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Why Is Workday (WDAY) Down 20.4% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Workday (WDAY). Shares have lost about 20.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Workday due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Workday Earnings & Revenues Top Estimates in Q4

Workday reported fourth-quarter fiscal 2020 non-GAAP earnings of 50 cents per share, which beat the Zacks Consensus Estimate by 25% and surged 22% year over year.

Robust growth can primarily be attributed to an improvement of 23.8% in revenues, which amounted to $976.3 million. The top line outpaced the Zacks Consensus Estimate for revenues by 1.1%. The upside was driven by solid growth in subscription and professional services revenues.

Quarter in Detail

Subscription services revenues (86% of total revenues) rallied 24.7% year over year to $839.7 million on the back of expanding customer base. The figure surpassed management’s guidance of $828-$830 million.

Workday ended the fiscal fourth quarter with 45% of the Fortune 500, precisely 60% of the Fortune 50, as HCM customers and penetration in the Global 2000 clientele of up to 20%.

Management is optimistic regarding the growing clout of Workday Financial Management, Business Planning Cloud, and Workday Prism Analytics offerings. Further, synergies from Adaptive Insights acquisition and strength in product suite drove revenues in the reported quarter.

Backlogs from Subscription revenues came in at $8.29 billion, up 23% year over year, primarily on the back of growth in net new bookings and deal renewals, and net retention of customers.

During the reported quarter, Workday concluded acquisition of Scout RFP. The buyout is anticipated to aid customers in enhancing source-to-pay solution and optimizing spend.

Professional services revenues (14% of total revenues) grew 18.7% from the year-ago quarter to $136.6 million and surpassed management’s guidance of $134 million.

Revenues outside the United States improved 33% to $244 million and contributed 25% to total revenues.

The company witnessed rapid deployment of HCM solution in the fiscal fourth quarter. The company added 16 Global 2000 and 11 Fortune 500 companies in the reported quarter.

Key deal wins include Southwest Airlines, Wells Fargo and Spain-based multinational bank Banco Bilbao Vizcaya Argentaria or BBVA. Moreover, companies like Prudential Company of America, the U.K.-based Natwest Group and Spain-based Banco Santander, went live with Workday’s HCM solutions during the fiscal fourth quarter.

Margin Highlights

Non-GAAP expenses pertaining to Product development, Sales and marketing, and General and administrative climbed 23.9% year over year to $621.3 million. As a percentage of revenues, the figure came in at 63.6%, flat on a year-over-year basis.

The company generated non-GAAP operating income of $116.6 million, up 25.8% year over year.

Non-GAAP operating margin expanded 10 bps on a year-over-year basis to 11.9% on higher revenue base.

Balance Sheet & Cash Flow

Cash, cash equivalents and marketable securities were $1.94 billion as of Jan 31, 2020, compared with $2.10 billion as of Oct 31, 2019.

Workday generated operating cash flow of $297.1 million compared with prior-quarter figure of $258 million.

Guidance

For first-quarter fiscal 2021, Workday expects subscription revenues in the range of $873-$875 million (indicating year-over-year growth of 25%). Professional services revenues are projected at $137 million.

The company raised fiscal 2021 guidance for subscription services revenues. It now expects subscription services revenues in the range of $3.755-$3.770 billion (previously $3.73 billion). For fiscal 2021, Scout RFP is anticipated to contribute less than 1% to subscription services revenue growth. Professional services revenues are projected to be around $580 million.

The company anticipates non-GAAP operating margin to be approximately 14.5%, up from the prior guidance of 14%. The guidance takes dilution of 150 bps margin from acquisition of Scout RFP, into account.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted 23.16% due to these changes.

VGM Scores

Currently, Workday has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Workday has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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