WDAY • 10-Q • Q1 2023 • Positive

Workday Shows Resilient Growth Despite Tech Slowdown, Operating Leverage Improves

May 25, 2023 • 1 min read

TL;DR

Workday delivered strong Q1 results with subscription revenue growing 20% YoY to $1.43B, demonstrating resilience in enterprise spending. Operating margin expanded 310bps to 23.1% as operational efficiency initiatives took hold. Professional services revenue declined 4% YoY but remains strategically important for customer success. The company maintained full-year guidance despite macro uncertainty, suggesting continued enterprise demand for HR and financial software modernization.

Financial Performance Overview: Total revenue grew 17.4% YoY to $1.72B, with subscription revenue leading at 20% growth. Operating margin hit 23.1%, up 310bps YoY, reflecting improved operational leverage and disciplined spending. Subscription revenue backlog increased 27% YoY to $16.5B, indicating strong future revenue visibility. Customer retention remained above 95%, while average contract value for new customers increased 15% YoY.
Strategic Initiatives and Operational Changes: Management highlighted accelerated AI integration across the platform, including new ML capabilities in HCM and Financial products. The company expanded its partnership with Microsoft for Azure deployment options, addressing customer choice demands. Workday's acquisition of VNDLY is showing early success in contingent workforce management. New product adoption rates are trending above historical averages, particularly in financial management solutions.
Market Position and Competitive Dynamics: Workday maintained its leadership position in Cloud HCM with 40% market share of Fortune 500 companies. The company is seeing increased traction in financial management, with 60% of new customers adopting both HCM and financials. Competition from Oracle and SAP remains intense, but win rates stayed stable. International expansion accelerated with EMEA growing 25% YoY.
Operational Efficiency and Profitability: Gross margin improved 150bps to 75.3% as cloud infrastructure optimization efforts yielded results. Sales efficiency metrics improved with CAC payback period reducing to 18 months from 22 months last year. R&D spending increased 15% YoY but decreased as a percentage of revenue, showing improved investment efficiency. The company achieved positive operating leverage while maintaining strategic investments in AI/ML capabilities.
Growth Catalysts and Material Risks: AI integration and expanded platform capabilities present significant growth opportunities in both HCM and financials. Macro headwinds could impact deal cycles and customer expansion, though enterprise spending remains resilient. Rising cloud infrastructure costs and intense competition for AI talent pose margin risks. International expansion and middle-market penetration represent key growth vectors for FY24.

Revenue

$1.72B ( YoY, QoQ) with subscription revenue at $1.43B ( YoY)

↑ +17.4%

Rd Spend

$496M ( YoY) representing of revenue

↑ +15%

Net Income

$78.6M (vs -$90.2M YoY) marking sustained GAAP profitability

Gross Margin

(+150bps YoY) driven by cloud optimization

↑ 75.3%

Free Cash Flow

$532M ( YoY) with margin

↑ +42%

Operating Margin

(+310bps YoY) showing operational leverage

↑ 23.1%

Growth Indicators

Over 10,200 customers ( YoY)

↑ +12%

Arr Or Bookings ↑$16.5B subscription backlog (+27% YoY)

Retention Metrics ↑>95% customer retention rate

Key Risks

Elongated enterprise sales cycles could impact growth trajectory
Rising cloud infrastructure costs threatening margin expansion
Intense competition for AI talent driving up R&D costs
Data privacy and AI governance requiring increased investment

Key Opportunities

AI integration across platform expanding TAM and competitive moat
International markets present significant growth potential, especially EMEA and APAC
Middle-market penetration remains underdeveloped with large addressable market
Platform expansion into adjacent areas like procurement and supply chain

Bottom Line

Workday's Q1 results demonstrate the company's ability to balance growth and profitability while executing on strategic initiatives. The combination of strong subscription revenue growth, expanding margins, and accelerating platform adoption suggests sustainable momentum. Key metrics to watch include AI adoption rates, international expansion progress, and operating leverage sustainability. The company's strategic positioning in enterprise software modernization, coupled with disciplined execution, positions it well for continued success despite macro uncertainties.