Workday Gains Traction In Planning Following Its Adaptive Insights Acquisition

Workday's planning product can help drive demand for cloud financials.

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Shares of Workday (WDAY) last week hit a new all-time high at $221. The cloud-based enterprise software provider is gaining traction in corporate planning, which should help drive demand for its Financial Management suite of solutions.

Workday shares have been on a good run, rising 57% last year on top of a gain of 54% in 2017. So far in 2019, the stock has advanced 31%. The performance of the share price is backed up by strong fundamentals.

Workday’s core human capital management (HCM) software business remains on track, taking market share from legacy vendors. The company counts half of the Fortune 50 and about 40% of the Fortune 500 as HCM customers.

At the same time, Workday is seeing momentum build for its Financial Management solutions (particularly in the healthcare and financial services verticals), helped out by the company’s planning offering, which has performed better than expected since the acquisition last summer of Adaptive Insights.

Last month, Workday reported total revenue in fiscal Q1 (ended April) rose 33% to $825.1 million, coming in above the consensus estimate of $813.9 million. Subscription revenue advanced 34%, topping the high end of the guidance range. International revenue (representing 24% of total revenue) rose 42%. Operating margin remained steady year over year at around 13%. Per-share earnings of 43 cents topped the consensus by two cents.

Workday is sitting on a subscription revenue backlog of $6.8 billion, up 30% from the year-ago level (slightly above the guided growth rate). The backlog is building thanks to a combination of strong net new bookings, plenty of add-on business and healthy renewals (with the retention rate above 100%). In FQ1, unearned revenue of $1.83 billion rose 29%, accelerating 200 basis points sequentially. The short-term portion of unearned revenue was up 31% to $1.73 billion. 

In the April quarter, Workday’s core HCM business was solid, adding a number of large enterprise customers—including Cisco Systems and Procter & Gamble. A major differentiator on the larger enterprise deals continues to be the company’s ability to support hefty volumes of customer data and transactions. 

While Workday’s HCM business remains critically important, the company’s newer products are increasingly doing their part to advance the top line. The Financial Management business in FQ1 saw both customer count and net new annual contract value (ACV) grow greater than 50%.

In addition to adding new financials customers, Workday is expanding relationships with many existing accounts. For example, investment management firm Legg Mason in FQ1 broadened its use of Workday Financial Management to include all of its affiliates, while a Fortune 500 insurance company added financials to become a full platform customer.

With the purchase last August of Adaptive Insights for $1.55 billion, planning has become a more important part of Workday’s growth story. The planning product is a good momentum builder for Workday’s overall business because the customer buying-decision timeframe is much shorter when compared to full-on Financial Management transactions. Planning also provides a competitive advantage in that it makes Workday’s product portfolio more robust.

Prior to being acquired by Workday, Adaptive Insights was focused on selling mainly into the SMB and mid-market enterprise segments. The company had just seven enterprise sales reps. Now part of Workday, Adaptive Insights still has a dedicated SMB sales force, but there’s a big push to move the product up-market. Adaptive Insights is now being sold by all of Workday’s enterprise sales reps as an add-on offering. 

As of now, only about a quarter of Workday’s current customer base of 2,700+ organizations has adopted the company’s Financial Management suite of solutions. One part of Workday’s strategy to boost that penetration rate entails getting more HCM-only customers to adopt the planning product. Once the planning offering has proven its capabilities to the CFO of a large account, Workday has a better shot at coming back to sell the full Financial Management product set.

In FQ1, Workday closed 150 standalone Adaptive Insights deals. Plus, the planning solution was included in about 50 large-enterprise platform or add-on deals. AstraZeneca, H&R Block and Airbus were among the existing Workday customers in the latest quarter that added the planning module.

For FY’20 (ending January), Workday will continue to make progress in the financials segment. The company is seeing a similar adoption pattern for Financial Management across the Fortune 500 as it did in the HCM space five or six years ago, according to Workday CEO Aneel Bhusri. As Workday gets bigger, the company is expanding its pool of important Financial Management reference customers, which will be helpful when trying to land larger enterprise accounts in the future.

Workday expects FQ2 subscription revenue growth of 32%. The growth headwinds will get a little more challenging in the second half of the year because of tough comps. For FY’20, Workday’s latest subscription revenue guidance range of $3.045 billion to $3.06 billion represents growth of 28%. 

Given the positive momentum across Workday’s business, there should be an upward bias to subscription revenue guidance throughout the year, especially if there’s outperformance from the Financial Management product. 

Revenue estimates are already on the rise, with analysts on average now calling for Workday to deliver FY’20 top-line growth of 26.4%, up from the consensus growth rate of 25% at the start of 2019. The latest Street-high revenue estimate for FY’20 of $3.62 billion represents growth of 28.3%.

At recent prices, Workday’s enterprise value is 13 times the FY’20 consensus revenue estimate of $3.57 billion.

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Workday's planning product can help drive demand for cloud financials.

Getty

Shares of Workday (WDAY) last week hit a new all-time high at $221. The cloud-based enterprise software provider is gaining traction in corporate planning, which should help drive demand for its Financial Management suite of solutions.

Workday shares have been on a good run, rising 57% last year on top of a gain of 54% in 2017. So far in 2019, the stock has advanced 31%. The performance of the share price is backed up by strong fundamentals.

Workday’s core human capital management (HCM) software business remains on track, taking market share from legacy vendors. The company counts half of the Fortune 50 and about 40% of the Fortune 500 as HCM customers.

At the same time, Workday is seeing momentum build for its Financial Management solutions (particularly in the healthcare and financial services verticals), helped out by the company’s planning offering, which has performed better than expected since the acquisition last summer of Adaptive Insights.

Last month, Workday reported total revenue in fiscal Q1 (ended April) rose 33% to $825.1 million, coming in above the consensus estimate of $813.9 million. Subscription revenue advanced 34%, topping the high end of the guidance range. International revenue (representing 24% of total revenue) rose 42%. Operating margin remained steady year over year at around 13%. Per-share earnings of 43 cents topped the consensus by two cents.

Workday is sitting on a subscription revenue backlog of $6.8 billion, up 30% from the year-ago level (slightly above the guided growth rate). The backlog is building thanks to a combination of strong net new bookings, plenty of add-on business and healthy renewals (with the retention rate above 100%). In FQ1, unearned revenue of $1.83 billion rose 29%, accelerating 200 basis points sequentially. The short-term portion of unearned revenue was up 31% to $1.73 billion. 

In the April quarter, Workday’s core HCM business was solid, adding a number of large enterprise customers—including Cisco Systems and Procter & Gamble. A major differentiator on the larger enterprise deals continues to be the company’s ability to support hefty volumes of customer data and transactions. 

While Workday’s HCM business remains critically important, the company’s newer products are increasingly doing their part to advance the top line. The Financial Management business in FQ1 saw both customer count and net new annual contract value (ACV) grow greater than 50%.

In addition to adding new financials customers, Workday is expanding relationships with many existing accounts. For example, investment management firm Legg Mason in FQ1 broadened its use of Workday Financial Management to include all of its affiliates, while a Fortune 500 insurance company added financials to become a full platform customer.

With the purchase last August of Adaptive Insights for $1.55 billion, planning has become a more important part of Workday’s growth story. The planning product is a good momentum builder for Workday’s overall business because the customer buying-decision timeframe is much shorter when compared to full-on Financial Management transactions. Planning also provides a competitive advantage in that it makes Workday’s product portfolio more robust.

Prior to being acquired by Workday, Adaptive Insights was focused on selling mainly into the SMB and mid-market enterprise segments. The company had just seven enterprise sales reps. Now part of Workday, Adaptive Insights still has a dedicated SMB sales force, but there’s a big push to move the product up-market. Adaptive Insights is now being sold by all of Workday’s enterprise sales reps as an add-on offering. 

As of now, only about a quarter of Workday’s current customer base of 2,700+ organizations has adopted the company’s Financial Management suite of solutions. One part of Workday’s strategy to boost that penetration rate entails getting more HCM-only customers to adopt the planning product. Once the planning offering has proven its capabilities to the CFO of a large account, Workday has a better shot at coming back to sell the full Financial Management product set.

In FQ1, Workday closed 150 standalone Adaptive Insights deals. Plus, the planning solution was included in about 50 large-enterprise platform or add-on deals. AstraZeneca, H&R Block and Airbus were among the existing Workday customers in the latest quarter that added the planning module.

For FY’20 (ending January), Workday will continue to make progress in the financials segment. The company is seeing a similar adoption pattern for Financial Management across the Fortune 500 as it did in the HCM space five or six years ago, according to Workday CEO Aneel Bhusri. As Workday gets bigger, the company is expanding its pool of important Financial Management reference customers, which will be helpful when trying to land larger enterprise accounts in the future.

Workday expects FQ2 subscription revenue growth of 32%. The growth headwinds will get a little more challenging in the second half of the year because of tough comps. For FY’20, Workday’s latest subscription revenue guidance range of $3.045 billion to $3.06 billion represents growth of 28%. 

Given the positive momentum across Workday’s business, there should be an upward bias to subscription revenue guidance throughout the year, especially if there’s outperformance from the Financial Management product. 

Revenue estimates are already on the rise, with analysts on average now calling for Workday to deliver FY’20 top-line growth of 26.4%, up from the consensus growth rate of 25% at the start of 2019. The latest Street-high revenue estimate for FY’20 of $3.62 billion represents growth of 28.3%.

At recent prices, Workday’s enterprise value is 13 times the FY’20 consensus revenue estimate of $3.57 billion.

I have covered the technology sector for more than 20 years. Since 2003, I have been the managing editor of Tech-Stock Prospector, a monthly publication offering researc...