This is my first DD so take that into account. I really just started trading so I want to make that clear. I saw someone ask about this company in Trading Desk and I have followed this stock for a while and my company uses it. So here goes.
Company
Workday is a SaaS vendor in the Human Capital Management and ERP/Financials market. The company’s original solution is a cloud-based Human Capital Management applications that allows organizations to staff, pay, organize, and develop their workforce. This has become increasingly important with the labor issues around Covid as companies need to hire and retain employees at a fast rate. Its HCM suite includes core HR Management, Talent Optimization, Recruiting, Payroll, Expense, Time Tracking, Learning, Workforce Planning, People Analytics, Employee Experience. In 2009 the company launched WDAY Financial Management financial applications including core Financial Management, Spend Management, Financial Planning, Analytics, Accounting Center. WDAY has ~8,000+ customers and reported revenue of $4.3 bln in FY21 (ending Jan).
Thesis
Since the pandemic, WDAY has seen more supressed growth (into the teens) than others, but macro environment suggests the velocity of WDAY deal activity is elevating and the company has been really aggressive in hiring sales guys. They have been offering big sign on bonuses to new sales people and hiring them as fast as they can since Q1 (April).
- The wind is in their sails with tighter labor market + hybrid work likely to drive more investment in HCM suites. Supporting hybrid work structures is requiring new kinds of workforce mgmt approaches. These are catalysts for co’s to modernize HCM platforms which should lead to a higher investment priority for HCM suites. In addition, the market is seeing increased spending on financial and back office apps is poised to rebound. Recent beats by Salesforce and Oracle show companies are getting back to normal and buying these sorts of apps again as they need to move these into the cloud.
- Strengthening renewal base next year + lots of new product to sell. After facing a weaker book of renewal business in FY2021(Jan, 2021), WDAY is positioned to see a more robust renewal book in FY2022 (Jan, 2022).
- At their recent analyst day, mgmt noted net-new Annual Contract Value comprises of 60% new customer land / 40% expansion into existing customers, a big mix-shift from 80/20 in prior years. It is much harder and takes mores time to land new customers and increasing wallet share in their existing customer base shows there are strong opportunities to cross sell products to expand growth.
- WDAY has been investing heavily to expand its product portfolio across both the HR and Finance apps markets, which gives the co. an increased number of customer entry points, a larger addressable market to target and a broader platform strategy. Many new products are early in the cross-sell phase and thus giving it ample opportunity to drive up attach rates. Below, is the list of WDAY’s add-on products and attach rates.
| Product Attache Rate | |||
|---|---|---|---|
| July 2019 | July 2021 | Change | |
| Procurement | 22% | 26% | 24% |
| Time Tracking | 63% | 65% | 2% |
| Expense | 33% | 35% | 2% |
| Payroll | 61% | 62% | 1% |
| Financials | 28% | NM | NM |
| Planning | 18% | 30% | 12% |
| Learning | 34% | 45% | 11% |
| Recruiting | 70% | 73% | 3% |
| Analytics | 9% | 9% | 0% |
| Talent Optimization | NM | 23% | NM |
| Workforce Planning | NM | < 10% | NM |
| Strategic Sourcing | NM | < 10% | NM |
| Help/Journeys | NM | < 10% | NM |
| Extend | NM | < 10% | NM |
| Peakon | NM | < 10% | NM |
| Accounting Center | NM | < 10% | NM |
- WDAY has been more aggressive in adding sales capacity this year and have increased sales headcount by over 11% & plan to continue being more aggressive into next year. We should start seeing acceleratied growth in productive sales capacity this quarter.
- WDAY has outlined plans to grow subscription revs at a ~20% CAGR post FY22 until it reaches $10b in revenue, higher than other big cap software companies which implies mgmt’s growing confidence in growth capacity & execution
Valuation
Shares are up ~25% YTD, but under performing some large cap growth peers like CRM & ADBE up ~35-40%. Shares trade at ~12x EV/CY22E Sales, a discount to the 20-30% growth SaaS comp stocks at ~14x. Recently analysts have started to increase their price targets to around $350, implying subscription growth higher than 20%.
Conclusion
This is a long play, but with likelihood of a beat tonight with a guide up. Lotto ticket and some shares or long dated options could play out. Make your own decision though.