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Workday (WDAY) Up 0.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Workday (WDAY - Free Report) . Shares have added about 0.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Workday due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Workday Surpasses Q1 Earnings & Revenues Estimates

Workday delivered first-quarter fiscal 2020 non-GAAP earnings of 43 cents per share, which beat the Zacks Consensus Estimate by couple of cents. The figure also improved from 33 cents reported in the year-ago quarter.

Strong growth can primarily be attributed to a rise of 33.4% in revenues, which totaled $825.1 million. The figure outpaced the Zacks Consensus Estimate for revenues of $814 million. The upside was driven by solid growth in subscription and professional services revenues.

Quarter in Detail

Subscription services revenues (84.9% of total revenues) rallied 34.3% year over year to $701 million on the back of expanding customer base and robust net new ACV growth. Further, synergies from Adaptive Insights acquisition and strong product suite drove revenues in the reported quarter. The figure surpassed management’s guidance of $692-$694 million.

Professional services revenues (15.1% of total revenues) grew 29% from the year-ago quarter’s tally to $124 million and surpassed the guidance of $120 million.

Revenues outside the United States improved 42% to $197 million and contributed approximately 23.9% to total revenues.

During the reported quarter, market research firm Gartner’s May 2019 “Magic Quadrant for Cloud Core Financial Management Suites for Midsize, Large, and Global Enterprises” report put Workday in the “Leaders” quadrant which reflects the company’s growing clout in the cloud market. Notably, Workday was recognized as a Leader for the third year in a row.

The company was ranked #1 on San Francisco Business Times’ list of the best place to work in Bay Area. Additionally, the company was ranked #1 on the list of the Best Large Workplaces in the U.K. by Great Place to Work Institute.

In the quarter, the company unveiled, Workday 32, with more than 500 latest features to aid resource managers support skills resources to projects and provide deeper integration between Workday and Adaptive Insights.

During the reported quarter, Workday in partnership with government agencies and other companies released The Cybersecurity Talent Initiativeto focus on cybersecurity workforce for the future.

The company witnessed rapid deployment of HCM solution in the first quarter. It was chosen by the likes of Carl Zeiss AG, Cisco Systems, Daimler Trucks North America, Old Mutual Limited and Procter & Gamble.

Management is also optimistic regarding the growing clout of Workday Prism Analytics and Adaptive Insights business planning cloud offerings.

The company generated non-GAAP operating margin of 13.1% during the quarter, almost flat on a year-over-year basis.

Balance Sheet

Cash, cash equivalents and marketable securities were $1.89 billion as of Apr 30, 2019 compared with $1.78 billion in the previous quarter.

Workday generated operating cash flow of $209.2 million compared with previous quarter’s figure of $250.5 million.

Current unearned revenues came in at $1.73 billion, representing annual growth of 31%. Total unearned revenues were around $1.83 billion, up 29% from the year-ago quarter’s level.

Guidance

For second-quarter fiscal 2020, Workday expects subscription revenues in the range of $746-$748 million (up approximately 32% sequentially). Professional services revenues are projected at $124 million.

Workday anticipates non-GAAP operating margin of approximately 10%.

The company raised fiscal 2020 guidance for subscription services revenues. It now expects subscription services revenues in the range of $3.045-$3.06 billion (previously $3.03-$3.045 billion). Professional services revenues are projected to be around $500 million.

The company expects non-GAAP operating margin to be almost 12.3%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.55% due to these changes.

VGM Scores

Currently, Workday has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Workday has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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