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Why Is Workday (WDAY) Down 10.1% Since Last Earnings Report?

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A month has gone by since the last earnings report for Workday (WDAY - Free Report) . Shares have lost about 10.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Workday due for a breakout? 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 Beats on Q2 Earnings & Revenues Estimates

Workday delivered second-quarter fiscal 2020 non-GAAP earnings of 44 cents per share, which beat the Zacks Consensus Estimate of 35 cents. The figure also improved from 31 cents reported in the year-ago quarter.

Robust growth can primarily be attributed to an improvement of 32.2% in revenues, which totaled $887.8 million. The figure outpaced the Zacks Consensus Estimate for revenues of $872 million. The upside was driven by solid growth in subscription and professional services revenues.

Quarter in Detail

Subscription services revenues (85.3% of total revenues) rallied 34% year over year to $757.2 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 $746-$748 million.

Backlogs from Subscription revenue came in at $7.03 billion, up 27% year over year, primarily on the back of growth in net new bookings along with “add-on business and net retention.”

Professional services revenues (14.7% of total revenues) grew 23% from the year-ago quarter’s tally to $130.6 million and surpassed the guidance of $124 million.

Revenues outside the United States improved 35% to $211 million and contributed approximately 24% to total revenues.

In the quarter, the company the upcoming Workday 33 release, with advanced features to aid resource managers support skills resources to projects and provide deeper integration between Workday and Adaptive Insights.

The company witnessed rapid deployment of HCM solution in the second quarter. It was chosen by the likes of Gap, Stanley Black & Decker and Rockwell Automation in North America, Aldi Stores Limited in Europe, and Bunnings Group Limited in Asia-Pacific.

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 13.2% during the quarter, compared with the year-ago quarter’s figure of 13.1%. The year-over-year margin expansion can be attributed to higher revenue base and cost control measures.

Balance Sheet

Cash, cash equivalents and marketable securities were $1.93 billion as of Jul 31, 2019 compared with $1.89 billion in the previous quarter.

Workday generated operating cash flow of $100.3 million compared with previous quarter’s figure of $209.2 million.

Current unearned revenues came in at $1.80 billion, reflecting annual growth of 29%. Total unearned revenues were around $1.89 billion, up 27% from the year-ago quarter’s level.

Guidance

For third-quarter fiscal 2020, Workday expects subscription revenues in the range of $783-$785 million (up approximately 26% sequentially). Professional services revenues are projected at $135 million.

Workday anticipates non-GAAP operating margin of approximately 10.5%.

The company raised fiscal 2020 guidance for subscription services revenues. It now expects subscription services revenues in the range of $3.06-$3.07 billion (previously $3.045-$3.06 billion). Professional services revenues are now projected to be around $520 million (previously $500 million).

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

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -18.41% due to these changes.

VGM Scores

Currently, Workday has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

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

Outlook

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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