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Workday's (NASDAQ:WDAY) Posts Q2 Sales In Line With Estimates


Full Report / August 24, 2023

Finance and HR software company Workday (NASDAQ:WDAY) reported results in line with analysts' expectations in Q2 FY2024, with revenue up 16.3% year on year to $1.79 billion. The company also slightly raised its full-year subscription services revenue and adjusted operating margin guidance. Workday made a GAAP profit of $78.7 million, improving from its loss of $64.2 million in the same quarter last year.

Workday (WDAY) Q2 FY2024 Highlights:

  • Revenue: $1.79 billion vs analyst estimates of $1.77 billion (small beat)
  • EPS (non-GAAP): $1.43 vs analyst estimates of $1.26 (13.6% beat)
  • Free Cash Flow of $361.5 million, up 65.4% from the previous quarter
  • Gross Margin (GAAP): 74.9%, up from 72.5% in the same quarter last year

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.

Surprisingly a lot of companies still rely on a mixture of paper records, spreadsheets and legacy on-premise software to run their finance, HR and resource planning. As a result, critical information is often being siloed in systems that are unable to communicate with each other, and that makes planning and keeping track of expenses slow, error prone and cumbersome work.

Workday offers cloud-based software that integrates all of the finance and HR data and functions as a de facto operating system of the company. Majority of the company’s customers are large enterprises, and Workday often replaces tens of individual, single-purpose software applications. The platform initially started as an HR tool, helping companies manage employee onboarding, payroll, time tracking and recruiting pipelines. Over time it added a similar set of functionalities for the finance teams, providing them with tools for accounting, finance reporting and contract tracking.

The key selling point for Workday is that it offers one, always up-to-date source of truth and system of record for the whole company, doesn’t matter how large or geographically spread. As a result it is also able to provide valuable business insights, for example find departments where high employee turnover might signal looming problems or identify what are the bottlenecks in the hiring process.

Implementing a system like Workday can be a lengthy process, and while cloud-based platforms are easier to onboard, it can still take more than a year. On the other hand it means that the products are naturally quite sticky and hard to leave.

Finance and accounting software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like supply chain and tax management are aggregated into a single, easy to use platforms.

Workday competes with enterprise software vendors like Oracle (NYSE:ORCL) and SAP (NYSE:SAP) as well as modern cloud platforms such as Anaplan (NYSE:PLAN), BlackLine (NASDAQ:BL), and Coupa (NASDAQ:COUP).

Sales Growth

As you can see below, Workday's revenue growth has been solid over the last two years, growing from $1.26 billion in Q2 FY2022 to $1.79 billion this quarter.

Workday Total Revenue

This quarter, Workday's quarterly revenue was once again up 16.3% year on year. We can see that Workday's revenue increased by $102.5 million quarter on quarter, which is a solid improvement from the $38.1 million increase in Q1 2024. Shareholders should applaud the acceleration of growth.

Looking ahead, analysts covering the company were expecting sales to grow 16% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 74.9% in Q2.

Workday Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, Workday's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Workday's free cash flow came in at $361.5 million in Q2, turning positive over the last year.

Workday Free Cash Flow

Workday has generated $1.55 billion in free cash flow over the last 12 months, an impressive 23.2% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.

Key Takeaways from Workday's Q2 Results

With a market capitalization of $60 billion, a $6.66 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Workday has the resources needed to pursue a high-growth business strategy.

It was good to see Workday beat analysts' EPS and free cash flow estimates by a wide margin this quarter. We also enjoyed seeing it lift its full-year revenue and adjusted operating margin guidance, driven by higher expectations for subscription services revenue. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 3.18% after reporting and currently trades at $232.36 per share.

Is Now The Time?

When considering an investment in Workday, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. Although we have other favorites, we understand the arguments that Workday isn't a bad business. However, its revenue growth has been a little slower, and analysts expect growth rates to deteriorate from there. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

The market is certainly expecting long-term growth from Workday given its price to sales ratio based on the next 12 months is 7.6x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Workday doesn't trade at a completely unreasonable price point.

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