WDAY • 10-Q • Q3 2022 • Positive

Workday Shows Resilient Enterprise Demand Despite Macro Headwinds with 20.5% Growth

November 29, 2022 • 1 min read

TL;DR

Workday delivered strong Q3 results with subscription revenue growing 22.3% YoY to $1.43B, demonstrating resilient enterprise demand. Professional services growth moderated to 8.5% but margins expanded 230bps to 24.4%. The company maintained full-year guidance despite FX headwinds and macro uncertainty, supported by 98.5% subscription revenue retention. New product adoption in financial management and analytics suggests expanding wallet share within existing customers. Long-term growth trajector

Financial Performance Overview: Total revenue grew 20.5% YoY to $1.6B, with subscription services leading at 22.3% growth to $1.43B. Operating margin expanded 230bps to 24.4% driven by improved subscription gross margins and operating leverage. Professional services revenue growth moderated to 8.5% YoY as the company shifts focus to partner-led implementations. Backlog remains healthy at $14.1B (+21% YoY) with strong customer adds in core HCM and growing Financials penetration.
Strategic Initiatives and Operational Changes: Management highlighted accelerated adoption of Workday's expanded platform offerings, particularly in Financial Management and Analytics. The company is investing heavily in AI/ML capabilities, with over 50% of customers now using skills cloud and talent marketplace features. Partnership expansion with Microsoft and Google Cloud demonstrates platform strategy evolution. Key focus on enabling partner-led implementations to improve scalability while maintaining margins.
Market Position and Competitive Dynamics: Workday maintained its leadership position in cloud HCM with 98.5% subscription revenue retention. The company is seeing increased competitive wins in financial management against legacy vendors, particularly in mid-market. Customer count grew 15.8% YoY to over 9,500 core customers, with 35% now using multiple Workday products. Geographic expansion continues with international revenue now representing 25% of total revenue.
Operational Efficiency and Profitability: Subscription gross margin improved 120bps YoY to 85.2% reflecting platform scalability and cloud optimization efforts. Operating leverage drove 230bps margin expansion despite 18% headcount growth and continued R&D investments at 29% of revenue. Free cash flow margins reached 25.3%, up from 23.1% in prior year, demonstrating improving operational efficiency and strong cash generation.
Growth Catalysts and Material Risks: Key growth drivers include continued legacy displacement in core HCM, expanding financial management penetration, and cross-sell of newer analytics and planning products. Primary risks include elongating sales cycles in certain verticals, FX headwinds impacting international growth, and increasing competition in financial management. Management cited strong pipeline but acknowledged some deal scrutiny in current macro environment.

Revenue

$1.6B ( YoY, QoQ) with subscription at of total

↑ +20.5%

Rd Spend

$464M ( YoY) at of revenue

↑ +18%

Net Income

$43.3M (vs. $43.4M YoY) with improving operating leverage

Gross Margin

(+120bps YoY) for subscription services

↑ 85.2%

Free Cash Flow

$406M ( YoY) with margin

↑ +31%

Operating Margin

(+230bps YoY) with efficiency gains

↑ 24.4%

Growth Indicators

$14.1B backlog ( YoY)

↑ +21%

Customer Count ↑9,500+ (+15.8% YoY)

Retention Metrics ↑98.5% subscription revenue retention

Key Risks

Elongating sales cycles in retail/consumer verticals with 10-20% longer close times
FX headwinds creating 300bps growth drag requiring price adjustments
Increasing competition in financial management from cloud and legacy vendors
Talent retention costs remaining elevated in competitive labor market

Key Opportunities

80% of Global 2000 still using legacy HCM solutions ($20B+ TAM)
Financial management penetration at only 12% of customer base
Geographic expansion with international at 25% of revenue
AI/ML capabilities driving analytics and planning adoption

Bottom Line

Workday delivered strong Q3 results demonstrating the mission-critical nature of its solutions and successful platform expansion strategy. Growth remains healthy across core and emerging products while operational efficiency continues improving. The company appears well-positioned to navigate near-term macro uncertainty while investing in long-term growth initiatives. Key metrics to watch include deal cycle times, cross-sell rates, and international growth trajectory. The shift from single-product HCM vendor to multi-product platform company progresses successfully with expanding margins.