WDAY • 10-Q • Q2 2022 • Positive

Workday Shows Resilient Enterprise Demand Despite Macro Headwinds with 22% Growth

August 25, 2022 • 1 min read

TL;DR

Workday delivered strong Q2 results with subscription revenue growing 22.8% YoY to $1.24B, demonstrating continued enterprise software demand despite macro uncertainty. Professional services growth moderated to 3.1% as expected, while total revenue reached $1.54B. Operating margins expanded 230bps YoY to 20.1% showing improved operational leverage. Customer additions remained healthy with 24-month subscription backlog growing 21.5% to $8.37B, suggesting sustained momentum into FY23. Management's

Financial Performance Overview: Subscription revenue accelerated to 22.8% YoY growth reaching $1.24B, up from 22.2% last quarter. Operating margins expanded 230bps YoY to 20.1% driven by improved sales efficiency and disciplined spending. Professional services revenue grew 3.1% to $295M as the company continues shifting toward partner-led implementations. Total revenue of $1.54B beat consensus by $20M while operating cash flow of $114.4M demonstrated strong cash generation despite increased investments. The 24-month subscription backlog growth of 21.5% suggests healthy forward visibility.
Strategic Initiatives and Operational Changes: Management is accelerating its shift toward partner-led implementations while increasing R&D investments in AI/ML capabilities across its platform. The Peakon acquisition is showing strong cross-sell traction with 30% of new deals including employee experience offerings. Geographic expansion continues with international revenue growing 26% YoY. The company is also seeing increased adoption of its financial management solutions alongside core HR, with 50% of Fortune 500 customers now using multiple products.
Market Position and Competitive Dynamics: Workday maintained its leadership position in cloud HCM while gaining share in financials against legacy vendors. Customer retention remained above 95% with expanding product adoption in the base. The company is seeing increased competitive wins against Oracle and SAP in large enterprise deals. Medium enterprise momentum accelerated with 40% growth in new ACV from companies with <10K employees. The TAM expansion into employee experience and analytics represents an incremental $10B opportunity.
Operational Efficiency and Profitability: Gross margins improved 150bps YoY to 74.5% driven by cloud infrastructure optimization and increased scale. Sales efficiency metrics showed improvement with CAC payback periods declining to 18 months from 21 months last year. R&D spending increased 19% YoY but declined as a percentage of revenue. The shift toward partner implementations is improving services margins while reducing operational complexity. Management expects continued margin expansion through FY23.
Growth Catalysts and Material Risks: Key growth drivers include continued core HCM displacement, financial management cross-sells, international expansion, and new employee experience offerings. Macro headwinds pose risks to deal cycles and customer spending, though enterprise software remains relatively resilient. Rising competition from Microsoft and ServiceNow in adjacent markets could pressure growth. Currency headwinds expected to impact revenue by 200bps in second half. Management's maintained guidance suggests confidence in hitting full year targets despite macro uncertainty.

Revenue

$1.54B ( YoY, QoQ) with subscription at $1.24B ( YoY)

↑ +21.9%

Gross Margin

(+150bps YoY) driven by scale and cloud optimization

↑ 74.5%

International

YoY growth, representing significant expansion opportunity

↑ 26%

Multi Product

of Fortune 500 customers using multiple products

↑ 50%

Free Cash Flow

$79.3M ( margin) with strong cash generation

↑ 5.2%

Operating Margin

(+230bps YoY) showing improved efficiency

↑ 20.1%

Growth Indicators

24-month subscription backlog of $8.37B ( YoY)

↑ +21.5%

Customer Count ↑Over 4,000 core HCM customers with >95% retention

Retention Metrics ↑>95% gross retention with expanding product adoption

Partner Ecosystem

of implementations now partner-led

↑ 60%

Key Risks

Macro uncertainty potentially elongating sales cycles (Medium probability, monitored via pipeline metrics)
Currency headwinds impacting revenue by 200bps in H2 (High probability, partially hedged)
Rising competition in adjacent markets (Medium probability, differentiated by platform approach)
Implementation quality with partner-led model (Low probability, strong governance in place)

Key Opportunities

Financial management cross-sell into 50% of HCM base ($5B+ TAM)
Medium enterprise expansion with improved sales efficiency (40% growth in segment)
Geographic expansion particularly in APAC and LATAM (26% international growth)
Employee experience and analytics platform expansion ($10B TAM opportunity)

Bottom Line

Workday's Q2 results demonstrate the company's strong execution and resilient business model despite macro uncertainty. The acceleration in subscription revenue growth, margin expansion, and healthy customer additions suggest enterprise digital transformation spending remains robust. The successful expansion beyond core HCM into financials and employee experience positions Workday well for sustained growth. While macro headwinds and competitive dynamics bear watching, the company's strong market position, high customer retention, and multiple growth vectors provide confidence in the forward trajectory. Key metrics to watch include deal cycle times, cross-sell rates, and international expansion progress. The most compelling insight is that Workday's platform approach and focus on financial management is creating a more defensible and valuable business than many appreciate, with significant potential for continued share gains against legacy vendors.