Workday, Inc. (NASDAQ:WDAY) Q4 2024 Earnings Call Transcript
Workday, Inc. (NASDAQ:WDAY) Q4 2024 Earnings Call Transcript February 26, 2024
Workday, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Workday's Fiscal 2024 Fourth Quarter Earnings Call. [Operator Instructions]. 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 2024 Earnings Conference Call. On the call, we have Carl Eschenbach, our CEO; Aneel Bhusri, our Executive Chair; Zane Rowe, our CFO; and Doug Robinson, our Co-President. 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 that could cause actual results to differ materially.
Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our fiscal 2023 annual report on Form 10-K and our most recent quarterly report on Form 10-Q 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, in our investor presentation 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. Additionally, our quarterly investor presentation will be posted on our Investor Relations website following this call. Also, the Customers page of our website includes a list of selected customers and is updated monthly. Our first quarter fiscal 2025 quiet period begins on April 15, 2024. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2023. With that, I'll hand the call over to Carl.
Carl Eschenbach: Thank you, Justin, and thank you, everyone, for joining us today. I'm pleased to share that Workday delivered a solid Q4, achieving 18% subscription revenue growth and a non-GAAP operating margin of 24%. These results were driven by momentum across the business and capped off a year of strong execution by our nearly 19,000 Workmates across the globe. Over the course of the last year, we've made key investments across our leadership team, go-to-market and partner ecosystem and our platform, positioning us to drive enduring growth in FY '25 and beyond. I couldn't be prouder of what we've accomplished over the last year, particularly in an environment where deal scrutiny remains high. I'd like to thank our customers, partners and especially my fellow Workmates for making these results possible.
My belief in the opportunity ahead for Workday and our value proposition has only gotten stronger in the 14 months since I've joined. With the emergence of AI, shifting talent landscape and pressure to realize operational efficiencies, leaders are turning to Workday as their trusted platform to manage their most critical assets, their people and their money. Customers have come to trust us with helping them navigate these huge transformations from the cloud to AI. In fact, the theme of building trust took center stage at the World Economic Forum annual meeting in Davos last month. Throughout my conversations, it was clear to me that leaders see the business benefits of implementing AI, but they also recognize building trust is key. Workday stands apart in our commitment to the responsible development of AI technologies, its responsible deployment within our own company and our advocacy for its regulation.
We've been delivering AI capabilities to our customers for nearly a decade, building AI into the core of our platform, and we're making significant investments to further enhance our leadership in this area. Workday Skills Cloud, for example, uses AI to gain insights into an organization's current skills and identifies skills needed for the future, allowing for smarter decisions about talent across the company. In our upcoming R1 release, many of the generative AI use cases we showcased at Rising will be put into the hands of early adopters, including job descriptions and knowledge articles. To further accelerate our AI road map, today, we're excited to announce our planned acquisition of HiredScore, which provides AI-powered talent orchestration solutions.
HiredScore's technology delivers data-driven insights to help improve recruiting and internal mobility processes. The combination of our data set in Workday Skills Cloud with HiredScore's solution will provide customers with a transparent, AI-powered talent acquisition and internal mobility offering. Not only is it technology compelling, but HiredScore and Workday share a commitment to responsible AI development, including a focus on explainability and transparency. We are absolutely thrilled about the potential of what we can do together. Now let's move into the performance from the quarter, which reflects the diversity and durability of Workday's business. As we shared at our Financial Analyst Day, our net new business is driven by a balanced mix of new customer wins and expansions within our installed base, which speaks to the significant opportunity that we have ahead.
From a net new customer perspective, we once again saw strength in full platform deals. We welcomed customers like Australian Stock Exchange, Boyd Gaming Corporation, HHS, Randstad, UHS of Delaware and VXI Global Solutions as full platform HCM and Financials customers. And new HCM customers this quarter included Crane Company, El Corte Inglés, Hitachi Astemo, Hungry Jack's, Kohler Co., and Swisscom. Alongside healthy net new customer activity, our customer base team again delivered in Q4. We had several strategic expansions and renewals in the quarter, including BJ's, Goodyear and Greystar Global Enterprise. And we had a number of core Financial Management expansions across our HCM customer base, including Allied Financial, Huntington Bank, Intermountain Health and Stewart Title Guaranty.
Our create and close motion also had another great quarter and is becoming an important driver of our customer-based sales team's growth. From a solutions perspective, we saw healthy uptake across our portfolio, including Extend, where new ACV doubled year-over-year in Q4. We now have more than 850 Extend customers, and I'm pleased to share that roughly 1/3 of our Extend new ACV signed in Q4 was from our new professional SKU, which includes AI Gateway as well as Workday Developer Copilot launching later this year. Beyond the wins we celebrate when our customers go live on our platform and I'm pleased to share that in FY '24, over 95% of our deployments went live on time. In Q4, we had several strategic HCM deployments, including AT&T, Northern Trust and Whataburger, alongside notable Financial Management go-lives, including American University, Sagility Operations and UMass Memorial Health.
To propel our land and expand business, we continue to invest in several growth areas. I'll share a few highlights from those areas now, starting with international. Today, international represents over half of our addressable opportunity yet is 1/4 of our revenues. We're working to change that, and we're seeing early signs of progress. In EMEA, our leadership additions continue to drive improved and more consistent results. I spent a couple of weeks visiting our teams in Europe this past quarter, and I have to tell you, I am fired up by the momentum we're building. In Q4, our teams once again delivered healthy new ACV growth across key markets such as the U.K., Spain and France. We also closed our first deal in EMEA with our Alight co-sell partnership, and we continue to build pipeline with important partnerships alongside ADP and Alight in addition to our broader referral and co-sell ecosystem.
In the Asia Pacific region, Australia delivered once again, and I'm pleased to share that Japan, which is a key investment priority, drove strong new ACV growth in Q4. While it's still early days for us in this market, we're focused on growing it. To help lead the way, I'm delighted to welcome Chikara Furuichi as our new leader of the Japanese market to help us win in one of the world's largest economies. Chikara brings over 25 years of experience in both SaaS security and cloud services from across Japan and APAC. He reports directly to Patrick Blair, our President of Global Sales. Moving to financials. We're seeing continued proof that our go-to-market and platform investments are paying off with healthy growth in core financials customers and new ACV and a robust pipeline looking forward.
We drove a record number of new full platform wins in both Q4 and FY '24, and our industry approach is a clear driver of this momentum. Health care, for example, again grew new ACV over 50% in Q4, capping off a fantastic FY '24. Our innovation in key areas such as supply chain is differentiating us in the market and is driving industry awards such as the recent recognition in best-of-class in enterprise resource planning for the seventh year in a row. We're also pleased to share that Gartner named Workday a leader in the 2023 Gartner Magic Quadrant for Financial Planning Software for the second time since the category's inception last year. Our education and government teams also drove continued success in FY '24, and higher ed was a standout in Q4 with a number of full platform wins, including Oregon State University, Portland Community College and the College of William and Mary.
And to help accelerate our trajectory in the U.S. Federal business, I'm delighted to welcome Lynn Martin as our new federal leader. Lynn has more than 30 years' experience in the public sector, most recently running Google's U.S. federal business and before that, running VMware's public sector team for close to a decade. Supporting our progress around many of these investment areas is our partner ecosystem where our focus is delivering customer outcomes, growing our business through referrals and co-selling and building differentiated solutions. During Q4, we announced a strategic partnership with Insperity that delivers on all 3 of these priorities. Through this partnership, Workday will become the platform powering Insperity's PEO service for SMB organizations, effectively opening up a new market opportunity for us.
It's a terrific example of how we're innovating our go-to-market strategy to drive growth. Another great example is the Spark&Grow offering, which we launched with Kainos. It helps our emerging and medium enterprise customers to go live on Workday in less than 4 weeks. We've seen incredible demand for this offering, and we're just getting started. These are 2 great examples of momentum that is building across our ecosystem, which I'm pleased to share now includes more than 200 partners that have been onboarded to refer new sales leads and co-sell with us. We launched this pilot program last May and we've seen momentum building throughout the year with a nice uptick in Q4 partner-driven pipeline generation. In closing, I'm incredibly proud of our team's strong execution throughout FY '24, all while navigating a dynamic environment and embracing important changes we've rolled out across the business.
We enter FY '25 with a strong foundation and a clear strategy to support durable growth while at the same time continuing to drive efficiencies across the business. As I said on my first Workday earnings call 1 year ago, we have the opportunity to be one of the largest, most enduring and profitable software businesses of our time. I've never been more convinced in that belief. Before I turn the call over, I'd like to take a minute to acknowledge Aneel, who recently moved into a new role as Executive Chair. Aneel, it has been an incredible 14 months, and I'm truly grateful for your partnership and the trust you put in me to lead what you and Dave started nearly 19 years ago. Your technology vision and your commitment to Workday's special culture and values have put this company in an incredible position.
I am excited for what we'll achieve together next. Thank you for continuing to be in my corner not just in guiding the applications and platform development but also as a friend. Aneel, over to you.
Aneel Bhusri: Thank you, Carl, and to everyone joining today's call. As Carl highlighted, we are continuing to see solid momentum across the business, fueled in large part by our ability to deliver the innovation our customers need to thrive in today's fast-paced and dynamic environment. There is no doubt that more and more organizations, spanning midsize to large enterprises, are seeing the increasing value in building their businesses upon the Workday platform with AI at its core. Earlier this month, we officially named Carl sole CEO of Workday while I assumed the role of Executive Chair. As I've said before, there is no better person than Carl to lead Workday through this next chapter of growth. He has already made a tremendous impact on the business from day 1.
And thanks to his leadership, we are already successfully executing on several key growth initiatives and strategies that he put in place. Furthermore, and most importantly, Carl perfectly aligns with our values-driven approach, and I can't wait to see what the future holds for us with him at the helm. As Executive Chair, I'll remain actively involved but with an emphasis on my true passion as a technologist. Together with our Co-President, Sayan Chakraborty, and the rest of our amazing product and technology organization, I will focus on guiding the future direction of Workday's applications and technology platform while staying close to our Workmates and our customers. How we evolve and expand the Workday platform in the coming years will be critical to our continued growth and scale.
To help us do that, we have identified several core elements of our innovation strategy that we plan on building out over the next 12 to 18 months. The first is a continued focus on evolving our Financial Management and HCM applications so that we can further empower the offices of finance and HR to optimize their 2 most important assets, their people and their money. Next is AI. Fueled by our 10-year head start and unique approach to building AI directly into the core, we will continue to responsibly deliver new ML models that solve real business problems for our customers and enable their employees. We'll also incorporate high-value generative AI capabilities to enhance search, understand historical context, make recommendations and create content.
Additionally, I'm incredibly excited about bringing HiredScore into the fold and how we'll further strengthen our overall AI capabilities. Third is industry, with an emphasis on deepening our offerings in retail and hospitality, education and government along with financial services, health care, professional services and tech and media. Extensibility is another important focus area so that we can enable IT teams to build and maintain integrations between Workday and third-party systems, ultimately extending the value of our platform. Our new Extend AI Gateway, which we announced at Rising last year, is a perfect example of the type of work we are focused on here. Fifth is experiences. Delivering persona-tailored experiences empowers high-performing employees and teams for maximum productivity.
Manager Insights Hub and Flex Teams, which we also unveiled at Rising, are just a few of the ways we've already been delivering enhanced experiences for managers. The final area of investment is security and resiliency, which is foundational to everything we do. With more than 10,000 organizations depending on Workday to help run their businesses, it's essential that we design to protect the resilience and performance of critical processes, safeguard against the growing number of global cybersecurity threats and increase our investment in public cloud offerings to drive greater performance, scalability and security for our customers. We're also investing in our long-term innovation strategy by continuing to strengthen our product and technology leadership team.
I'm pleased to share that David Somers has been appointed as our new Chief Product Officer and will lead development across our full suite of products. David, who will continue to report into Sayan, has been instrumental in leading our HR product strategy and development in the last few years, and I'm excited that he will be helping to lead our efforts to build out the capabilities of Workday's full product portfolio. As I think back to our early days, it's incredible to see the growth and scale we've been able to achieve. When our customers first went live in 2007, we offered a few different products. Today, we offer a full platform that helps our customers transform how they manage their people and their money. Additionally, we now have more than 5,400 core HCM and Finance customers, more than 65 million users under contract and process over 800 billion transactions per year.
I'm proud of the company we've built and the continued value and impact that we deliver for our customers. In closing, I want to extend my deepest thanks to our nearly 19,000 Workmates around the world for finishing our fiscal year 2024 in such a strong fashion. Workday's future is incredibly bright, and I'm energized to work alongside them, Carl and the rest of our leadership team to help drive Workday forward. With that, I'll hand it over to Zane. Over to you, Zane.
Zane Rowe: Thanks, Aneel, and thank you to everyone for joining today's call. As Carl and Aneel mentioned, Q4 marked a solid close to FY '24 with momentum building across our key investment initiatives. We enter FY '25 well positioned to deliver another year of durable subscription revenue growth, coupled with expanding margins. Turning to results. Subscription revenue in Q4 was $1.76 billion, up 18%, and full year FY '24 subscription revenue was $6.6 billion, growing 19%. Professional services revenue was $162 million in the quarter and $656 million for the year. Total revenue in Q4 was $1.92 billion and for the full year was $7.26 billion, both growing 17%. U.S. revenue in Q4 totaled $1.44 billion, up 16%, and international revenue totaled $478 million, growth of 21%.
For the year, U.S. revenue was $5.46 billion and international revenue was $1.8 billion, both growing 17%. As we have highlighted, we see significant long-term international market opportunities, which we expect over time will become a more meaningful driver of our growth. 12-month subscription revenue backlog or CRPO was $6.62 billion at the end of Q4, representing growth of 20% with the outperformance driven by higher-than-anticipated early renewals. Gross and net revenue retention rates remain over 95% and over 100%, respectively. Total subscription revenue backlog at the end of the quarter was $20.92 billion, up 27%. Our non-GAAP operating income for the fourth quarter was $461 million, resulting in a non-GAAP operating margin of 23.9%.
Full year non-GAAP operating income was $1.74 billion, reflecting a non-GAAP operating margin of 24%. Q4 GAAP net income benefited from a onetime $1.1 billion valuation allowance release related to our U.S. deferred tax assets. Q4 operating cash flow was $996 million, with approximately $100 million of the outperformance driven by strong in-quarter collections and earlier-than-expected payments. Full year operating cash flow was $2.15 billion, growth of 30%. During Q4, we repurchased $136 million of our shares at an average price of $253.85 per share. In addition, our Board of Directors has authorized a new $500 million share repurchase program. We ended the quarter with $7.8 billion in cash and marketable securities. We continue to invest in growth areas of the business, and we ended January with over 18,800 Workmates around the globe.
Now turning to guidance. We are reiterating our full year FY '25 subscription revenue guidance of $7.725 billion to $7.775 billion, representing growth of 17% to 18%, which aligns with the preliminary outlook we provided last quarter. This guidance reflects our Q4 performance and our expectation for current macro conditions to persist throughout FY '25. We expect Q1 FY '25 subscription revenue to be $1.81 billion, representing 18% growth. I will highlight that Q1 benefits from an extra day of revenue recognition, given the leap year. Normalized for this, our guided subscription revenue growth in Q1 is approximately 17%. For Q2, we expect subscription revenue to increase approximately 5% sequentially, reflecting typical seasonality in the business when considering the leap year impact of Q1.
We anticipate FY '25 professional services revenue of approximately $630 million to $640 million as we further leverage our partner ecosystem. For Q1, we expect professional services revenue of $163 million. Turning to backlog. As we've highlighted, CRPO growth is influenced by quarter-to-quarter variability in renewal volume, which can impact its growth in any particular quarter. In FY '25, we expect CRPO growth to come off the elevated levels we experienced in FY '24 as we lap periods of strong scheduled and early renewals. Given this variability, we expect CRPO to increase between 17.5% and 18.5% in Q1. We expect FY '25 non-GAAP operating margins of approximately 24.5%. Our outlook contemplates incremental investments across our key growth initiatives while delivering continued margin expansion as we scale and optimize the business.
For Q1, we expect non-GAAP operating margin of 24.5%. GAAP operating margins for the first quarter and full year are expected to be approximately 24 and 21 percentage points lower than the non-GAAP margins, respectively. The FY '25 non-GAAP tax rate is 19%. We expect FY '25 operating cash flow of $2.25 billion, which is impacted by the $100 million of Q4 collections I called out as well as an extra payroll payment we expect to make in FY '25, given the leap year. In addition, we expect FY '25 capital expenditures of approximately $330 million. Our FY '25 outlook takes into account the acquisition of HiredScore, which is expected to close later this quarter. We're pleased with our execution in FY '24, thanks to the support of our customers, partners and Workmates.
With momentum building across our strategic growth areas, we enter FY '25 focused on continuing to invest to drive long-term growth while also expanding margins. Let me turn it back over to Aneel before we begin Q&A.
Aneel Bhusri: Thanks, Zane. Given my new role, this will be my last regularly scheduled earnings call as I fully hand over the reins to the great Carl and Zane. It's been a pleasure getting to know so many of you over the years, and I wanted to give a special thank you to Mark Murphy, Brent Thill, Pat Walravens, Kirk Materne and John DiFucci, who have all been covering Workday since our IPO in 2012, and also to Kash Rangan, who I'm sure wanted to cover us back then but couldn't because his wife was a Workmate at the time. Okay. With that, operator, let's go to the Q&A.
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