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Morningstar | Workday's Expansion Into Financials Drives Positive Subscription Revenue Outlook

Since Workday was founded in 2005, it has quickly gained traction with large enterprises with its natively built, pure-play human capital management, or HCM, software, having attracted more than 2,300 customers thus far. We believe Workday will continue to have an impressive win rate, rapidly increase its subscription revenue stream, and expand its market share at the expense of incumbents SAP and Oracle. We believe that many customers, particularly large enterprises like Fortune 500 companies, will expand to use Workday as a platform of solutions, including adopting financial management, Adaptive planning, or HCM modules, rather than as a point solution.We view expansion by Workday into a full enterprise resource planning suite that includes supply chain and manufacturing applications as unlikely, but we believe that the addressable market for the company’s current offering is large enough to sustain double-digit revenue growth for at least a decade. Financial management, which we estimate made up 12% of revenue in 2018, will be key to driving future revenue growth, as it currently offers Workday the largest market opportunity.HCM provides employers with a comprehensive system to manage and plan administrative and operational human resources needs such as payroll, benefits, recruiting, and learning and development. Workday has grown rapidly in HCM since its inception, which we attribute to its customer-focused approach and the growing preference for cloud software-as-a-service solutions. All in all, this provides a better user experience and lowers the company’s maintenance requirements.The August 2018 acquisition of Adaptive Insights for $1.55 billion added a third core application to Workday’s offerings: collaborative financial modeling and planning. We believe the addition of Adaptive should be a natural cross-selling opportunity between Workday’s financial management customers and Adaptive’s 4,000 customers, increasing customer stickiness and the likelihood that these customers will adopt Workday’s HCM application as well.