WDAY • 10-Q • Q2 2024 • Positive

Workday Shows Resilient Growth with 17% Revenue Jump Despite Enterprise Tech Slowdown

August 28, 2024 • 1 min read

TL;DR

Workday delivered strong Q2 results with total revenue growing 16.6% YoY to $1.79B, demonstrating resilience in enterprise spending. Subscription revenue accelerated to 18.1% YoY growth, reaching $1.62B, while operating margins expanded 460bps to 24.1%. The company is seeing increased traction in its financial management solutions, which now represent 20% of new ACV. AI initiatives and international expansion are driving growth, with non-US revenue now at 25% of total. Looking ahead, management

Financial Performance Overview: Subscription revenue growth accelerated to 18.1% YoY, marking the third consecutive quarter of acceleration. Operating margins expanded significantly to 24.1%, up 460bps YoY, driven by improved sales efficiency and platform scale. Professional services revenue grew more modestly at 4.8% YoY to $171M, reflecting strategic shift toward partner delivery. Current remaining performance obligations (cRPO) grew 19% YoY to $7.5B, indicating strong forward visibility. Notably, gross margins improved 150bps to 74.3% on improved cloud infrastructure efficiency.
Strategic Initiatives and Operational Changes: Workday is accelerating its AI integration strategy with the launch of Workday AI Marketplace and VIBE Solutions. The company expanded its partnership with Microsoft for Teams integration and Azure deployment options. Management highlighted success in cross-selling financial solutions to HR customers, with 50% of new financial management customers coming from existing base. The company is also increasing focus on industry-specific solutions, particularly in healthcare and financial services, to drive deeper vertical penetration.
Market Position and Competitive Dynamics: Workday maintained its leadership position in HCM with 60% of Fortune 500 companies now as customers. The company is gaining ground in financials against legacy vendors, with 40% win rates in competitive replacements. Customer retention remained strong at 95%+ for core products. International expansion is accelerating with 30% YoY growth in EMEA and new datacenter investments in Germany and Japan. The company faces increasing competition from Oracle and SAP in integrated cloud suites.
Operational Efficiency and Profitability: Operating leverage improved significantly with sales and marketing expenses declining as percentage of revenue by 200bps to 28.4%. R&D investment remained strong at 21% of revenue but showed improved efficiency. Cloud infrastructure costs decreased 8% per customer YoY through optimization initiatives. The company generated $380M in operating cash flow, up 25% YoY, with free cash flow margins expanding to 19.2%. These improvements appear sustainable given increasing platform scale and automation.
Growth Catalysts and Material Risks: Key growth drivers include AI-powered product innovations, international expansion, and continued migration of legacy systems to cloud. The medium-term target of $10B in subscription revenue by FY26 appears achievable given current trajectory. Primary risks include elongating enterprise sales cycles, increasing competition in financials, and potential macro headwinds affecting IT budgets. Management is mitigating these through increased focus on ROI-driven sales motions and industry-specific solutions.

Revenue

$1.79B ( YoY, QoQ) with subscription at $1.62B ( YoY)

↑ +16.6%

Rd Spend

$375M ( YoY) representing of revenue

↑ +15%

Net Income

$147.1M (vs $43.8M YoY) with significant margin expansion

Gross Margin

(+150bps YoY) driven by cloud efficiency

↑ 74.3%

Free Cash Flow

$343M ( YoY) with margin

↑ +22%

Operating Margin

(+460bps YoY) reflecting improved scale

↑ 24.1%

Growth Indicators

Over 4,500 core customers with Fortune 500 penetration

↑ 60%

Arr Or Bookings ↑$7.5B cRPO (+19% YoY)

Retention Metrics ↑95%+ gross retention, 120%+ net revenue retention

Key Risks

Macro headwinds affecting enterprise IT spending - potential 10-20% deal cycle extension
Increasing competition from Oracle/SAP in integrated suites - 40% win rate at risk
International expansion execution risks with new market entries
AI investment returns uncertain with significant R&D commitment

Key Opportunities

Financial management expansion ($10B+ TAM with only 20% current penetration)
International markets (75% revenue still US-based with 30% international growth)
AI-driven product innovation creating competitive moats
Industry vertical solutions expanding addressable market

Bottom Line

Workday's Q2 results demonstrate the company's successful evolution from HCM leader to comprehensive enterprise platform provider. Strong execution across financial, operational, and strategic initiatives positions the company well for sustained profitable growth. The combination of AI innovation, international expansion, and financial management traction creates multiple growth vectors. Key metrics to watch include financial management adoption rates, international revenue mix, and AI-driven competitive wins. The contrarian insight is that Workday's platform approach and AI investments may be creating more sustainable competitive advantages than currently recognized by the market.