Workday, Inc. (NASDAQ:WDAY) Morgan Stanley Technology, Media & Telecom Conference 2022 March 8, 2022 6:00 PM ET
Pete Schlampp – CSO
Conference Call Participants
Keith Weiss – Morgan Stanley
Thank you everyone for joining us this afternoon. My name is Keith Weiss. I run the U.S. Software Research Group here at Morgan Stanley, and very pleased to have us with us from Workday, Pete Schlampp, Chief Strategy Officer.
Before we get started, I have a brief disclosure for important personal holdings and research disclosures, please look at the Morgan Stanley website at www.morganstanley.com/researchdisclosures. There was a Safe Harbor statement that Workday was going to show, but when they do show it, pay attention to that as well.
So, with that,–
Thank you for the effort. Keith, that was good. excellent.
Excellent. So, Pete, thank you, again, so much for joining us. A really exciting year, we’re coming out at for Workday, both in terms of demand ramping back and into sort of better underlying fundamentals and expansion of the solution portfolio. Overall, a more balanced selling motion, if you will, between sort of new customers and sort of upselling into existing customers.
But before we dig into all those topics, I just wanted to sort of give you a chance to kind of introduce yourself, I don’t think a lot of investors know you. Specifically, can talk about sort of your background in in more specifically the role of the Chief Strategy Officer at Workday and what you’re focusing on?
Sure. Absolutely. Nice to see you all. Thank you for coming and listening today. So, I — my name is Pete Schlampp, I am the Chief Strategy Officer at Workday, I joined Workday six years ago via an acquisition. It was a company called Platfora, which was a data and analytics company. After Workday acquired Platfora, I became the General Manager of our Analytics business, which resulted in products like Prism Analytics, you may hear us talk about Prism Analytics, People Analytics, Accounting Center, which I hope we talk about a lot today, because it’s an important part of our business.
I then transitioned over and became responsible for global product development. So, all of our product development are reported to Aneel Bhusri, our CEO, and all of our products across human capital management and financial management.
And then just recently in November, took on this new role of Chief Strategy Officer. And I’ll say, I think it’s a really interesting time at Workday to be responsible for strategy. If you’ve listened to us, lately, you hear us — you’ve heard us talk about a, a goal of getting to $10 billion of revenue by our fiscal year 2025 and we have a lot of opportunity to get there. And I think that my main job is to help us kind of guide the path to $10 billion.
I’ll say it a little bit better than that, I’ll say, illuminate the path to $10 billion. Why do I say that? Because what does this role mean? It’s actually all of our marketing at Workday. Its strategy is corporate strategy, it’s M&A, and it’s also, strangely enough, it’s the user interface — it’s all the design for our user interface of our products. So, I get a good kind of cross section of things.
But most — more than anything, it’s really, that path to $10 billion, is making choices along the way, all these opportunities that we have, and I hope we talk about a lot of them today, but making those choices and helping us get there as fast and efficiently as possible.
Q – Keith Weiss
Got it. Got it. I want to start out kind of high level a little bit, sort of looking back at FY 2022. It’s a year that, Aneel had been talking about a lot of a year of acceleration seeing sort of the new business accelerate throughout the year that culminated in sort of a guy for FY 2023 that does show that that that acceleration coming through onto this Russian revenue line, can you talks to us a little bit about what’s kind of driving that that kind of rebound in spending and in acceleration? Is it sort of more of a shift of focus towards the back office? Is it a sort of a release of pent-up demand that you guys have seen? Like what’s driving that broader demand environment for Workday right now?
Right. So, I look at — we had a fantastic Q4 and even better fiscal year 2022. And the I think the main headline for me, as I look at the business is it was really broad based. I think many people think of Workday and the first thing that comes to mind is large enterprise human capital management. And that’s who Workday was five years ago, seven years ago, 10 years ago.
What has happened in the last five years and really, really, everything kind of came together in FY 2022 was the multi dimensionality of the business. It was human capital management, it was financial management too with wins that, for instance, U.S. Bank, Genpact, for instance, with financial management. It was large enterprises, medium enterprise. It was North America, it was international and international really did contribute quite a bit as well.
And I think another one that’s really close to my heart and I think has been a really important part of the change for Workday, the reacceleration, that we’ve seen with Workday is not only the net new business for us, but also the back to base business as well. And that’s been a multi-year strategy to get us to a point where we have really happy customers, as you know, we talk about all the time, but also the new products to be able to sell back into the base, and then the mature go-to-market motions to be able to do that as well.
So, I look at our confidence and being able to go and raise guidance as we did for FY 2023 in a significant way. And I feel like it’s because we look across the business and there’s not these big weak spots that we’re seeing is really quite broad based.
Excellent. I want to start the conversation on the HCM side of the equation. I think this is where I get the kind of most investor concerns and the core question they’re asking is on the net new side of the equation, how much greenfield is left? You guys have been a dominant vendor in HCM, particularly large enterprises for a while now. Is there still that net new opportunity left on a go forward basis?
Yes, so we have now more than 50% of the Fortune 500 is running Workday human capital management. And when I say that I’m — it is core human capital management, that’s the system of record for your people, right? One way to look at that as we got 50% of the Fortune 500, the other way to look at that is we got 50% more to go.
So, I think — and even if you look at you look at Q4, a number of Fortune 500 wins in HCM and there continue to be more in the pipeline as well. So, there’s continued room to go large enterprise HCM. But I think the other thing that I asked everybody to think about on the on the HCM side is core HCM is a — not enormous sigh — part of the of the total addressable market for the office of the CHRO.
There are multiple other pieces of that. There’s payroll, there’s recruiting, there’s talent optimization, there’s analytics, there’s — we could go on and on and on. And what we’ve done as a business is we now have close to 4,000 human capital management — core human capital management customers. And then we have a series of products, each with large standalone markets for them that we are selling back to those customers. So, the investments that we’ve made over the past few years, in products like our learning products, our talent optimization, people analytics, workforce planning, our help and journeys and onboarding capabilities. Those are all new products that are gaining momentum right now. So, lots of opportunity left for us in the in — what we would call the office of the CHRO market.
Got it. And then if you think about those upsell opportunities, any visibility to get us into; one, how penetrated are we in that kind of back to base motion within the office of the CHRO. And of those I think you’ve mentioned five different kinds of segments. Any of your favorites, if you will, — or any sort of the — a list in terms of what has the most momentum right now?
Yes, so the way I think about this — I think about this as kind of, three tranches of products that we’ve created. There’s core human capital management, you’ve got payroll and recruiting. And those are the most mature products we have. Payroll and recruiting have the highest penetration into the customer base.
You’ve then got the second tranche of products, I think kind of represented by learning, for instance, which has about a medium — I think last time we talked about this, I think we cited 45% penetration — 40% to 45% penetration, we can get the exact number later into the customer base.
And then you’ve got a whole host of new products. In fact, just we just went GA on a new one called scheduling, which these are all products that are in the 10%-ish penetration base into the customer base, all great opportunities.
The other thing that we haven’t talked about yet, but I — you asked me what my favorites are. And we’ve adopted some products — we’ve acquired some products. We’ve made a few acquisitions recently, we acquired — a few years ago, we acquired adaptive planning, which has been incredibly important for us, I’m sure we’ll talk about financials in a while talk about that then.
This last year, we acquired a company by the name of Peakon, which is about the voice of the employee. And we also acquired a company called VNDLY. Two, incredibly, actually all three of those, if you take all three of those, three products incredibly well-suited for the time.
As we went into COVID and the world got turned upside down, CFOs wanted to get a handle on their business, they wanted to be able to plan more, they wanted to come up with new ways to look at a business — actually what we saw, we talked to you about this before, Keith, we saw in that week, when — in that month, the first month of COVID in United States, we saw the number of plans created in adaptive planning, increase by 30x, I think was actually 36 times what it was the previous month.
What that meant was CFOs businesses across the customer base were saying, let me try this scenario, let me try this scenario, let me try this scenario over and over and over again. And that hasn’t changed, right? Like yes, it’s come down from that, that absolute peak, but huge spike in people wanting to be able to understand their business more, right? So, incredibly well suited for the time.
Okay, so then then we go into COVID, as well and people — then we start hitting this, this imperative for talent, and being able to understand your talent your employees and know how are they feeling at any given time, creating communication with your employees. So, we acquired Peakon. We actually looked at our own capabilities internally and we knew that this was an incredibly hot space. And we said, we know that we’re not going to be able to advance our capabilities fast enough. So, we went out to market we acquired a best-in-class capability around Peakon, and that’s around the voice of the employee. Perfect for the time.
Finally, VNDLY. VNDLY is a — what’s traditionally known as a vendor management system. This is about managing your workforce that is not full time employees. You might not know — many people don’t know this, but I’ll cite a statistic for you, in — within the United States Fortune — within the Fortune 500 of the workforce, 46% of the Fortune 500 workforce is what would be known as non-employee labor. So, that’s 10 employees contract employees gig, SoW work. And that is rapidly going across 50%.
So, with VNDLY, you can — why we bought that as we saw this trend happening in the marketplace, you can manage not only your full-time employee base inside Workday, the system of record, but now also this — what we call the non-employer, the extended workforce as well.
So, I took longer than probably what you want it, but my favorites are — I guess I’ll give more attention to the ones that we just that we just brought in. But there’s just a lot of opportunity across this entire portfolio.
Right. And I wanted to touch base on that in terms of how big of a growth driver that emerge, because in — just in the conference alone, we’ve talked to Qualtrics, who has an employee experience, we talked to Amy Hood from Microsoft this morning was talking about the Viva, which is their product in that space.
So, two questions on that, like one, how big of a demand driver is that right now in terms of that focus of the corporation on employee experience and tying that into kind of retention and attracting better employees? Two, are those the people we should think about is the competitive environment there is it Microsoft would be Viva and Qualtrics employee experience or is the Workday with Peakon is that different types of solutions?
Well, I don’t think that there’s a topic maybe before two weeks ago. I’ll say this before two weeks ago, I don’t think there was a topic on CEOs’ minds that was more important than talent, honestly. You go to any CEO and say, what are you worried about? What are you thinking about right now? And they’re thinking about their people? How do they keep their people? How do they hire more people?
And understanding the voice of the employee is absolutely critical there. The solution that — so Peakon is different. Yes, it — I would consider Qualtrics a direct competitor in the best of breed space, not Viva. We can get it all into an employee experience, but not worth it. But I would say the difference, of course, between what Qualtrics does is Qualtrics is a survey experience platform or a survey platform or an experience platform. Peakon is very specifically built for employees and the voice of the employee and I’ll give you an example. It’s not just a survey that you get every week, but it is an anonymous survey between the employer and the employee around a set of questions that are continuously changing. And then employees can give their answer of how do I feel right now about, let’s say, our return to the office strategy.
And managers can go in and they can create conversations — anonymous conversations with employees, right in the mobile app. It’s not just a survey, it’s truly creating a connection between employees and the employer. So, very specific to the HR space.
And I’ll just — I’ll say one last thing, Keith, because you touched on competitive — on competitors. Look, our business is still centered on human capital management, financial management, and our primary competitors in the space are Oracle and SAP. And I think you asked this question last week, about the competitive environment. And so I’m just going to go ahead and answer it, which is our competitive numbers have been incredibly consistent, incredibly consistent, actually, part of my job is to go in and look at that and see and see how we’re trending. We’ve — I feel really, really good about where we’re at and they’ve been trending positively for a while now. So, feeling really good about the competitive space
Got it. And a good segue to the financial side of the equation. Can you just talk about — I think when a lot of investors are thinking about digital transformation, the focus is much more front office, but in my conversations with you guys, Aneel in particular, he sees more of an onus on — listen, monetization of applications is across the board, right? Coming out of COVID, there’s a real impetus to make sure back office, front office, mid office is all kind of in the cloud. Why is that? Why did it becomes much more important to have that modern cloud-based financial suite in the cloud post-COVID?
For a few reasons, but I think one of my favorite anecdotes is one of our customers that went they went full remote, as we all did in at the beginning of COVID. And they were telling us, this is the first time that we’ve closed the books completely remotely. Nobody’s in the office, can we do it? And they were able to do it on Workday and they had the confidence to be able to do that on Workday.
Meanwhile, you had many customers who had not moved from — the market was in case people don’t know yet, don’t know this — it was all on premises, right? It was all on premises, ERP, sitting in a data center, and people just worried that, can I actually do it? Can we actually be — can we function still as a company completely remotely in this new world? And so yes, I think that this need to feel like you had the security to be able to do that was a key driver.
The other one is agility. And that’s where things like planning come into play, right? And so that need quickly to be able to look at many different scenarios in your business, determine what the right path is, have all the data at your fingertips. Truly, that is a big driver to have all your data at your fingertips. That’s what drives — that’s what’s driving the market there.
I’ll stop, I’ll emphasize — maybe a little anecdote for us for a second. So, we mentioned that U.S. Bank — we just won U.S. Bank, they were our human capital management customer. And they just moved over to financial management or we just won that in Q4, and that’s our largest financial services wins so far for enterprise financials.
Why would they do that? So, what’s the driver right now to make that move? They had legacy systems across the entire bank. They had a an old GL, they had an old analytic system. They did not have a single view of all of the data in one place. And what they wanted was they wanted — and they thought about can we continue to go on premises, can we look at other solutions that are in the cloud? I won’t name other competitors. But what they loved about Workday was the fact that all of the data was in a single system.
And it was our product accounting center, you all have heard us, maybe haven’t. But there’s a product called accounting center and the point of accounting center is to be able to aggregate all of the data from the operational systems, the front office systems, the middle office systems, bring that all into Workday, run accounting on it, roll it up into the GL into the “back office system”, and then have a visibility across all of that. And that was the driver, right? That was the driver of digital transformation was, it was data? How do we get it all in one system? How do I have one single pane of glass?
And we’ve definitely heard, from our channel conversations, similar things about accounting center, that is a key catalyst for customers to — it’s a key innovation in sort of — and it’s not very, that back office, versus the GL tends to be less of a like innovation driven more of an event driven sort of sale. But this is an innovation that’s actually driving more focus on this is actually helping us run our business better, right?
Accounting center has been transformational in our financial services business, and our win rates have substantially increased in FSI because of accounting center. And I actually look at that as just the first industry that we’re going to — that we’ll use a counting center for it in that way. And I think you’re right, so replacing a GL for the sake of replacing GL, what do you get? You get it in the cloud, you get more reliability, that’s all good. It’s all goodness. But when you are able to pull all the data together and run analytics on it and have and hook that up to a planning system. That’s innovation of added value, right?
It’s more agility for the business.
Yes, more agility for the business and that’s a reason to move, right?
Can I pose — one of the bare cases I hear from investors when it comes to financials, Workday is doing well selling financials into existing HCM customers. Workday gets net new business in the mid-market, but unlike other SaaS stores that have been very successful ServiceNow really rolling over BMC or Salesforce rolling over [indiscernible], Workday, HCM rolling over PeopleSoft, you guys can’t roll over Oracle or SAP the same way, right. It is so much harder to displace an Oracle and SAP than it was in the other and that just makes the path forward for financials that much more difficult.
Well, I would say those other markets that you just mentioned, very different markets, right? selling to a CFO whose job it is to be conservative, is different than selling to a CIO whose job it is to innovate all the time, right?
But nonetheless, the market is moving and it has moved. The — I don’t think that we’re ever going to look at the history of Workday’s financial business and say, hey, there was a moment in time where there was an inflection point is continued momentum and we’ve seen that we saw it before COVID There was a pause, of course, right at COVID, because people were not decided to do large transformations at that moment. But we’ve picked right back up from where we were. And it’s just a continued kind of pace of change there — of continued momentum in our financials business and as we look forward to pipelines, it’s the same thing.
I want to touch on the change in the sellings motion, if you will, if we went back three years ago, I think the mix would have been closer, like 8020 in terms of 80% of the business coming from net new customers 20% from upsell. Over the past three years, you guys really expanded that back to base motion. The fear was that was — because you had to, there was a lot in that new business to be done in 2020. But it’s been a lot more resilient. 2021 was another really good year of active base.
Can you talk to us about what structurally changed and sort of your go-to-market to even out that back to base versus net new? And how durable should that be on a go-forward basis?
Yes, so it is — I want to be — whenever I get this question, I always want to be super clear. We are we want to go out and make new customers all the time. It’s our primary motion. That’s what we’re always trying to do and that business really came back for us in FY 2022. And it was and when as we look forward, we’re really feeling great about that too.
But during COVID, one of the things that we did do is we, we learned to sell back into our very happy customers ,97% satisfaction rate and that’s they’re asking us to sell more to them. And we started figuring that out.
A couple things happened. One is we created the portfolio of products to be able to sell back to them. So, we actually developed software, in some cases, we acquired products. And then the other side is we learned how to do the go-to-market motion as well. So, marketing back to our base, it’s actually having account reps that are specifically dedicated to that. And that’s something that we’re actually continuing to invest even more in going forward.
Let me repeat that. So, our goal is to get $10 billion by growing above 20% year-over-year and how we get there. You draw your own timeline for that.
Thank you, Justin. Excellent. Correction. Thank you.
I wanted to touch on M&A strategy. The — I would say the cadence of M&A within Workday has picked up over the past couple of years. You mentioned adaptive insights and Peakon, VNDLY, also Scout RFP was put in there from a kind of, product strategy perspective.
How are you guys thinking on kind of the buy versus build decision because you guys also spend a lot on R&D. That’s one of — been one of the hallmarks of Workday is very strong R&D-focused on sort of developing a lot of organic product to make it all work together and all be part of the same data?
Yes. Our primary motion for innovation is organic, and as we build — and it will continue to be that way for a while. We are — we build a best-in-class service and we’re creating barriers as we do that.
It requires organic investment. As we go into new international areas from on the HCM side, as we build in new — as we make — as we go into the total addressable market, we make it Workday addressable market by adding new areas within the human capital management side, that all requires additional investment.
Last year, we made three acquisitions as I talked about, they were all great. But as I look forward, there’s no quota, there’s no certain number that we’re going to do. There’s nothing that I think about that way. It really is timing. Is it a good fit. And that’s a good technology fit, it’s a good market fit, it’s a good culture fit. We’ve been really successful with the transactions that we have done. And a lot of that is because the teams are still around. So, it’ll be a mix, but really no specific quota or number that we’re going for there.
I mean is there any way that we could kind of characterize the internal R&D focus tends to be more on kind of the core solutions and expanding out the applicability and the TAM of financials and HCM and maybe sort of the analytics portfolio? And then there’s kind of modules around sort of those core systems that you’d be more likely to acquire? Or is it not that black and white?
Really not that black and white. And I think if you look, historically at the acquisitions that we’ve made, a lot of them have been timing based, fast, fast moving markets, that we know that we’re not going to be able to organically develop ourselves in the time when the market is happening. And we go out and we look at a best in class solution to be able to plug in. That’s that — that’s really what drove most of the recent acquisitions.
Got it. So, we’re running towards the end of our allotted time slot, but meaning to leave on one kind of, final question with you. As we look forward into FY 2023, calendar 2022, what are the initiatives or sort of things that you’re seeing in the marketplace that you’re most excited about in terms of driving the story further, helping you sort of illuminate that sort of clear illumination of the path towards $10 billion on a go-forward basis?
Yes, I think right now there are some really important market trends that we’re looking at. You’ve got the talent imperative. You’ve got the voice of the employee becoming more and more important. You have a move from being really a resume-based marketplace for talent to a skills-based marketplace for talent. That’s a big transition.
You’ve got what I talked about from full-time employee mix to a more non-employee mix of the workforce. On the financial side, you’ve got this drive for automation within the financials business. These are all large forces that are happening outside of Workday. They’re happening — and they’re driving our business forward.
Those are kind of the external things that are happening. So, I think of Workday and all our opportunities, there’s four key categories I think of. I think of the back-to-base customer motion, which is quite large. We have — we continue to build new products internally, and we have the ability to sell them out. It is winning the office of the CFO really through an industry focused lens. And so making sure that we’re hitting the industries that we’re going into and driving our financials business to that. It’s the midsize enterprise, a large opportunity there, and the last one is international. Huge open space for us to grow internationally as well.
Outstanding. Pete, thank you so much for joining us. It has been a great conversation.
Yes, it was great. Thank you, everybody.