Workday (WDAY)

Finance and HR software company Workday (NASDAQ:WDAY) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 12.6% year on year to $2.24 billion. Its non-GAAP profit of $2.23 per share was 11% above analysts’ consensus estimates.

Company Overview

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.

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.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Workday grew its sales at a 17.2% annual 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.

This quarter, Workday reported year-on-year revenue growth of 12.6%, and its $2.24 billion of revenue exceeded Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 12.8% over the next 12 months, a deceleration versus the last three years. Still, this projection is above the sector average and implies the market sees some success for its newer products and services.

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 punched in at $1.57 billion in Q1, and over the last four quarters, its growth slightly outpaced the sector as it averaged 12.9% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

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 47.5 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 75.7% gross margin over the last year. That means for every $100 in revenue, roughly $75.66 was left to spend on selling, marketing, and R&D.

This quarter, Workday’s gross profit margin was 76%, 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 4.5%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Workday’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Workday generated an operating profit margin of 1.7%, down 1.5 percentage points year on year. Since Workday’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Workday has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging 26.7% over the last year.

Workday’s free cash flow clocked in at $421 million in Q1, equivalent to a 18.8% margin. This result was good as its margin was 4.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts’ consensus estimates show they’re expecting Workday’s free cash flow margin of 26.7% for the last 12 months to remain the same.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Workday is a profitable, well-capitalized company with $7.97 billion of cash and $3.39 billion of debt on its balance sheet. This $4.58 billion net cash position is 6.3% 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 good to see Workday narrowly top analysts’ revenue expectations this quarter. Looking ahead, Q2 subscription revenue guidance was ahead of Wall Street Consensus, but full-year subscription revenue guidance was roughly in line. Additionally, its billings missed. Overall, this was a mixed quarter. The stock traded down 3.2% to $263.44 immediately after reporting.

Updated: May 22, 2025 at 10:03 PM EDT

Before making an investment decision, investors should account for Workday’s business fundamentals and valuation in addition to what happened in the latest quarter.

Workday has some positive attributes, but it isn’t one of our picks. Although its revenue growth was a little slower over the last three years and analysts expect growth to slow over the next 12 months, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Workday’s price-to-sales ratio based on the next 12 months is 7.5x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $299.06 on the company (compared to the current share price of $253.40).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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