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

Full Report / November 18, 2021
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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.

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

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.

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.

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 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.


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

Sporting a market capitalization of $74.6 billion, more than $3.55 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.

We struggled to find many strong positives in these results. Zooming out, we think this was a decent quarter in line with estimates, showing the company is staying on target. But the market was likely expecting more, being used to SaaS companies beating expectations by wide margins and the company is down 6.94% on the results and currently trades at $278 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. We think Workday is a solid business. Its revenue growth has been a little slower, but at least that growth rate is expected to increase in the short term. But on a positive note, 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 13.1x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Workday and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $321.6 per share right before these results, implying that they saw upside in buying Workday even in the short term.

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