Elliott builds a position in Workday after software company unveils a multiyear plan to boost value

Company: Workday (WDAY)

Business: Workday is a provider of an artificial intelligence platform to help organizations manage their people, money and agents. The company provides over 11,000 organizations with cloud solutions powered by AI to help solve business challenges, including supporting and empowering their workforce, managing their finances and spending in an ever-changing environment, and planning for the unexpected. It offers financial management, spend management, human capital management, planning, and analytics applications. The company sells its solutions worldwide primarily through direct sales. It also offers professional services, both directly and through its Workday Services Partners, to help customers deploy its solutions. It offers businesses flexible solutions to help them adapt to their industry-specific needs and respond to change. It serves various industries, including professional and business services, financial services, healthcare, education, government and others.

Stock Market Value: $58.48 billion ($219.01 per share)

Activist: Elliott Investment Management

Ownership: ~3.4%

Average Cost: n/a

Activist Commentary: Elliott is a multistrategy investment firm that manages about $76.1 billion in assets (as of June 30) and is one of the oldest firms of its type under continuous management. Known for its extensive due diligence and resources, Elliott regularly follows companies for years before making an investment. Elliott is the most active of activist investors, engaging with companies across industries and multiple geographies.

What’s happening

Elliott has taken a more than $2 billion position in Workday and expressed its support for the company’s management team.

Behind the scenes

Workday is a cloud-based enterprise software company that provides HR solutions for human capital and financial management. Its human capital platform enables companies to manage workforce and HR processes, while the financials platform supports streamlining financial operations such as accounts payable, procurement and accounting. While the HR software sector is highly competitive, Workday is a dominant player, used by over 11,000 organizations and more than 60% of Fortune 500 companies. Additionally, this is a very sticky business model with a 98% customer retention rate and steady mid-teens revenue growth. Despite this strong backdrop, Workday has significantly underperformed its closest peer group (ServiceNow, SAP and Salesforce) by an average of 13.61, 69.58, and 49.87 percentage points over the past 1-, 3- and 5-year periods, respectively.

Since going public 13 years ago, Workday has embraced a growth at all costs mentality, which has been highly effective, allowing them to grow their revenue base from under $300 million pre-IPO to almost $9 billion now.

The problem with this strategy today is that Workday is now facing the law of large numbers — with such a large revenue base sustaining high growth becomes increasingly difficult. Moreover, despite this hyper growth, Workday has never really generated significant profit and investors have been losing patience. However, the company has recently made a huge change that is the impetus for a plan that should drive tremendous shareholder value — after being led by co-founder Aneel Bhusri since inception, Carl Eschenbach became its full-time CEO in February 2024.

This is not meant to denigrate Bhusri — quite the opposite. Bhusri is a rare visionary who did the hardest part already — building a company from zero to $58 billion. The next stage, efficiently operating a public company is often a different skill set that most founders, particularly one as young as Bhusri, do not recognize should be done by someone else. He deserves a lot of credit for handing over the day-to-day reins and moving up to executive chair. This will allow the company to make a critical fresh start in its strategic direction. And that they just did.

On Tuesday, Workday announced a multiyear plan at its financial analyst day that included a number of value-focused initiatives, such as a $5 billion share repurchase program, cost prevention measures expected to deliver nearly 1,000 basis points of GAAP margin expansion over the next couple of years, and a $15 per share free cash flow target by fiscal year 2028.

Elliott announced on Wednesday that they have taken a more than $2 billion position in Workday and expressed their support of the company’s management team. Many people think that Elliott and “amicable” go together as well as “deafening silence” or “virtual reality,” but Elliott has had significant success in amicable engagements and this will be another example.

Elliott does deep research on all companies and industries they invest in and were likely watching Workday when Eschenbach became CEO, piquing their interest even more. Elliott’s relationship with Eschenbach stems back over a decade to his prior role as president and COO of VMware, where Elliott was a very active shareholder. So, it is no coincidence that Elliott’s decision to make their investment public comes the day after Workday announced their new multiyear plan. Elliott would never take such a significant position in a controlled company (via dual class shares) unless they have had extensive conversations with management and know they were on the same page.

Accordingly, while the board and management should get the credit for this new plan, we can’t help but see Elliott’s fingerprints on it to some extent. Moreover, this will not be a difficult plan to implement.

With more than $8 billion in net cash, Workday has more than enough capital to fund buybacks while retaining an M&A war chest. And as the company is still growing at a healthy clip, margin expansion can be accomplished without cost cutting, but through cost maintenance. Additionally, AI implementation presents a significant opportunity for Workday.

In 2024, the company generated about $150 million in net new AI based revenue — a 200% year over year increase. With many HR functions involving tedious and repetitive processes, Workday is uniquely well positioned to leverage AI to automate its workflows and improve its product offerings.

The company is well aware of this and has already commenced accretive M&A in the space. On Tuesday, Workday announced a $1.1 billion deal to acquire Sana; and last month, the company acquired both Paradox and Flowise.

It is also important to note that a company like Workday that is founder controlled, with Busri holding over 70% voting power through Class B shares, can often be ascribed a governance discount if the market does not believe that the controlling founder will work on behalf of shareholders. A new, unaffiliated body in the C-Suite emboldened by the support of Elliott should go a long way to assuage those concerns.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.