It seems like Workday has been around forever, ceaselessly nipping at the heels of Oracle and SAP. Actually, it’s been only 10 years since the company was founded, and just under four years since it went public.
At its IPO Workday was valued at $9.5 billion. Today its market capitalization has reached $15.8 billion, and it recently surpassed the $1 billion annual revenue threshold.
That makes it a company with some heft, but its identity essentially remains what it’s been all along: an upstart SaaS firm seeking to pull market share from two monster-sized competitors (market caps of $169 billion and $103 billion, respectively, for Oracle and SAP, and revenue of about $37 billion and $27 billion).
Profitability is still a ways off, with the company spending heavily on R&D, marketing, and talent, although it’s nearly achieved break-even on an operating, non-GAAP basis, subtracting stock-based compensation expense. That last item is a bigger-ticket one than is true at most companies, as every Workday employee receives stock.
The big key for Workday going forward is to make significant market inroads with the suite of cloud-based financial software it’s been building since 2007 to complement its more popular human capital management (HCM) functionality, which is also in the cloud. So far, Workday has gained only a modest degree of traction on the financial side of its business.
Despite competing directly with the two dominant ERP vendors that also sell systems providing both financial management and HCM functionality, Workday doesn’t want to be thought of as an “ERP” company. One of its oft-used marketing slogans is “Alternative to ERP.”
Why? We posed that question, among others, to Workday’s new CFO, Robynne Sisco, who was promoted from chief accounting officer in May after four years with the company. She reports to former finance chief Mark Peek, who’s now co-president and who was also Sisco’s boss at their previous employer, VMware.
An edited version of CFO’s conversation with Sisco follows.
How’s the job going so far?
It’s going well, I think because I’ve been at Workday for a few years so I know a lot about the company and the numbers. I know the leadership teams. So from an internal perspective it’s been very smooth and seamless. But I’ve been spending more time trying to get to know the press, the Wall Street analysts, and the large investors I didn’t know before.
From an internal perspective, in addition to the accounting team I now also have tax, treasury, and financial planning and analysis.
Is doing this job like you thought it would be? Any surprises?
Not yet. I’ve been watching Mark [Peek] do it for so long. But I really want to get my finger more on the pulse of what other CFOs are saying.
Are you going to play a sales role?
I’ve been engaged in the sales cycle for our financials product for the four years I’ve been here. [Potential customers] want to talk to someone who’s actually running on [the software].
Do they trust you to be objective?
Well, I think so. The most important thing isn’t inking the contract — it’s making that customer successful and happy so that we know they’re going to be a customer for a long time. How we do things is as important to us as what we do. We’re not going to lie to a customer to get a contract, because that would erode our reputation and customer satisfaction.
Workday is spending more than 30% of its revenue on R&D, and also more than 30% on sales and marketing. You’re obviously not profitable. What’s the strategy?
If you look at our sales and marketing as a percentage of revenue with a company that’s a lot more mature than us like Salesforce, we’re actually significantly lower. One reason we have an efficient sales and marketing organization is that we don’t have a lot of churn. We’re not constantly losing customers that we have to replace with new sales.
From an R&D perspective, we are consciously spending more than our peers in the SaaS space on continuing to build out the product suite. Building a financials product is really hard — more complicated than HCM. There are a lot more industry-specific requirements, while an HCM product can work across the various industries.
Does anybody ever utter the word “profit” at Workday?
Oh, yes. Last year, on a non-GAAP basis, our operating margin was about break-even. We lost $2.7 million on $1.1 billion of revenue. We’ve said publicly that we’ll be about break-even again this year, but with substantially higher revenue. We’re reinvesting all of our incremental revenue back into the business for both product and international expansion purposes.
But we are at the point in the life-cycle of our company where we need to start showing profitability. That will be one of our focus areas. At the same time, we want to make sure we balance that with the growth that we believe we can continue to achieve and with our company culture, which is very important to us.
R&D spending will trail down, and it already has. That is, we’ll spend more dollars each year, but it will be a lower percentage of revenue as we start focusing on profitability.
How about your share price? Do you look at that? Some CFOs claim that they don’t — that if they do the right things, share price will follow.
Oh, yeah, we look. We’ve got a big stock-based component to our compensation plan. Every single one of our more than 5,500 employees gets stock. Having employee ownership really drives a lot of the great cultural aspects that we have. It ties them to customer success and company success. But what comes with that is that as stock prices move, every employee feels it. So we do watch it.
Was passing the billion-dollar revenue threshold a meaningful hurdle, or is it just a number?
I think it’s a psychologically meaningful hurdle. How many publicly held software companies have made it to $1 billion? I think around 200. And when you get to $4 billion, it’s something like 19.
CFOs are under a lot of pressure these days — demands for more transparent financials, mounting regulatory requirements, changing accounting standards, internal and external demand for better data analytics, accelerating M&A, and greater economic instability. How do you cope with all of that?
You have to have systems that support those things. Otherwise you end up with a massive finance organization full of spreadsheet junkies, who can’t actually stay [on top of] all the regulations and business changes.
We bought a company about a year ago called GridCraft that has spreadsheet technology, and we’ve embedded it into our financials product. You can pull in actuals when doing a forecast or budget. That addresses the issue of moving spreadsheets around through emails, which is very insecure and creates version-control issues.
To what degree is that program like Excel?
It’s very like Excel. It’s got all the functions and formulas that you would expect.
Is it against the law for your accountants to use Excel?
No, it’s not against the law. Someday it might be. But we do use it less because so much more can be done in the system.
Back to the pressures. Is there anything you’re responsible for that might keep you awake at night?
It’s what I touched on earlier — balancing between profitability, growth, and culture. If you go back a couple of years we were trying to balance growth with the culture. Now there’s this third component that we know it’s time to worry about, so how do we introduce that into the mix without jeopardizing the other two?
Is getting to the right mix a matter of trial and error? You move a little bit in one direction, see how things work out, then maybe move further?
I hope not! But I do think it’s about being willing to make tough decisions, because we’re going to have to prioritize. If we’re not going to have the same percentage spend on R&D, what does that mean for the products that our customers want us to build? Should we have better profitability and not build this product? [Should we] build it and let profits be a little lower?
In making decisions like that, how much is based on science and how much on going with your gut?
There’s some of both. You have data and numbers, and in the end you have to do what you think is the right thing.
Right, because things might be happening or starting to evolve out in the world that aren’t yet reflected in any data you have access to.
That’s right. You have to be flexible, because who knows what’s going to happen next with the economy or with currencies. The days when you’d set a budget and stick to it for a year are gone. It’s about continually refining it and adjusting to external forces.
Tell us about your competitors. Are there any, besides Oracle and SAP?
On the large enterprise side, that’s generally it. In the medium enterprise practice, there are other players, like NetSuite.
What’s the smallest company you’ll go after?
We generally don’t do deals with customers under 500 employees.
I assume that’s an apt metric for the human capital management side of your business but not as relevant for your financials product.
It’s the metric for the financials as well. That’s how we price it. We believe that it’s not about how many finance people are in there using the system. It’s about the value that everybody in the company gets out of it, whether it be expense reports or procurement or dashboards that allows managers to manage to their budget and see their real-time actuals.
It’s unlike the old world where the financial systems were accessed only by finance people because they were too complicated and difficult for anyone else to actually get in there and dig around. You really had to be an expert on the system. Now it’s open to everybody. That’s one of our value propositions.
How many customers do you have for your financials product?
About 220. Most of them run the HCM product as well. They generally buy that first, and then we go back and sell them the financials. And in a lot of cases we sell both at once. We do have a couple of customers that bought financials and may someday buy HCM.
I’m sure those systems are integrated, but “integration” could mean a lot of different things. What does integration mean to you?
We wouldn’t actually say they’re integrated, because it’s all one product. Customers buy the right to use certain pieces of it. If you buy all of it, you can look at particular employees and see what security access they have, how much money they make, their home address, what expense reports they’ve filed, what purchase requisitions they’ve done, who works for them. Its HCM and financial data, all connected.
Sounds something like an ERP. So why does Workday refer to its product as the “Alternative to ERP”?
“ERP” tends to be associated with the older, legacy technologies.
But aren’t people who buy those capabilities used to thinking of them as ERP stuff? If you’re not using that term, does it impede you from resonating with customers?
No, I don’t think so. People are starting to feel more comfortable with the cloud.
These days Workday is referring to itself as a provider of “financial management and human capital management” software. Why do you give top billing to the financial side when only a fraction of your customers are using the financial suite?
Because we believe the financials are our biggest opportunity and are the more complex part of the product.
Speaking of human capital management, what’s your view of the shortage of top finance and accounting talent that everybody is talking about?
It’s interesting, because the profile of people we hire is very different from whom I would have hired at previous companies, given that we’re on our own software.
What difference does that make?
It’s less about inputting data and spreadsheet jockeying, because you can get what you need out of the system without having to download everything. It’s more about continuous change in business support and analytics. You still have to do the transactions, but when they’re automated in a better way you can spend less time on them.
The user experience is just like a consumer website. You can go to Amazon and figure out how to buy stuff. Workday is similar in that it’s intuitive. You can go in there and figure out how to get the data you need. So the type of people we hire are more analytical, and they’re people who really like change and will drive change.