Workday [WDAY] Conference call transcript for 2021 q4
2022-02-28 19:21:06
Fiscal: 2022 q4
Operator: Welcome to Workday's Fourth Quarter Fiscal Year 2022 Earnings Call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the call. During the Q&A, please limit your questions to one. With that, I will now hand it over to Justin Furby, Vice President of Investor Relations.
Justin Furby: Thank you, operator. Welcome to Workday's fourth quarter fiscal 2022 earnings conference call. On the call, we have Aneel Bhusri and Chano Fernandez, our Co-CEOs; Barbara Larson, our CFO; and Pete Schlampp, our Chief Strategy Officer. Following prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions, including those related to the impacts of the ongoing COVID-19 pandemic on our business and global economic conditions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our 2022 annual report on Form 10-K for additional information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Also, the customers' page of our website includes a list of selected customers and is updated monthly. Our first quarter fiscal 2023 quiet period begins on April 16, 2022. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2021. With that, I will hand the call over to Aneel.
Aneel Bhusri: Thank you, Justin, and good afternoon, everyone. Thank you for joining us today for our fourth quarter fiscal year 2022 earnings call. Before we begin, I want to spend a moment acknowledging the current situation in the Ukraine. Our thoughts are with all of those who are personally impacted by the devastating situation, including Workday contractors in Ukraine, Workmates across the western region in Europe and families of military personnel who have been deployed in the region. Turning now to our business results. I'm pleased to report that Workday delivered an exceptional fourth quarter, which helped us achieve the fastest growth in full year new ACV bookings in over five years. This acceleration in our business, along with our relentless focus on employees, customers and innovation, is serving as a strong foundation for driving durable growth on our path to $10 billion in revenues and beyond. Our business success is enabling us to attract talent at a pace we have never seen before and is allowing us to continue to expand and support new customers across our broad suite of solutions aimed at the CHRO and CFO. Indeed, we now serve more than 60 million total users across 9,500 organizations, including more than 4,100 core HCM and finance customers. As our customer community continues to expand, so does our opportunity to serve them in more strategic ways. As Chano will soon share, we closed several significant transactions within our customer base sales team in Q4. Our continued commitment to our customer success is also reflected in our industry-leading gross retention rate of over 95%. Additionally, we are seeing customers increase their engagement and usage of our applications as evidenced by the over 440 billion transactions processed within Workday in fiscal year 2022, which is an increase of 67% over the previous year. Altogether, we now work with over 50% of the Fortune 500 and over 25% of the Global 2000. Before I turn it over to Chano, who will share more on our go-to-market success; and Barbara Larson, our new CFO, who will provide specifics on our rate growth outlook for fiscal year 2023, I'd like to share some fourth quarter highlights. First, momentum for our human capital management suite remains strong as organizations continue to transition their HR operations to the cloud. In Q4, we saw a healthy demand across all HCM product areas driven by our ability to attract new customers while strengthening and deepening our relationships with existing ones. New customers in Q4 included Allied Financial, DICK'S Sporting Goods, National Australia Bank Limited, RiteAid Corporation, Smith Hill Foods and 7-Eleven, to name a few, notable HCM go-lives in Q4 included Evonik Industries, Anheuser-Busch InBev and Wells Fargo Bank as we continue to have over 70% of our HCM customers in production. Switching over to our financial management applications, Q4 was another solid quarter with several marquee wins, including Genpact Limited, Mass General Brigham, University of Melbourne and U.S. Bank. During the quarter, we doubled the number of add-on core financial management wins when compared to the same period a year ago and had several customers go live, including Bright Horizons Children Centers, Sharp Healthcare and SS&C Technologies. In addition to the strong growth from our core finance application, we saw continued momentum from our expanding suite of products that support the office of the CFO, including planning, analytics and spend management, where our strategic sourcing solution experienced roughly 50% new ACV growth and our procure-to-pay solution grew even faster. We continue to see very healthy attach rates for spend management solutions within our financial customers, illustrating health finances increasingly partnering with their procurement peers, drive visibility and bottom line impact for the single solution. As we head into fiscal year 2023, we are confident in the opportunity we have in front of us and our ability to execute on our growth initiatives on our path to $10 billion in revenues. As such, we expect fiscal year 2023 to be another strong year for us. Lastly, I'd like to share a couple of updates related to Workday's Board of Directors. First, Tom Bogan, who most recently served as Vice Chairman of Corporate Development, retired from Workday on January 31st. And while we're excited for Tom and his well-deserved retirement, we are thrilled to announce that he has joined our Board. Tom came to Workday in 2018 as part of the Adaptive Insights acquisition, a company he led as CEO for nearly four years. During his time at Workday, Tom has been a trusted adviser, a true culture champion and passionate leader who embodies Workday's values. We are fortunate that he will now lend his expertise and guidance to help us capitalize on new opportunities for the business and work to accelerate future growth. The second update I want to share is that Dave Duffield, my mentor, best friend and Workday's Co-Founder and former CEO and Chairman, has stepped down from our Board of Directors. I will now carry the honorary title of CEO Emeritus. While Dave will no longer be on the board, he remains our largest shareholder and will continue to provide his invaluable counsel as an adviser of Workday. When Dave and I started Workday nearly 17 years ago, our goal was to build a lasting multigenerational company with employees at the center and relentless focus on customer service and innovation. We wanted to have fun along the way. The growth we've experienced this past year in the face of a challenging macro environment has only solidified my belief in the foundation that we have built, thanks to the amazing group of employees and leaders who embraces our values and are committed to delivering the industry's best products and customer experience. I will end by saying that I'm quite optimistic about our future. With that, I'll turn it over to our co-CEO, Chano Fernandez. Over to you, Chano.
Chano Fernandez: Thank you, Aneel, and thank you to everyone for joining today. I want to start off by acknowledging the more than 15,200 Workmates across the globe, who helped drive our incredibly strong finish to the year. Amazing job. I can't wait to see what we accomplish together in FY 2023. I'm also looking forward to safely spending time with many of you this week at our sales kickoff here in Las Vegas, where we are taking great care to follow the safety measures in accordance with the CDC and local authority guidelines. As Aneel mentioned, we delivered an exceptional Q4 and growth reacceleration driven by a strong execution and healthy demand across solutions and regions. Our performance in North America was a standout, and we had another solid quarter internationally, where Asia Pacific markets such as Australia and New Zealand were a highlight, in addition to healthy growth in key EMEA market such as Germany. We had a solid quarter of landing net new core HCM and FINS customers, including several Fortune 500 and Global 2000 companies, along with healthy activity in the medium enterprise. Our expanding portfolio of landing solutions also experienced significant momentum, including Peakon, Workday Strategic Sourcing and Planning where new customers included Tony's Healthcare, Plastic Omnium and At Home Stores. And we couldn't be more excited to add VNDLY to our portfolio of strategic landing solution. Even though it's early, we're already seeing the results with Q4 wins including RSM, Leonardo UK and Guild Mortgage, among others. In addition to strength from our net new teams, our customer base sales teams drove outstanding performance across both add-on and renewals, once again demonstrating the strategic nature of our platform. Customer base expansions in Q4 included U.S. Bank who purchased core FINS, Accounting Center, Prism and Extend; FIS who purchased Workforce Planning, Extend and Canadian UK payroll; and Merck, BP, International and Advocate Aurora Health, who all added Extend. In Q4, we also expanded our relationship with Accenture, who is deploying Peakon to gain a real-time post on its employee base to help power its global talent strategy. As strategic partners of ours, Accenture is applying its innovation in this area to drive engagement and deep employee-related insights for our mutual customers. From an industry lens, we continue to see our differentiated value proposition winning in the market. In financial services, for example, we closed several strategic deals in Q4, including core FINS win at the aforementioned U.S. Bank, Junior Mutual and Pam Mutual Life Insurance; and core HCM wins at National Australia Bank, Allied Financial and Autoplot [ph] Group. In addition, we expanded our footprint with several financial services customers this quarter, including Commonwealth Bank of Australia, Kemper and Western Union. Industry-specific investments such as Accounting Center, along with our deep industry knowledge and our rapidly expanding reference base of customers, which now includes more than 70% of the financial services companies in the Fortune 500, are all key to our success. And it's not just the innovation we are driving that is enabling our success, but also that of our partners, such as PwC, who created a solution for multidimensional part planning and profitability by leveraging Workday Financials, Extend, Accounting Center, Prism and Adaptive Planning. Our partners are key to our industry approach, and we're excited by the innovation happening across our ecosystem. We enter FY 2023 with healthy pipelines and clear momentum in our business. In order to capitalize on that momentum, we plan to continue making significant investments within our go-to-market and service and support team with key focus areas, including customer base, international industry and emerging land motion, all of which are important growth vectors in achieving our goal of sustaining 20% plus subscription growth well into the future. Part of this investment involves strengthening our leadership team as we continue to scale, to which I'm pleased to welcome Patrick Blair as our newly appointed President of the Americas. Patrick brings more than 25 years of enterprise software sales experience and not only is a proven leader, but he's a great person and a tremendous fit into the organization. I couldn't be more happy to have him join that and the team to lead our largest market. With that, I'm now pleased to hand it over to our newly minted CFO and a cool start within the Workday organization, Barbara Larson. Barbara, over to you.
Barbara Larson: Thanks, Chano. I appreciate the kind words. Good afternoon, everyone, and thank you for joining us. I look forward to working with all of you over the coming quarters and years, and I'm thrilled to be joining Aneel, Chano and Pete today to update you on our progress. I joined Workday seven years ago and have witnessed unbelievable growth in the company over that time. One observation I'd make is that our market position has never been stronger, and the broad-based momentum that we saw across the business in Q4 serves as a great validation of that. Now let's turn to our results. Subscription revenue was $1.23 billion in Q4, representing year-over-year growth of 22%. For the full year, subscription revenue was $4.55 billion, growth of 20%. Professional services revenue was $147 million for Q4 and $592 million for the full year. Fourth quarter revenue outside of the U.S. was $348 million, representing 25% of total revenue. 24-month backlog at the end of the fourth quarter was $7.98 billion, growth of 22%. The strong result was driven by new bookings outperformance and continued strength in renewals with growth and net retention rate over 95% and 100%, respectively. Total subscription revenue backlog was $12.81 billion, growth of 27%. Our non-GAAP operating income for the fourth quarter was $237 million, resulting in a non-GAAP operating margin of 17.2%. As expected, our non-GAAP operating margin declined from last quarter driven by an accelerated pace of hiring, the rollout of our previously mentioned cash-based performance bonus and other growth investments made across the business, including the recent VNDLY acquisition. For the year, non-GAAP operating income was a record $1.15 billion or 22.4% of total revenue, showcasing the strength of our business model. Operating cash flow for Q4 was $615 million, bringing our full year operating cash flow to $1.65 billion, growth of 30%. Record cash flow results were driven by solid operating income performance as well as strong cash collections throughout the year. Our largest investments continue to be in our people and attracting top talent to Workday. We successfully added and integrated roughly 1,000 net new employees in Q4, including over 140 from VNDLY, ending the year with more than 15,200 employees, growth of 21% and in line with our hiring aspirations when we entered FY 2022. The record hiring is a testament to our culture, our global brand and the significant growth opportunity that we have ahead. Overall, we are very pleased with the strong company-wide execution in our seasonally most important quarter. Turning now to guidance, we are encouraged by the significant momentum in our business, and we're optimistic that the environment will remain robust throughout FY 2023 as organizations continue to prioritize and invest in their strategic finance and HR transformation initiatives. With that context, we now expect FY 2023 subscription revenue to be in the range of $5.53 billion to $5.55 billion, representing 22% year-over-year growth. For the first quarter of FY 2023, we expect subscription revenue to be between $1.263 billion and $1.265 billion, representing 23% year-over-year growth at the high end. We expect subscription revenue to increase sequentially by approximately 7% in Q2 and approximately 5.5% in Q3 and Q4. We expect the 24-month backlog to grow approximately 22% in Q1 of FY 2023. We are expecting professional services revenue to be approximately $160 million in Q1 and $650 million for the full year. We will continue our tight alignment with our growing partner ecosystem to help ensure customers have successful implementations that support the highest levels of customer satisfaction and business value. From a margin standpoint, since the onset of COVID, we have demonstrated the scalability inherent in our model. As we've discussed, however, investing for growth remains our number one priority. In FY 2023, we plan to continue hiring across the company at a rapid pace with a focus on sales and products. We are also expecting a return to travel and in-person events. And as we have discussed, we've rolled out a performance-based cash bonus program across the company. Given this ramped level of investment and taking into account our increased revenue outlook, we are raising our FY 2023 non-GAAP operating margin guidance to 18.5%. Investing for growth remains our focus, and we will continuously evaluate gross margin trade-off. But we're currently expecting to resume margin expansion in FY 2024 and have continued confidence in reaching 25% margin at $10 billion in revenue. We estimate non-GAAP operating margins of approximately 19% in Q1 and expect a normal seasonal sequential decline in Q2 as we invest in our people through our annual compensation process. The GAAP margins for the first quarter and the full year are expected to be approximately 28 and 24 percentage points lower, respectively, than the non-GAAP margin. The FY 2023 non-GAAP tax rate remains at 19%. We expect operating cash flow in FY 2023 to be approximately $1.65 billion, flat from record levels in FY 2022, driven by the ramp in growth investments, the corresponding decrease in margins and an estimated $80 million onetime tax payment related to the expected transfer of acquired intellectual property. We expect capital expenditures of roughly $475 million in FY 2023 to support continued business expansion and phased return to office with investments across our existing facilities, corporate IT infrastructure and customer data centers. This includes opportunistic data center investment that was previously planned for FY 2024 as we manage the supply chain and plan for future growth. And finally, I'll close by thanking our amazing employees, customers and partners for their continued support and hard work, which allowed us to deliver exceptional results during yet another unprecedented year. We are more confident than ever in our long-term opportunity ahead. With that, I'll turn it over to the operator to begin Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your questions.
Operator: Our next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your questions.
Operator: Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your questions.
Operator: Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley.
Operator: Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed with your question.
Operator: Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.
Operator: Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.
Operator: Our next question comes from the line of Brent Bracelin with Piper Sandler. Please proceed with your question.
Operator: Our next question comes from the line of Brad Zelnick with Deutsche Bank. Please proceed with your question.
Operator: Thank you. We will now take two more questions. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Operator: Our final question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question.
Operator: Ladies and gentlemen, thank you for your participation on today's conference. This will conclude Workday's fourth quarter FY 2022 earnings call. Thank you again for joining us.
