3647

Workday (NASDAQ:WDAY) Reports Q3 In Line With Expectations But Stock Drops


Jabin Bastian /
2021/11/18 4:11 pm EST
Add to Watchlist

Finance and HR software company Workday (NASDAQ:WDAY) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 20% year on year to $1.32 billion. Workday made a GAAP profit of $43.4 million, improving on its loss of $24.3 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) Q3 FY2022 Highlights:

  • Revenue: $1.32 billion vs analyst estimates of $1.32 billion (small beat)
  • EPS (non-GAAP): $1.10 vs analyst estimates of $0.87 (27% beat)
  • Free cash flow of $351.3 million, up from $110.6 million in previous quarter
  • Gross Margin (GAAP): 72.8%, in line with same quarter last year

“We delivered another strong quarter as we continue to expand our addressable market through our diverse product portfolio and multiple go-to-market levers, helping to support our sustained growth,” said Aneel Bhusri, co-founder, co-CEO, and chairman, 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 measured over the last year, growing from quarterly revenue of $1.1 billion, to $1.32 billion.

Workday Total Revenue

This quarter, Workday's quarterly revenue was once again up a very solid 20% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $66.9 million in Q3, compared to $85.3 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 19% over the next twelve months, although estimates are likely to change post earnings.

There are others doing even better than Workday. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 400% since the IPO in December. You can find it on our platform for free.

Profitability

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, licenses, technical support and other necessary running expenses was at 72.8% in Q3.

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. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Workday is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Workday's Q3 Results

With a market capitalization of $74.6 billion, more than $3.55 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

Zooming out, we think this was a decent quarter in line with estimates, showing the company is staying on target. But investors might have been expecting more, getting used to SaaS companies beating estimates by wide margins and the company is down 6.61% on the results and currently trades at $279 per share.

Should you invest in Workday right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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