resilient. And that is due to the strategic nature of the relationship we have with our customers. Clearly, as well the DC value on the solutions we bring today and all the new product innovations that kudos to Aneel and the team brought forward in these last years. That has certainly been paying off.

And when you have those relationships built in, that is easier to do business that when you are to be building those relationships completely virtual since day one with net new customers. So we still we saw a bit of harder headwinds on the new customer side. But we really balanced the business pretty nicely with the installed base, and we grew that business over 50% on annual contract value, bookings compared to the previous year. So that was really exciting. And as well, it was terrific and quite incredible for me that we were able to pull many customer implementations, 100% virtually. Something that we never would have thought of a couple of years ago, maybe we were doing 70%, 80% of implementations.

And to give you a data point, just in Q4, we did 250 implementations, 100% virtual. That compares to 200 the year before. In Q4, we had customers like Accenture, and General Electric and some others, hundreds of thousands employees customers. Walmart during the year than many others that were just becoming live completely virtually, so that's a lot of great learnings that certainly we can take forward even post pandemic.

Keith Weiss

Excellent. Excellent. Aneel, maybe to bring you into the conversation, if I had to pinpoint the kind of key investor debate that guys are having right now is where on the CIO priority list, where on the executive priority list is core financial going to lie in calendar '21? As we get out of the pandemic as we get past this crisis and as spending ramps back up, like where is this going to lie on the digital transformation priority list?

You've been talking about the modernization of the CFO's office for years now. And given the commentary on last week's call, it sounds like you think that's ready to really be a catalyst and really drive that forward faster on a go-forward basis. One, am I taking that too incorrectly, do you see that accelerating coming out of the crisis, and if so, why? What drives the sort of modernization of core financials to the top of the priority list post the crisis?

Aneel Bhusri

Well, first of all, Keith, thanks for having us on today. So when I go back five or six years, we were just a core accounting company. Today, we have planning. We've got core accounting, we've got procurement. We've got financial analytics. And so there's no question, the CFO -- the average CFO coming out of the pandemic is saying, I need to be more agile, more flexible. I need to get to the cloud.

And you've seen that happen. But during the pandemic, it was a tale of a few worlds. Planning exploded. Gartner told us there were 28% more or 30% more planning inquiries during this past year. Core accounting dropped, I think, 13% or 14% in terms of inquiries. And -- but what they told us when we talked to the CFOs in the next little of detail was while people had punted on the projects for core accounting for the calendar year '20 or fiscal year '21 for us, they had actually accelerated their needs of bringing it in.

Instead of '24, '25, it was now '22, '23. And I think that's really the best way to the reality. I think digital transformation across the board is going to accelerate post pandemic. HR really didn't see a blip. It just continued to thrive and continues to thrive. But I think finance, maybe in the second half of this year, the core accounting piece will really get going.

But in the interim, Scout for procurement and Planning for financial planning, they're doing really, really well right now. And so we get our leg in the door. And then hopefully, when the Company makes a decision -- or customer decision to change out their core accounting system, we're already in the door with HR, we're in the door with Planning, we're in the door with Scout, and we're the natural choice for core accounting.

Keith Weiss

Got it. When we've been doing channel conversations and we talk to systems integrators and partners of yours, we hear a similar theme of that these transactions that perhaps didn't get done during calendar '20 are coming back on to the table. And perhaps even faster than these guys had imagined because what CIOs are starting to realize is that if you don't get the core financials modernized, right? If you're still using a legacy system that's really hard to pull data in and out and integrate into, it's slowing down the whole digital transformation. You can't get all the rest of the wheels turning if that beating heart of your organization isn't modernized. Why is that core financials is it just so key? Why is it such an integral part to all the rest of the digital transformation that these organizations are trying to do?

Aneel Bhusri

Well, I would say, from our perspective, it's less key than I might have been five years ago but it's still so key to customers because at the end of the day, if you're changing your business model, you're changing your plan, think about what happened with COVID and every retailer having to rethink e-commerce or curbside pickup. Well, that all has to get reflected in the accounting system, right? I mean, that has to get reflected in the way the systems were able to take on revenue and monetize that revenue.

And if you're on a legacy system, well, those change every four or five years. They don't work in a world of COVID and rapid change. And so if you want that flexible accounting system, and more importantly, the flexible analytics system around it, I think that's really what the core accounting system in the cloud has enabled. They enable ready access to data, ready access to change but then a rich set of analytics that help you make better decisions.

And when you sit down and talk with CEOs, CFOs, CHROs, they all just want to automate their transactions, and that is table studies. The next push is, how do we use all that data to make better decisions? And that's where needing a next-generation core accounting system with a flexible accounting model versus a very structured unmovable code block. And I know that from my time that PeopleSoft, that just doesn't work today. You got to get to this flexible accounting system to meet the needs as our marketing people would say a changing world.

Keith Weiss

Got it. I'm trying to -- and perhaps a cue on Adaptive Insights. And in particular, the improvements that you guys have been able to make in terms of go to market and really driving customer growth there. We were working on that IPO before you guys acquired it. And we were excited about the opportunity. I'm very excited about the planning opportunity.

I actually, before Morgan Stanley, I came from a planning job and understand how all those systems are, and how legacy they are. And these new sort of solutions out there and Adaptive Insights being of this new generation of solutions that leverage the cloud are just so much more flexible and so much more dynamic than what we're using back, I'm not going to even say how long ago.

So I've always been excited about the market opportunity. Adaptive was going further up market and getting really good traction with larger enterprises. But the customer numbers that you guys have put up over the past year, I think you more than doubled the numbers that we had in our IPO model. What was it that you guys were able to do with that asset when you put it into the Workday distribution model that just really just spring-loaded, if you will, that customer count?

Chano Fernandez

Yes, Keith. Well, I think, first, I need to give here the credit to Aneel and the product team. I would say that on one hand, because of the strategic decision to take into Planning and what it has meant, particularly when you look at this past year, and we'll talk a little bit about that, and secondly, because Adaptive was perceived as more medium enterprise. And certainly, the product in here has to -- adaptively to scale to the largest customers in the world.

And we proved that across workforce planning, financial planning, and even extended the leader by leader to some of the operational and sales planning, right? So, that has created a lot of credibility on many of those re-ferenceable customers, how they're using their solution, right? When you look at what has happened, right, the beauty for that it is it can be used as a -- in terms of planning stand-alone. It can't be used as a -- suit part of Workday, when you try to plan, execute and analyze, as we're saying and bringing that visibility into customers doing better decisions as Aneel was mentioning, too. And it works very well on both.

So we've seen really great pipeline creation and win ratios in both categories. And it's been thriving more on a stand-alone basis, hopefully, giving us the opportunity for up-sell and cross-selling core financials on some of others -- of our solutions later on. But it's been playing out very well in terms of customers that are becoming either financials or HCM customers. They won't adapt it to be part of the deal because that is -- will allow them to plan, execute and analyze properly.

And suppose basically the data-rich data they have all there on helping them out of making much better solutions, right? And yes, and this last year, as you can imagine, and it was mentioned, we've been some of those customers doing kind of 30x more planning than they were doing before for obvious reasons, right? It's been continuous change scenarios where on every single segment industry, customers have been saying, what would be this case or this is the case. And if we apply this model as you would make changes here.

And you know what it will happen with my people with my money, with my operational changes, right? How it has reflected on the plan? So it's being -- yes, it's been a tremendous asset for us. But I think we're more at the beginning of the journey there in terms of the opportunity ahead of us that really on a mature state. Planning has become very, very strategic. You know very well coming from that segment, Keith.

Keith Weiss

Right. So given sort of the success that you had in calendar '20 or your FY '21 and pickup in Planning, a lot of it, which was market related. In times of uncertainty, executives want to have a better plan. They want to have a better understanding of how changes are going to affect their business on a go-forward basis. Does calendar year '21 become a really tough comp year? Both for planning in and of itself, but also that back to base motion that you guys did so well with, you talked about growing that 50% in the year ago period. Is that a really tough compare on a go-forward basis? Can you sustain that same type of growth as we head into calendar '21 with planning and the broader up-sell portfolio?

Chano Fernandez

I think what we're looking into is to accelerate bookings overall, right? And certainly, what we see as a mix of the pipeline is that there is good solid pipeline into customer installed base because, again Planning did well, but I think it will continue to do well. Definitely, as part of the broader suite and on a stand-alone basis, but also we commented on the call the other week, Keith, that we have 50% more monetizable products in the last three years than we had before.

Many of those products like people analytics or what the extent or accounting center. They're very early days, and we certainly have a great white space --, if it's ended at, of course, we close in that transaction. So there is much more to really put forward through the distribution channel, that is really exciting, but then what we are expecting and we're still reflected on the pipeline that has also and it's looking better into the net new motion is as we get a bit on the other side of COVID, those headwinds that we saw last year in terms of bookings.

So that new customers will be easening, and certainly, we see acceleration into that business and keep capturing that new logos. So I think the combinations of both is potentially what it give us good confidence when we look at forward into the future.

Keith Weiss

Got it. Got it. Aneel, I feel like one of the things that you're often correcting me on is I asked you the question about a how Adaptive Insights is doing versus a stand-alone investment breed vendor in this space? Or I ask you about Scout RFP and how that's doing against kind of other vendors in the space? And what you're often reminding me is that it's a different competitive playing field because you have an integrated solution, right? That you're able to bring that to bear with the core financials, with a broader set of solutions. Why that makes such a difference? Is the buying pattern that much towards suites? Or differentiated versus suites versus best of breed? Because in my view, that you have to compete on a best-of-breed basis with all these solutions. Why is that integration such an important differentiator for you guys?

Aneel Bhusri

Well, it's a great question, Keith. I would say on planning, what customers want today, our large enterprise customers want. They want unified planning and transactions. They don't want to have to come up with a new plan. And then have to go change the transactional system to reflect that, and not all customers want that. Maybe it's 70-30. 70%, more unified and 30% are happy with stand-alone planning.

But in that 70% world, coming back to Chano's comments, we're really a great solution. And what we can do in terms of having a share data structure or unified data model, effectively, over time, a shared user experience, although the users of planning systems are different than transactional systems, is true unified system. And it comes back to our vision of planning execution analysis being unified under our security model and a data model.

And if you talk to any large customer, that's what they want. They spend way too much money and time trying to integrate all those different pieces together. So it means that we don't actually have to be absolutely best-in-breed in planning, although I think we are or close to some areas. The value of the integration to the core accounting systems and HR systems is so much is so much more value than a same provider could ever deliver.

Keith Weiss

Got it. Got it. And just a programming note for the clients on the line, if you have any questions you get, you can enter the question into the webcast, it shows up on my page right here, and I'm going to try to weave those into the discussion as well. One of the questions that we got from an investor, maybe I'll point to that you, Aneel. With the integration of more components into your back office solution, one of the areas that we've seen other back-office SaaS providers add is B2B payments. We've seen it from Coupa, we've seen it from bill.com and the like. Is that something that you think would make sense within the broader Workday portfolio to do something more in B2B payments perhaps?

Aneel Bhusri

It's definitely on the long-term road map, for sure. We first want to flesh out the entire P2P, procure-to-pay applications that Scout was such a key component of, but we still have some more work to do around areas like contract management. But there's no question that B2B payments is something that's on our radar. It's something that we should have a good place in the market down the road.

Keith Weiss

Got it. Got it. Shifting gears to the HR side of the house. I just wanted to talk broadly about sort of probably the second biggest investor debate that -- or investor question that I get, let's just present it that way, is how penetrated is HCM for large enterprises. And in particular, your core HCM solution, and investors are concerned that you guys have had such success, particularly in the U.S., particularly with large enterprises that we're running out of headroom for that core solution. What's your perspective on that? How much more room is there to run in terms of getting Workday core HCM into large enterprise accounts?

Aneel Bhusri

Well, I'll take a quick pass on it because this is really for Chano. I'd first say that, yes, we've been very successful with the Fortune 500 crowns across the globe, closing in on 50% of the Fortune 500. In the U.S., the medium enterprise is still not that penetrated. When you get outside the U.S., the market is still relatively young. The market for moving to the cloud hasn't yet materialized from the biggest economies like Japan and Germany. So I think there's a lot of headroom, but really the person to answer that is Chano.

Chano Fernandez

Yes, I concur. Thank you, Aneel. And Keith, I concur with what Aneel said. I mean, when you look at U.S., there is room in medium enterprise. We're opening new markets, mid long term, like the federal market, and certainly, all these new monetizable solutions that we're bringing. Many of them are HCM related and you heard us lately talking about employee engagement with -- when that materializes. But there are tons of others that I mentioned like people analytics, even much more room on workforce planning analytics.

And clearly, the payroll ones where we have a much let's say, broader market to really address, when you go international, we are running at around 8% market share in EMEA, 7% market share in APA. That kind of poses us six -- like when we were in the UX -- in the U.S., sorry, six, seven years ago. And certainly, we believe that with the power of distribution and as those markets are tracking behind, that we know we can get closer to similar win ratios and penetration ratios that we got in the U.S.

Keith Weiss

Got it. Is there a penetration argument to be made for certain verticals? One of the questions we got from an investor was, you mentioned on your last call, expanding into retail and manufacturing. I know Workday has traditionally been very strong on the services side of the equation, maybe a little bit less on manufacturing, services, education and the like. Are there additional verticals -- industry verticals where you guys get further penetration?

Aneel Bhusri

Well, what I would say is, as it relates to HR, we can play in any industry. And if you look at our customer base, more than 20% of our HR customer base, it's probably manufacturer, and some of the biggest manufacturers in the world, Caterpillar being a recent one. But GM, GE, you name the large manufacturing using Workday. It's more of in a conversation on finance because historically, finance was tied to the rest of the ERP system for a manufacturer.

And the way we've expanded the market for finance, which has really been more focused on the service industries, is this new offering called enterprise finance management, which basically takes together consolidations, planning, reporting, including personal analytics and creates basically an engine on top of a legacy ERP system, where you can get to a minor refinance system if you're a retailer or manufacturer from Workday and not have to replace your underlying ERP system. And that's a big growth opportunity for us that didn't exist a year or two years ago.

Keith Weiss

Got it. Got it. I wanted to touch on the Peakon acquisition. A lot of investors are drawing a parallel. And I think you're going to push back on this parallel, but I'll put it out there anyway. In terms of Scout RFP was to Coupa that Peakon is to Qualtrics, right, that you guys are going into a market that Qualtrics has been trying to define around employee experience. Is that the right way to think about Peakon and about the opportunity do you guys see with that asset?

Aneel Bhusri

In terms of Peakon versus Qualtrics, I got a ton of respect for Ryan Smith. He's a great guy, and he's built a great company. But he didn't start the Company to do specifically employment engagement analytics. And as an HR provider, what we've learned over time is customers are not looking at us for generally tools. They're looking at us for apps.

And one of the most well sought areas right now is employee engagement. And we have started on this path through our own efforts called pulse surveys, but it became clear and clear that customers wanted a lot more than pulse surveys. And we need to get into the market right away, and that manifests itself into acquiring Peakon, not really a reaction to Qualtrics.

I think Qualtrics has a really powerful surveying platform across lots of areas. Employee engagement, especially in the way that Peakon does it is very domain-specific and very much tied to the machine learning around exactly what's happening with employees' experience. And so it was more that for us to be a full suite vendor to our HR customers. This was an open hole that we had to address. Chano, anything you want to add?

Chano Fernandez

No, I think that's is well said. Nothing to add.

Aneel Bhusri

I had just -- again, a lot of respect to Ryan, But Qualtrics was not the driver for this. This has been an area that's been on our radar for a couple of years.

Keith Weiss

Got it. Got it. Chano, we have a couple of minutes left. I know this week, you guys have your sales kick off going on. And despite the fact you're taking the co-CEO role, you're still leading the go-to-market efforts, Aneel is making you do two jobs around now. So as we -- the world hopefully returns to normal on a post-crisis basis, can you talk to us a little bit about what changes and what doesn't? Like what did you learn over the past year that's made your go-to-market strategy more efficient or better? What are the things that you're looking to or really sort of looking to get back at that you weren't able to do last year. Can you talk us through sort of how does that go-to-market strategy change as we enter calendar '21? Or more so enter the post-crisis period?

Chano Fernandez

Yes. It's a great question. I guess, Keith, we were not different than any of other of our customers, like, meaning we've been transforming as well. So when the pandemic hit us, we were thinking? What are the resilience part of our business models? Where are the parts that are more exposed? What should we be changing and thinking? So we double down a bit more on the installed base.

We doubled down a bit more until the products and innovation that we could put through our distribution channel onto the buying centers where we are definitely stronger. We kept building pipeline into net new logos we in our relationships, but we knew but that was going to be a little bit tougher. We needed to learn how to adapt messaging and changing that one what was working and what was not working.

We need to learn how to move from 70%, 80% remote implementation just 100% fully done implementations. We need to learn how to do better interactive demoing and how to show better the value of our products and so on and so forth. So, there were a lot of learnings there that we to comport that clearly, there are some good learnings going forward.

Certainly, when you talk to me in terms of once we are our sales team really looking forward to going back to the old world, I would tell you, yes, they're really excited to meet customers face-to-face again, meet with their colleagues. And while I do not anticipate that we will go back to the same level of traveling that we were doing before and time will tell, Keith, that is 30% or 50% less.

I'm certainly expecting that for those customers that are willing and when it is safe to do so, we're going to be meeting them again face-to-face, and that clearly engagement. And especially when it comes to the culture that we built as a company in terms of really onboarding, collaborating, launching new projects, we believe that that is better than on a face-to-face motion than any other thing. That plays as well better to our strengths.

So I think we can take many of these learnings, but I think this is going to make it better and stronger when we go back to the old world on where we can apply. But certainly, there are a lot of great things that we were even outperforming the competition there on some of those engagements that we, I think, are in a better place than any other one to prove those due to our culture on a face-to-face and normal way of interacting with customers especially for us who are still seeking a lot of new logos and the new customers to become part of the world family.

Aneel Bhusri

Well, if I could add just one thing. We did elevate Doug Robinson to be the Head of Global Sales. So Chano only has one job to the better…

Keith Weiss

You take one away. One investor conversation, I just want to wrap on -- I'm going to try to sneak in this one last one because I think it's good. So, the investor is asking, management teams sound so extremely constructive here. But this traditional revenue guidance doesn't seem to quantify that confidence because subscription revenues is really backwards looking, it's amortizing off the balance sheet and kind of what you guys did last year. What should investors be looking to in FY '22 or in calendar year '21? What should we be looking to as the leading indicator that this confidence that we're going to be hearing from you is actually turning into book deals on a go-forward basis?

Aneel Bhusri

We got to get back to you on that with Robyn and the accounting metrics. I can just tell you our internal plan is to [indiscernible] the new ACV to grow this year at a faster rate than last year. Last year, the first two quarters were tough. Fourth quarter, we bounced back. And as you said, I think the disconnect between some of the sell-side and our guidance is that subscription revenue is a lagging indicator. And I'll come back -- we'll come back to you with what the right indicators are in terms of showing that we're actually accelerating growth. But subscription revenue is going to show the growth in fiscal year '22, not this year.

Keith Weiss

Got it. That's super helpful. Chano and Aneel, thank you so much for joining us. That 30 minutes went super fast. But it was great hearing the Workday story and hearing about that opportunity ahead to you guys. And it should be a very exciting year to be watching Workday.

Chano Fernandez

Thank you, Keith, for having us and all the best with your conference, okay. Thank you all of you for joining, thank you.

Keith Weiss

Thank you guys.