Finance and HR software company Workday (NASDAQ:WDAY) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 18.6% year on year to $1.26 billion. Workday made a GAAP profit of $105.7 million, improving on its loss of $28 million, in the same quarter last year.
Workday (WDAY) Q2 FY2022 Highlights:
- Revenue: $1.26 billion vs analyst estimates of $1.24 billion (1.61% beat)
- EPS (non-GAAP): $1.23 vs analyst estimates of $0.77 (60.1% beat)
- Free cash flow of $110.6 million, down 71% from previous quarter
- Gross Margin (GAAP): 72.5%, up from 71.6% previous quarter
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).
As you can see below, Workday's revenue growth has been decent over the last year, growing from quarterly revenue of $1.06 billion, to $1.26 billion.
This quarter, Workday's quarterly revenue was once again up 18.6% year on year. We can see that the company increased revenue by $85.3 million quarter on quarter. That's a solid improvement on the $43.3 million increase in Q1 2022, so shareholders should appreciate the re-acceleration of growth.
Analysts covering the company are expecting the revenues to grow 16.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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, licences, technical support and other necessary running expenses was at 72.5% 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. Significantly up from the last quarter, this is around the 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.
Key Takeaways from Workday's Q2 Results
Sporting a market capitalization of $60.8 billion, more than $3.3 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.
It was good to see Workday outperform Wall St’s revenue expectations this quarter. And we were also glad to see the improvement in gross margin. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is up 2.91% on the results and currently trades at $254 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 solid, and analysts believe that sort of growth is sustainable for now. 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 11.8, 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 it doesn't trade at an unreasonable price point.The Wall St analysts covering the company had a one year price target of $277 per share right before these results, implying that they saw upside in buying Workday even in the short term.
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