Shares of finance and HR software company Workday (NASDAQ:WDAY) jumped 6.3% in the morning session after the company reported third quarter results with revenue narrowly outperforming Wall Street's estimates despite a slight billings miss. Management added that the topline results were driven by "broad based strength across net-new and customer base teams, medium and large enterprise and across regions, notably, the U.S. and EMEA." Twelve and twenty four-month backlogs (which are leading indicators of revenue) were strong in the quarter and ahead of Consensus. According to the company, these benefited from strong new bookings and renewals in the quarter, with early renewals exceeding management's internal expectation. Management again saw strength in full platform deals where customers are not just buying single products or features but an entire suite of products. In addition, the company beat on non-GAAP operating income, showing that expense control is solid, and outperformance on the free cash flow line was also welcome. It was also encouraging that the company raised its full year outlook for both subscription revenue and non-GAAP operating margin. Zooming out, we think this was a very good quarter, showing that the company is not just staying on target but exceeding expectations.
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What is the market telling us:
Workday's shares are somewhat volatile and over the last year have had 6 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 6 months ago, when the stock gained 11% on the news that the company delivered an impressive "beat and raise" first quarter, surpassing analysts' expectations across key topline metrics such as total billings, total revenue, and subscription revenue. Profitability metrics also came in strong as gross margin and non-GAAP operating income were ahead of Consensus. However, there was a decline in free cash flow margin, which also fell short of estimates. Looking ahead, next quarter's total revenue guidance was roughly inline, though the low end of fiscal 2024 subscription revenue guidance was raised. Additionally, the company maintained fiscal 2024 non-GAAP operating margin guidance of 23%. The company announced Zane Rowe as the new Chief Financial Officer (CFO). He was formerly the CFO of VMware, assuming the position in 2016.
Overall, the company demonstrated strong performance driven by solid revenue and profitability while guidance was reassuring. There was also qualitative emphasis in the earnings release on AI capabilities and the commitment to integrating AI throughout the product portfolio.
Workday is up 54.4% since the beginning of the year. Investors who bought $1,000 worth of Workday's shares 5 years ago would now be looking at an investment worth $1,800.
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