Workday (NASDAQ:WDAY) Posts Better-Than-Expected Q2

Jabin Bastian /
2021/08/26 4:08 pm EDT

Finance and HR software company Workday (NASDAQ:WDAY) reported Q2 FY2022 results that beat analyst expectations, with revenue up 18.6% year on year to $1.26 billion. Workday made a GAAP profit of $105.7 million, improving on its loss of $28 million, in the same quarter last year.

Is now the time to buy Workday? Access our full analysis of the earnings results here, it's free.

Workday (WDAY) Q2 FY2022 Highlights:

  • Revenue: $1.26 billion vs analyst estimates of $1.24 billion (1.61% beat)
  • EPS (non-GAAP): $1.23 vs analyst estimates of $0.77 (60.1% beat)
  • Free cash flow of $110.6 million, down 71% from previous quarter
  • Gross Margin (GAAP): 72.5%, up from 71.6% previous quarter

“Our business continues to accelerate, fueled by growing demand from large enterprise customers for our industry leading HR, finance, and planning solutions to drive transformation at scale,” said Chano Fernandez, co-CEO, Workday.

Founded by industry veterans Aneel Bushri and Dave Duffield after their former company PeopleSoft was acquired by Oracle in a hostile takeover, Workday (NASDAQ:WDAY) provides cloud-based software for organizations to manage and plan finance and human resources.

Organizations are constantly looking for improving organizational efficiencies and having a single, integrated system in the cloud for finance, HR, and payroll can scale better and be easier to operate than the rag-tag mixture of legacy on-premise systems. The demand is further driven by the fact that integrated HR and finance applications are better able to deal with the increasing amount of compliance, and have the advantage of being able to process data in real time, rather than just keeping track of the past.

Sales Growth

As you can see below, Workday's revenue growth has been decent over the last year, growing from quarterly revenue of $1.06 billion, to $1.26 billion.

Workday Total Revenue

This quarter, Workday's quarterly revenue was once again up 18.6% year on year. We can see that the company increased revenue by $85.3 million quarter on quarter. That's a solid improvement on the $43.3 million increase in Q1 2022, so shareholders should appreciate the re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 16.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Workday's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 72.5% in Q2.

Workday Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Key Takeaways from Workday's Q2 Results

Sporting a market capitalization of $60.8 billion, more than $3.3 billion in cash and with positive free cash flow over the last twelve months, we're confident that Workday has the resources it needs to pursue a high growth business strategy.

It was good to see Workday outperform Wall St’s expectations this quarter. And we were also glad to see the improvement in gross margin. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is up 2.51% on the results and currently trades at $253 per share.

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The author has no position in any of the stocks mentioned.