A month has gone by since the last earnings report for Workday (
WDAY Quick Quote WDAY - Free Report) . Shares have added about 4.6% in that time frame, outperforming 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 Earnings & Revenues Top Estimates in Q3
Workday reported third-quarter fiscal 2021 non-GAAP earnings of 86 cents per share, which outpaced the Zacks Consensus Estimate by 28.36%. Moreover, the bottom line improved 62.3% year over year.
Bottom-line growth can primarily be attributed to an improvement of 17.9% in revenues, which amounted to $1.106 billion. The top line surpassed the Zacks Consensus Estimate by 1.83%. The upside was driven by solid growth in subscription services’ revenues. Quarter in Detail Subscription services revenues (87.6% of total revenues) rallied 21.3% year over year to $968.5 million on the back of expanding customer base. Management had anticipated subscription revenues to be $948-$950 million. Backlogs from Subscription revenues were $8.87 billion, up 23.4% year over year, primarily driven by robust growth in new ACV bookings through both net new and add-on business domains, deal renewals, and net retention of customers. However, the company encountered headwinds in raking in net new business, which limited growth. Management, further, stated that per the company’s subscription model, the headwinds will be more pronounced in “next year’s subscription revenue,” which is anticipated to weigh on growth at least in the near-term. Subscription revenue backlog that will be recognized within the next two years totaled $5.94 billion, up 21%. In the fiscal third quarter, gross retention rate exceeded 95% and net retention, which includes upselling at the time of renewal, was 100%. Professional services’ revenues (12.4% of total revenues) declined 1.6% from the year-ago quarter to $137.4 million. Professional services revenues were projected to be $135 million. Revenues outside the United States climbed 16.2% year over year to $272 million and contributed 25% to total revenues. The company witnessed the rapid deployment of HCM solution in the fiscal third quarter, which was selected by Novartis, DraftKings, CTBC Bank, and Mexico-based Tecnologias Rappi, among others. The company also expanded its Fortune 500 clientele with one of the leading U.S. telecommunications services company adopting its HCM offerings. Key HCM go-lives in the reported quarter included Walmart, Accenture, General Electric and UPS. Workday Financial Management customer base continued to expand to over 1,000, with key wins, including the State of Washington, Fifth Third Bank, University of Central Florida, Extendicare and The New York Times. Moreover, Progressive Insurance and Bon Secours Mercy Health were the key core financials go-lives in the quarter. The company has also been witnessing momentum in its latest offerings, including Workday Adaptive Planning, Spend Management and Prism Analytics. Synergies from Scout RFP acquisition aided Workday to win multiple customers. Markedly, Scout RFP is fully integrated and has been re-branded as “Workday Strategic Sourcing,” which is part of spend management domain helmed by Scout co-founder and CEO, Alex Yakubovich. During the quarter under review, the company rolled out two new offerings, VIBE Central and VIBE Index, to aid HR leaders boost inclusivity, and accelerate belonging and diversity (B&D) initiatives within the workplace. Workday noted that VIBE is the acronym for Value Inclusion, Belonging, and Equity. Additionally, the company announced availability of Workday Accounting Center and Workday Talent Marketplace. Also, Workday People Analytics — an augmented analytics application that delivers deep insights regarding risks and opportunities related to a company’s workforce — is gaining traction. Management is optimistic on the growing pipeline of the latest offerings, including Health, Accounting Center, Extend, and People Analytics, which drove the top line in the reported quarter. In the large enterprise domain, the company inked multiple new Global 2000 (G2K) HCM customer wins and one new Fortune 500 core financial solutions’ deal. Solid momentum across education and government agencies, and a solid pipeline of deal wins are also encouraging. Further, the company witnessed strength across medium enterprise vertical. Moreover, robust performance across the unites states of America and DACH regions remained notable. Margin Highlights
Non-GAAP expenses pertaining to Product development, sales and marketing, and general and administrative climbed 4.7% year over year to $595.4 million. As a percentage of revenues, the figure contracted 680 basis points (bps) on a year-over-year basis to 53.8%. Reduced spend on travel and marketing, program delays, canceled events and more calculated hiring kept expenses in check.
The company generated non-GAAP operating income of $268.1 million, which soared 88% year over year. Consequently, non-GAAP operating margin expanded 900 bps on a year-over-year basis to 24.2%. Balance Sheet & Cash Flow
Cash, cash equivalents and marketable securities were $2.95 billion as of Oct 31, 2020, compared with $2.75 billion as of Jul 31, 2020.
Total debt (current plus non-current) was $1.792 billion as of Oct 31, 2020, compared with $1.79 billion as of Jul 31, 2020. At the end of the fiscal third quarter, the company had access to $750 million of the untapped capacity of revolving credit facility. Workday generated operating cash flow of $293.8 million compared with the prior-quarter figure of $157.2 million. As of Oct 31, 2020, total unearned revenues (including non-current portion) were $2.069 billion compared with $2.07 billion as of Jul 31, 2020. Guidance
For fourth-quarter fiscal 2021, Workday expects subscription revenues of $991-$993 million (indicating year-over-year growth of 18%). Professional services revenues are projected to be $121 million. The company anticipates a non-GAAP operating margin of 15%. Management projects subscription revenue backlog growth in the fiscal third quarter to be in the range of 14-16%.
Workday revised the fiscal 2021 guidance encouraged by robust fiscal third-quarter performance, strong backlog and solid pipeline. The company now expects subscription services’ revenues to be $3.773-$3.775 billion (previously $3.73-$3.74 billion). For fiscal 2021, continues to project Professional services revenues of $525 million. The company anticipates non-GAAP operating margin to be 19%, up from the previously mentioned 18%. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -7.74% due to these changes.
Currently, Workday has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
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.