WDAY Up 0.7% Since Last Earnings Report: Can This Continue?

It’s been a month since the last weekday earnings report (WDAY). Shares rose about 0.7% in that time, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Workday headed for a decline? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the company’s most recent earnings report in order to better understand the important catalysts.

Workday beats first-quarter earnings and revenue estimates

For the first quarter of fiscal 2020, Workday earned non-GAAP earnings of 43 cents per share, which beat the Zacks Consensus Estimate by a few cents. The figure also improved from the 33 cents reported in the year-ago quarter.

The strong growth can be primarily attributed to a 33.4% increase in revenues of $825.1 million. This number surpassed the Zacks Consensus Estimate and showed revenue of $814 million. Solid growth in subscription and professional services revenues contributed to the upside.

Quarter in detail

Subscription services revenue (84.9% of total revenue) increased 34.3% year-over-year to $701 million, driven by a growing customer base and solid net new ACV growth. Moreover, synergies from the acquisition of Adaptive Insights and its strong product suite contributed to revenue growth in the reported quarter. This amount exceeded management’s forecast of $692-694 million.

Professional services revenue (15.1% of total revenue) increased 29% from the prior-year quarter to $124 million and exceeded the $120 million forecast.

Revenues outside the United States increased 42% to $197 million and represented approximately 23.9% of total revenues.

During the reporting quarter, Gartner’s May 2019 “Magic Quadrant for Cloud Core Financial Management Suites for Midsize, Large and Global Enterprises” report placed Workday in the “Leaders” quadrant, reflecting the company’s growing strength in the cloud market. Notably, Workday has been recognized as a Leader for the third year in a row.

The company was ranked No. 1 on the San Francisco Business Times’ list of best places to work in the Bay Area. Additionally, the company was ranked first in the list of the Best Large Workplaces in the UK by the Great Place to Work Institute.

This quarter, the company announced Workday 32 with more than 500 cutting-edge features that help resource managers support skill resources across projects and provide deeper integration between Workday and Adaptive Insights.

During the reporting quarter, Workday, in partnership with government agencies and other companies, released The Cybersecurity Talent Initiative to focus on the future cybersecurity workforce.

In the first quarter, the company witnessed the rapid implementation of the HCM solution. It has been chosen by companies such as Carl Zeiss AG, Cisco Systems, Daimler Trucks North America, Old Mutual Limited and Procter & Gamble.

Management is also optimistic about the growing strength of Workday Prism Analytics and Adaptive Insights cloud business planning offerings.

During the quarter, the company generated a non-GAAP operating margin of 13.1%, almost flat year over year.

Balance

Cash, cash equivalents and marketable securities were $1.89 billion as of April 30, 2019, compared to $1.78 billion in the prior quarter.

Workday generated operating cash flow of $209.2 million, compared to $250.5 million in the prior-year quarter.

Current unearned revenue was $1.73 billion, an annual increase of 31%. Total unearned revenue was approximately $1.83 billion, an increase of 29% from the prior quarter level.

Conductivity

Workday expects subscription revenue in the second quarter of fiscal 2020 in the range of $746 million to $748 million (up approximately 32% sequentially). Professional services revenue is projected at $124 million.

Workday anticipates non-GAAP operating margin of approximately 10%.

The company raised its fiscal 2020 guidance for subscription services revenue. It now expects subscription services revenue in the range of $3.045-$3.06 billion (previously $3.03-$3.045 billion). Professional services revenues are expected to be approximately $500 million.

The company expects non-GAAP operating margin to be nearly 12.3%.

How have estimates changed since then?

Last month, investors saw a downward trend in new estimates. Due to these changes, the consensus estimate moved -8.55%.

VGM results

Currently, Workday has a great A growth score, a rating with the same momentum score. However, the stock is rated F for value, putting it in the fifth quintile for this investment strategy.

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, Workday carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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