Despite subscription-revenue growth of 19%, ongoing strength in key verticals, and 24% growth in total subscription-revenue backlog, Workday has trimmed revenue projections for the rest of the year as some customers are taking much longer to sign off on big deals.
Workday’s decision to revise its FY25 guidance triggers key questions about what’s going on in the market:
- Is this “elevated scrutiny” unique to Workday, or will other enterprise-applications vendors feel the same effect?
- What about the AI Revolution — is the Workday pullback an indication that customers are less bullish on GenAI’s potential?
- Are business customers beginning to reduce IT spending across the board, with Workday just happening to be the canary in the coal mine?
Before we get to the answers to those questions, I want to share some key details from Workday’s fiscal Q1 results for the three months ended April 30 that will shed some light on what’s going on with the #7 company on the Cloud Wars Top 10:
- subscription revenue up 19% to $1.82 billion;
- total revenue up 18% to $1.99 billion;
- U.S. revenue up 18% to $1.49 billion;
- international revenue up 18% to $497 million;
- 12-month subscription-revenue backlog up 18% to $6.6 billion;
- total subscription-revenue backlog up 24% to $20.7 billion; and
- total customer count of 10,500, including more than 60% of the Fortune 500.
Pretty solid Q1 performance, right? So why the decision to trim full-year guidance for the fiscal year ending Jan. 31 by $35 million?
Two primary reasons cited by Workday CEO Carl Eschenbach are additional levels of scrutiny being applied by customers, and slower headcount growth among Workday customers, which leads to fewer seats being purchased.
Here’s how Eschenbach broke the news during the company’s recent Q1 earnings call, and then I’ll offer additional perspectives made by Eschenbach and CFO Zane Rowe during that earnings call last week.
“Our first quarter is always our seasonally slowest,” Eschenbach said during his opening remarks.
“We had clear areas of outperformance, including healthcare, public sector, and continued strength in financials and full platform wins. But we also closed fewer large deals than last Q1, notably in EMEA. When purchase decisions are being made, our win rates remain strong. But within the quarter, we experienced increased deal scrutiny as compared to prior quarters” [emphasis added].
“And we are seeing customers committing to lower headcount levels on renewals compared to what we had expected. We expect these dynamics to persist in the near term, which is reflected in our revised FY ’25 subscription-revenue guidance.”
CFO Rowe pointed out that the elongated buying decisions are happening primarily in EMEA (Europe, Middle East, and Africa).
“At the same time, we experienced elevated scrutiny in our sales cycle, particularly in EMEA,” Rowe said.
“Within our customer base, we continue to see expansion primarily through product add-ons versus customer-headcount growth which has slowed relative to our expectations.”
During the Q&A portion of the call, most of the questions from financial analysts were about the revised guidance and the “elevated scrutiny” from customers that led to that revision.
In reply to the first such question, Eschenbach was quite blunt when describing how the change in customer behavior emerged for the very first time in Q1.
“Number one, I think for the last year and a half we haven’t seen any material change to the macro, meaning we haven’t seen any additional scrutiny one way or the other — in fact, it’s been rather consistent,” he said.
“But this quarter, we did” — particularly involving large deals and net new deals. In addition, Eschenbach said, Workday’s intensified focus on selling what it calls “the full platform” — both HCM and Financials — requires the Workday sales team to meet with relatively large numbers of customer executives from across the C-suite.
“We did see a bit more scrutiny specifically on large deals and net-new deals, and that wasn’t just in the U.S. — it was truly around the world,” Eschenbach said.
“Some of that may be because we’re talking to our customers about full platform deals — we’re no longer just talking about HCM deals — and when we sell full platform, particularly in the large enterprise market, we are selling to multiple buyers. We’re selling to the CHRO, we’re selling to the CIO and the CFO, which makes it a little bit more of a complex deal for us, which makes some of these sales cycles a bit longer.”
Eschenbach brushed aside the suggestion that competitors are taking share from Workday and insisted that the primary issue is simply that customers are taking longer to commit.
“That being said, when customers do make decisions, we’re clearly winning our fair share of both HCM, Financials, and full-platform deal. So definitely some more scrutiny than we’ve seen in the past.”
CFO Rowe agreed that the dynamic behind the revised revenue guidance is customer behavior rather than competitive incursions.
“It’s just been a slowing effect,” Rowe said. “That’s the part that’s impacted us more so than actually losing deals. In fact, win rates have come in nicely aligned with where we’ve seen them historically.”
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Final Thought
Several weeks ago, Workday hosted its annual Innovation Summit for analysts and the company rolled out a stunning array of new products and capabilities all centered on AI, the power of a single data model, improved and appealing user interfaces, and security.
So I can say with great confidence that Workday technology and product strategy are definitely not the culprits here.
And while the euphoric outlooks among customers caught up in the heady early days of the AI Revolution might have led to some excessive spending in the back half of 2023, even the greatest growth market the world has ever known is subject to the ebbs and flows of the global economy.
With those cycles in mind, the high-energy Eschenbach insisted that Workday is superbly positioned to do well throughout 2024 and on into the future, regardless of how much time customers take to make their decisions.
“We have a solid number of large opportunities in front of us and these opportunities, while there is more scrutiny, we think we have a really good chance of closing them throughout the rest of the year,” Eschenbach said. “And as you know, in any given quarter, these larger transactions can be pushed out, sometimes pushed out one or two quarters, and in some cases we pull them in.
“But I think what’s really important to know is none of the larger opportunities that didn’t close in Q1 moved out of our pipeline. When a customer makes a decision to go to a big transformation on a platform like Workday HCM and Financials, it’s not if they’re going to do it — it’s when they’re going to do it.”
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