Carl Eschenbach’s $2 Million Purchase of Workday – Insider Weekends

Key Insights

• One of the largest open market insider purchases by the new Co-CEO of Workday (WDAY) who purchased 8,676 shares at an average price of $240.44 per share.
• Only two other insiders have purchased shares since the company went public at $28 per share in October 2012.
• The company has consistently grown revenue in the high teens or over 20% for the last 12 quarters.
• Workday beat analyst earnings estimates in each of the last four quarters, revised its revenue outlook for the full year higher and saw 24 analysts increase their earnings estimates in the last 90 days.
• Priced at 45 times forward non-GAAP earnings and 31 times forward EV/EBITDA the stock is richly valued and worth considering on a pull back from these levels.
• The money shot that explains why Mr. Eschenbach purchased $2 million worth of Workday can be found deep within his employment agreement.

I’ve held a position in Workday (WDAY) for several years and watched as the company has steadily executed on its core business of providing workforce management or human capital management (HCM) software to large enterprises. The company also provides student management software to universities. Over time the company has expanded its offering into inventory management and financials, the domain of competitors like Oracle (ORCL) and SAP (SAP).

We wrote the following about Workday last December following the sudden departure of its Co-CEO Chano Fernandez and the appointment of board member Carl Eschenbach as the new Co-CEO:

Just months after Oracle completed its acquisition of Peoplesoft, co-founder Dave Duffield and his trusted lieutenant Aneel Bhusri founded Workday (WDAY), a cloud software company focused on enterprise applications like financial management, human resources, and planning.

Messrs. Duffield and Bhusri ran Workday as co-CEOs through May 2014 before Mr. Duffield stepped down from the CEO role and became the Chair of the Board. He resigned from the Chairman role last April. Aneel Bhusri ran the company as its sole CEO until August 2020 when Chano Fernandez stepped into the role of co-CEO.

Chano Fernandez was with Workday for 9 years in various roles after joining the company in 2014.

Earlier this year, on March 16, 2022, private equity firm KKR (of Barbarians at the Gate fame), announced the appointment of Chano Fernandez as a Senior Advisor to KKR’s global technology team.

Workday Taps Board Member as Co-CEO

On December 21, 2022, Workday announced that Carl Eschenbach has been appointed as the new co-CEO after Chano Fernandez informed the Board of his intention to resign from his position as Workday’s co-CEO and a member of the Board effective December 20, 2022.

“Chano has been an integral part of Workday since he joined almost nine years ago and has helped us to achieve great success and growth. We thank him for his many contributions.” said Aneel Bhusri, co-founder and co-CEO of Workday.

Carl Eschenbach, a long-time enterprise solutions executive, who joined premier VC firm Sequoia Capital in 2016 is now heading back to an operating role. As Workday’s new co-CEO, Eschenbach will co-lead Workday with its co-CEO, co-founder and company chair Aneel Bhusri, until 2024, following which he will become sole CEO, and Bhusri will move to the role of Executive Chair.

Mr. Eschenbach has been a partner at Sequoia for nearly seven years and has served on the boards of Snowflake, UiPath, and Zoom Video Communications. He has also been a board member of Workday since 2018.

During his tenure at Sequoia, he sealed a number of deals  including persuading Zoom’s (ZM) founder and CEO Eric Yuan to accept $100 million in Series D funding entirely from Sequoia in 2017. At the time of Zoom’s 2019 IPO, Sequoia owned 11.4% of the company. Sequoia also held an 8.4% stake in Snowflake (SNOW) prior to its IPO in 2020.

Mr. Eschenbach held a number of positions at VMware, including President, Chief Operating Officer, Acting Chief Financial Officer, and Executive Vice President of world wide field operations.

Carl Eschenbach’s Insider Purchase

When Mr. Eschenbach was appointed Co-CEO he received a base salary of $1 million a year, an initial bonus target of 150% of base pay and $50 million worth of Restricted Stock Units (RSUs) that vest over a four year period. He was also granted three additional types of RSUs and it is the third of these that explain his $2 million insider purchase last week.

PVUs: Mr. Eschenbach received $50 million worth of Performance Vesting Units (PVUs) that vest in three tranches. If the stock price is 25% above a certain baseline price during years 1 to 3 of his employment, he receives one-third of the PVUs. If the price is 50% above the baseline during years 2 to 4, he receives the second tranche. When the price rises 75% above the baseline during years 3 to 5, he receives the third tranche.

The baseline price is calculated by using the 45 day trading period before he signed his employment agreement. Looking at the 45 day period before his December 20, 2022 appointment, I get a baseline price of $155.84 or $158.81 depending on how you calculate the 45 day period (trading days vs. calendar days). He was very lucky that the fourth quarter of 2012 was a difficult quarter for tech stocks and the price of Workday had dropped a lot that quarter. Even if we use the lower baseline price of $155.84, the current price of $248.49 is 59% above that level and qualifies him for the first tranche.

Special RSUs: In addition to the base pay, the bonus, RSUs and PVUs, the generous pay package includes $10 million worth of special RSUs.

Additional Special RSUs: We finally get to the part of the employment agreement that explains the insider purchase.  Mr. Eschenbach is entitled to another $5 million worth of RSU provided:

“you purchase shares of the Company’s common stock on the public market with a fair market value of Two Million Dollars ($2,000,000.00) within twelve (12) months following your Start Date”

And that is the money shot as to why he purchased shares on the open market. There are times when you can discover this kind of information by reading the footnotes of the form 4 filing but in this case, the footnotes of his form 4 filing did not specify this arrangement. It indicated that the stock was acquired through an established 10b5-1 plan and indirectly through a trust but made no reference to the “additional special RSUs”.

This is unlike the $5 million insider purchase by the new CEO of Pinterest (PINS) where his form 4 filing clearly specified the following in the first footnote:

“Purchased in connection with Mr. Ready’s employment agreement, pursuant to which the Company has agreed to grant Mr. Ready restricted shares of the Company’s Class A common stock following such purchase. The grant of such restricted shares has not yet been made.”

I would recommend checking out the employment agreement and the 8-K filed on December 20, 2022 for the various nuances tied to Mr. Eschenbach’s employment.

Conclusion 

When I started writing this article, I went into it with an open mind despite the fact that I hold a position in the company. I wanted to see if the stock could rise to $400 in five years and looked at both the comparative valuation as well as ran a DCF model to determine the intrinsic value of the company. It did not matter how I looked at the company, it appeared richly valued.

Which then made me wonder why Mr. Eschenbach was all of a sudden buying even more stock considering the generous stock grants these executives receive. I am glad I decided to dive into his employment agreement as it helped explain the motivation behind the stock purchase. I still think Workday is going to do well in the long run despite growth moderating into the low teens over the next five years but the stock should be on your watchlist to consider buying during general market weakness.

The larger takeaway is to not take insider purchases at face value and to dig in deeper to understand the motivations of the purchaser as well as doing qualitative work to understand if the company is worth buying.

Welcome to edition 697 of Insider Weekends. Insider buying declined last week with insiders purchasing $60.86 million of stock compared to $90.9 million in the week prior. Selling increased to $909.97 million compared to $721.05 million in the week prior.

Sell/Buy Ratio: The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by the total insider purchases that week. The adjusted ratio for last week went up to 14.95. In other words, insiders sold almost 15 times as much stock as they purchased. This week, the Sell/Buy ratio was unfavorable, compared to the prior week when the ratio stood at 7.93.

Notable Insider Buys:

1. Asana, Inc. (ASAN): $21.63

President, CEO, & Chair Dustin A. Moskovitz acquired 320,000 shares of this work management platform, paying $21.57 per share for a total amount of $6.9 million. Mr. Moskovitz increased his stake by 0.76% to 42,362,802 shares with this purchase.

You can view the list of recent insider transactions for Asana, Inc. here.

2. Workday, Inc. (WDAY): $248.49

Co-CEO Carl M. Eschenbach acquired 8,676 shares of this enterprise cloud applications provider, paying $240.44 per share for a total amount of $2.09 million. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Workday, Inc. here.

3. Catalent, Inc. (CTLT): $50.2

Executive Chair John J. Greisch acquired 21,000 shares of this drug manufacturer, paying $50.24 per share for a total amount of $1.06 million. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Catalent, Inc. here.

4. Sirius XM Holdings Inc. (SIRI): $4.50

CEO Jennifer C. Witz acquired 250,000 shares of this audio entertainment company, paying $4.11 per share for a total amount of $1.03 million.

You can view the list of recent insider transactions for Sirius XM Holdings Inc. here.

5. Insulet Corporation (PODD): $192.18

President and CEO James Hollingshead acquired 5,550 shares of this medical devices company, paying $181.41 per share for a total amount of $1.01 million. Mr. Hollingshead increased his stake by 19.39% to 34,177 shares with this purchase.

You can view the list of recent insider transactions for Insulet Corporation here.

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Paylocity Holding Corporation (PCTY): $203.78

Director Steven I. Sarowitz sold 147,278 shares of this software application company for $200.80, generating $29.57 million from the sale.

You can view the list of recent insider transactions for Paylocity Holding Corporation here.

2. Airbnb, Inc. (ABNB): $132.69

Shares of Airbnb were sold by 3 insiders:

• Director Joseph Gebbia sold 174,479 shares for $126.03, generating $21.99 million from the sale. These shares were sold indirectly through a trust.
• Chief Strategy Officer Nathan Blecharczyk sold 40,000 shares for $130.85, generating $5.23 million from the sale.
• Director Jeffrey D. Jordan sold 2,000 shares for $130.00, generating $260,000 from the sale. These shares were sold indirectly through a trust.

You can view the list of recent insider transactions for Airbnb, Inc. here.

3. NVIDIA Corporation (NVDA): $485.09

Shares of NVIDIA were sold by 2 insiders:

• Director Mark A. Stevens sold 52,175 shares for $480.91, generating $25.09 million from the sale. These shares were sold indirectly through a trust.
• EVP & Chief Financial Officer Colette Kress sold 4,980 shares for $460.74, generating $2.29 million from the sale.

You can view the list of recent insider transactions for NVIDIA Corporation here.

4. Salesforce, Inc. (CRM): $221.53

Shares of this CRM technology provider were sold by 4 insiders:

• Chair and CEO Marc Benioff sold 75,000 shares for $213.54, generating $16.02 million from the sale.
• President and CFO Amy E. Weaver sold 16,275 shares for $226.47, generating $3.69 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.
• Co-Founder and CTO Parker Harris sold 12,500 shares for $225.88, generating $2.82 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.
• President/Chief People Officer Brent Hyder sold 2,707 shares for $215.00, generating $582,005 from the sale. These shares were sold as a result of exercising options immediately prior to the sale.

You can view the list of recent insider transactions for Salesforce, Inc. here.

5. Palo Alto Networks, Inc. (PANW): $242.72

Shares of this cybersecurity platform were sold by 4 insiders:

• EVP, Chief Product Officer Lee Klarich sold 45,000 shares for $242.04, generating $10.89 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.
• EVP, Chief Technology Officer Nir Zuk sold 36,000 shares for $241.99, generating $8.71 million from the sale.
• EVP, Chief Financial Officer Dipak Golechha sold 2,000 shares for $239.58, generating $479,160 from the sale.
• Chief Accounting Officer Josh D. Paul sold 325 shares for $242.88, generating $78,936 from the sale.

You can view the list of recent insider transactions for Palo Alto Networks, Inc. here.

You can view the full list of sales from this Insider Sales page.

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium and Plus members.

Disclaimer:  I hold a long position in Workday (WDAY). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.