3647

Workday (NASDAQ:WDAY) Surprises With Q1 Sales But Stock Drops


Full Report / May 23, 2024

Finance and HR software company Workday (NASDAQ:WDAY) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 18.1% year on year to $1.99 billion. It made a non-GAAP profit of $1.74 per share, improving from its profit of $1.31 per share in the same quarter last year.

Workday (WDAY) Q1 CY2024 Highlights:

  • Revenue: $1.99 billion vs analyst estimates of $1.97 billion (small beat)
  • EPS (non-GAAP): $1.74 vs analyst estimates of $1.58 (10.1% beat)
  • Full year 2025 subscription revenue guidance: $7.71 billion vs analyst estimates of $7.77 billion (small miss) (next quarter's subscription revenue guidance also slightly below)
  • Gross Margin (GAAP): 75.4%, in line with the same quarter last year
  • Free Cash Flow of $291 million, down 69.4% from the previous quarter
  • Market Capitalization: $68.94 billion

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

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 three years, growing from $1.18 billion in Q1 2022 to $1.99 billion this quarter.

Workday Total Revenue

This quarter, Workday's quarterly revenue was once again up 18.1% year on year. We can see that Workday's revenue increased by $68 million quarter on quarter, which is a solid improvement from the $56.33 million increase in Q4 CY2023. Shareholders should applaud the acceleration of growth.

Looking ahead, analysts covering the company were expecting sales to grow 15.2% 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 75.4% in Q1.

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. Workday's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Workday is controlling its costs and not under pressure from its competitors to lower prices.

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 $291 million in Q1, up 33.4% year on year.

Workday Free Cash Flow

Workday has generated $1.99 billion in free cash flow over the last 12 months, an eye-popping 26.4% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Workday's Q1 Results

We struggled to find many strong positives in these results. Its billings unfortunately missed analysts' expectations. Subscription revenue guidance for next quarter and the full year also came in slightly below expectations. Overall, this was a mediocre quarter for Workday. The company is down 6.6% on the results and currently trades at $243.94 per share.

Is Now The Time?

Workday may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Workday is a good business. Although its revenue growth has been mediocre over the last three years with analysts expecting growth to slow from here, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Given its price-to-sales ratio of 8.1x based on the next 12 months, the market is certainly expecting long-term growth from Workday. There are definitely a lot of things to like about Workday, and looking at the tech landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $314.48 right before these results (compared to the current share price of $243.94), implying they see short-term upside potential in Workday.

To get the best start with StockStory, check out our most recent Stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released. Especially for companies reporting pre-market, this often gives investors the chance to react to the results before everyone else has fully absorbed the information.