Finance and HR software company Workday (NASDAQ:WDAY) reported results ahead of analyst expectations in the Q2 FY2023 quarter, with revenue up 21.8% year on year to $1.53 billion. Workday made a GAAP loss of $64.1 million, down on its profit of $105.7 million, in the same quarter last year.
Workday (WDAY) Q2 FY2023 Highlights:
- Revenue: $1.53 billion vs analyst estimates of $1.51 billion (1.11% beat)
- EPS (non-GAAP): $0.83 vs analyst estimates of $0.80 (3.11% beat)
- Free cash flow was negative $54.2 million, down from positive free cash flow of $380.9 million in previous quarter
- Gross Margin (GAAP): 72.4%, in line with 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).
As you can see below, Workday's revenue growth has been strong over the last year, growing from quarterly revenue of $1.26 billion, to $1.53 billion.
This quarter, Workday's quarterly revenue was once again up a very solid 21.8% year on year. On top of that, revenue increased $101.1 million quarter on quarter, a very strong improvement on the $58.5 million increase in Q1 2023, which shows re-acceleration of growth, and is great to see.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 19.4% over the next twelve months.
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 72.4% in Q2.
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 lower 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.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Workday burned through $54.2 million in Q2, with cash flow turning negative year on year.
Workday has generated $1.21 billion in free cash flow over the last twelve months, an impressive 21.4% of revenues. This extremely high FCF margin is a result of Workday asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Workday's Q2 Results
Sporting a market capitalization of $40.7 billion, more than $6.29 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.
Workday topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is up 8.38% on the results and currently trades at $176.03 per share.
Is Now The Time?
When considering Workday, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Workday is not a bad business. Its revenue growth has been solid. And on top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
Workday's price to sales ratio based on the next twelve months is 6.1x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While Workday wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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