What Workday’s New CFO Says About the Quest for Profitability
A common refrain during business software company Workday’s past two quarterly financial updates has been the growth for its cloud financial management software. That product’s performance will be in the spotlight again after the market close on Wednesday when Workday issues its second-quarter financial results.
Based on an average of Wall Street estimates, Workday (WDAY) is expected to post a 32% revenue increase for the quarter to around $373 million. They’re expected a loss of two cents per share, compared with a profit of two cents for the same quarter one year ago.
Workday is expanding beyond its stronghold in cloud human resources systems into management software, delivered via cloud services, for finance teams. Last year, it restructured its sales team to accelerate adoption, winning over big accounts such as insurance giant Aon and commercial real estate powerhouse Cushman & Wakefield. But these are long sales cycles, and at least one analyst, Needham’s Scott Berg, isn’t expecting much progress in this latest quarter, based on a research note he published earlier this week.
We like Workday’s long-term strategy and believe its significant push into financials is the right strategic move, but our checks continue to suggest the high end of the human resource management software market remains slow and competitive, along with financials sales remaining difficult as customers don’t seem ready for a cloud solution, and functionality not quite complete yet.
One of the more innovative features of the Workday financial management solution, a model that helps with business planning, is due before the end of 2016. Its acquisition of startup Platfora in July points to ongoing investments in the software’s predictive analytics features.
Although Workday’s stock took a hit early this week based on the Needham commentary, its shares have already recovered most of that ground. The company was trading at $80.40 around midday Wednesday.
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Another theme likely to be sounded during Workday’s conference call: its quest to improve profitability, a big strategic priority for its new CFO Robynne Sisco, who has been in her position for about four months. Sisco was previously Workday’s chief accounting officer. Prior to that, she held positions at companies including VMware (VMW), VeriSign (VRSN), and Oracle (ORCL).
How hard will that be? Workday was “break even” for its last fiscal year and is hoping for the same during its current one. Fortune caught up with Sisco in mid-July to discuss her evolving agenda. Here are excerpts from that interview, edited for clarity and length.
Fortune: What is your primary focus?
Sisco: Really three key areas. Growth, which has been a focus area for us, obviously, for quite some time and how do we continue to grow at a fast clip, because that’s what everybody wants of us. Culture, which is another important element to us. How do we maintain the culture? Not just over time but as we expand internationally, as we grow and get bigger, over 5,500 employees. How do you make sure the culture can continue to live on as you grow and expand and change as a company? And we’ve added a third. Profitability has been a core value of ours since Day One, but we have not had it as a focus area because we’ve been really focused on the growth story. Now that we’re over $1 billion in revenue, it’s really time for us to start focusing on profitability. Our challenge will be how we balance the three.
What is it about the profitability metric that seems so difficult for cloud software companies?
I don’t know that it’s difficult. It’s about prioritization. We were break-even last year. We have publicly said we expect to be about break-even this year. It’s all about us wanting to invest in our product. We have a huge market opportunity. We have huge technological advantages over our competitors. A lot of our value proposition is our continuous innovation of our product, that we deliver to our customers at no extra cost. And wanting to build Planning, build Learning, build Student as well as continue to enhance the products we already have. How do we balance that investment with profitability?
In the early days, it’s about building the product and really taking what you’ve earned and—in the early days more than what you’ve earned—and reinvesting it back into the product. If you look at our R&D compared to a more mature cloud company like a Salesforce (CRM), you’ll see that it’s significantly higher because we’re trying to invest in the product, and we’ve got a lot we want to do on that front. But you do reach a point, where we’re at now, where you realize it’s time for us to turn the corner. We can’t keep reinvesting every incremental dollar we make back into the product. We have to find a balance that allows us to move toward profitability.
What does that mean about your R&D investment?
We will be extremely thoughtful and deliberate about what that looks like. We will still spend more on R&D every year, going forward into the future. It just means that there will be some incremental revenue we let fall to the bottom line. The other thing that we’re doing: we need to really take advantage of the scale that we have as a company when it comes to the suppliers that we use, whether it be travel suppliers or other types of vendors that we use. We are now a large enough company that we’ve got buying power.
One promise of cloud financial management systems is the notion that companies can move away from an annual budget cycle and do this more on an ongoing basis. Is this realistic?
We are continually forecasting. When Workday Planning comes out later this year, when we go on that, then we will be on a more continuous budgeting mode. I think there will always be an annual cycle around board approvals and those sorts of things. We still need to look it in one-year terms for things like guidance, but we will start to plan further out and hope to get to a point in the near future where we are doing continuous—like 18 months or 24 months—longer continuous cycles.
It is a very acquisitive time in the software industry right now. What is Workday’s acquisition strategy?
You’ve seen us buy smaller technology “tuck-ins,” and that’s what you’re like to continue to see. We feel like part of the big story or value proposition is having a single technology, a single platform. We don’t have these “bolt-ons,” like our competitors do. We don’t expect to buy products that have significant revenue streams and bolt them on, because that goes against our core philosophy. What we do do is go out and try to identify cool technologies that we can embed in our product, that are invisible to the customer.
Are you seeing increased pressure from big legacy business software companies?
We actually haven’t seen the tactics change much in the last several years. They are using pricing to lure customers onto their cloud products, depending on how you define cloud. That pressure is being offset by the fact that they can’t show live happy customers at scale.