Workday (WDAY)

Enterprise software company Workday (NASDAQ:WDAY) announced better-than-expected revenue in Q3 CY2025, with sales up 12.6% year on year to $2.43 billion. Its non-GAAP profit of $2.32 per share was 6.7% above analysts’ consensus estimates.

Company Overview

Born from the vision of PeopleSoft founders after Oracle's hostile takeover of their previous company, Workday (NASDAQ:WDAY) provides cloud-based software for financial management, human resources, planning, and analytics to help organizations manage their business operations.

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 primarily with established enterprise software vendors like Oracle Corporation (NYSE:ORCL) and SAP SE (NYSE:SAP), as well as specialized providers in specific application areas including Microsoft (NASDAQ:MSFT), ADP (NASDAQ:ADP), UKG (private), Coupa Software (private), and Dayforce (NYSE:DAY).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Workday grew its sales at a 17.3% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Workday’s recent performance shows its demand has slowed as its annualized revenue growth of 15% over the last two years was below its five-year trend.

This quarter, Workday reported year-on-year revenue growth of 12.6%, and its $2.43 billion of revenue exceeded Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to grow 12.6% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Workday’s billings came in at $2.40 billion in Q3, and over the last four quarters, its growth slightly lagged the sector as it averaged 13.5% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Workday does a decent job acquiring new customers, and its CAC payback period checked in at 46.7 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

For software companies like Workday, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Workday’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 75.6% gross margin over the last year. Said differently, Workday paid its providers $24.36 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Workday has seen gross margins improve by 0.9 percentage points over the last 2 year, which is slightly better than average for software.

This quarter, Workday’s gross profit margin was 75.7%, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Workday has managed its cost base well over the last year. It demonstrated solid profitability for a software business, producing an average operating margin of 6.7%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Workday’s operating margin rose by 1.6 percentage points over the last two years, as its sales growth gave it operating leverage.

In Q3, Workday generated an operating margin profit margin of 10.6%, up 3 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Workday has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 28% over the last year, quite impressive for a software business.

Workday’s free cash flow clocked in at $550 million in Q3, equivalent to a 22.6% margin. This result was good as its margin was 6 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Workday’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 28% for the last 12 months will increase to 30.1%, it options for capital deployment (investments, share buybacks, etc.).

Companies with more cash than debt have lower bankruptcy risk.

Workday is a profitable, well-capitalized company with $6.84 billion of cash and $3.79 billion of debt on its balance sheet. This $3.05 billion net cash position is 5.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see Workday beat analysts’ billings expectations this quarter. Overall, this print had some key positives. The stock traded up 1.3% to $236.43 immediately following the results.

Updated: December 4, 2025 at 9:10 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Workday’s business quality ultimately falls short of our standards. For starters, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is its expanding operating margin shows it’s becoming more efficient at building and selling its software. On top of that, its ARR has disappointed and shows the company is having difficulty retaining customers and their spending.

Workday’s price-to-sales ratio based on the next 12 months is 5.5x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $275.64 on the company (compared to the current share price of $216.24).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.