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Workday (WDAY) Up 5.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Workday (WDAY). Shares have added about 5.4% in that time frame, outperforming the S&P 500.

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

Workday Q1 Earnings & Revenues Beat Estimates

Workday reported first-quarter fiscal 2022 non-GAAP earnings of 87 cents per share, which outpaced the Zacks Consensus Estimate by 19.2%. Moreover, the bottom line increased 97.7% year over year.

Revenues of $1.175 billion increased 15.4% year over year and surpassed the Zacks Consensus Estimate by 1.3%. The upside was further aided by solid growth in subscription services’ revenues.

Quarter in Detail

Subscription services revenues (87.8% of total revenues) rallied 17% year over year to $1.03 billion on the back of expanding customer base. Management had anticipated subscription revenues to be $1.018-$1.02 billion.

Backlogs from Subscription revenues were $10.08 billion, up 23% year over year.  Subscription revenue backlog that will be recognized within the next two years totaled $6.59 billion, up 20% primarily driven by robust growth in new ACV bookings through both net new and add-on business domains. In fiscal first quarter, gross retention rate exceeded 95%.

However, management stated that the company is still witnessing headwinds pertaining to historical contract lengths. This is anticipated to put pressure on the current fiscal’s subscription revenues.

Nevertheless, management anticipates those headwinds to diminish and expects the renewal base to re-grow in fiscal 2023.

Professional services’ revenues (12.2% of total revenues) increased 4.7% from the year-ago quarter’s level to $143 million. Professional services revenues were projected to be $139 million.

Revenues outside the United States climbed 14% year over year to $292 million and contributed 25% to total revenues.

The company witnessed the rapid deployment of HCM solution in the fiscal first quarter, which was selected by the likes of Mattel, Five Below Inc, ASM Global, Las Vegas Sands Corp and Cost Plus World Market, among others.

Key go-lives in the reported quarter included Macquarie University, Fielmann AG, and University of Sydney.

The company has also been witnessing momentum in its Financial Management offerings, including Enterprise Finance solutions, Workday Adaptive Planning, Spend Management including Workday Strategic Sourcing. Markedly, Scout RFP is fully integrated and has been re-branded as “Workday Strategic Sourcing,” which is part of spend management domain.

Additionally, the availability of Workday Accounting Center and Workday Talent Marketplace is bolstering adoption. Increasing clout of Workday People Experience and Workday Extend, integrated with enhanced capabilities is aiding top-line growth.

The company inked multiple FINS solutions customer wins in the first quarter and also added that it has strong pipeline growth for FINS solution.  Moreover, robust performance across the Unites States remained notable.

The company is planning to increase its headcount by more than 20% in fiscal 2022. The company is also directing significant resources toward marketing and brand campaign to drive business growth.

Workday also completed the acquisition of Peakon in March 2021. The company noted that in the quarter under review it witnessed “a number of meaningful Peakon upsell deals” within its client base.

Denmark-based Human Resource (HR) company, Peakon specializes in improving employee engagement by converting employee feedback into actionable insights.

Margin Highlights

Non-GAAP expenses pertaining to Product development, sales and marketing as well as general and administrative declined 1.3% year over year to almost $623 million.

As a percentage of revenues, the figure contracted 900 basis points (bps) on a year-over-year basis to 53%. Reduced spend on travel and marketing, amid COVID-19 induced shelter-in-place guidelines, and more calculated hiring kept expenses in check.

The company generated non-GAAP operating income of almost $288.5 million, which soared 121% year over year.

Consequently, non-GAAP operating margin came in at 24.6% compared with non-GAAP operating margin of 12.8% reported in the year-ago quarter.

 

Balance Sheet & Cash Flow

Cash, cash equivalents and marketable securities were $2.99 billion as of Apr 30, 2021 compared with $3.54 billion as of Jan 31, 2021.

Total debt (current plus non-current) was $1.865 billion as of Apr 30, 2021 compared with $1.795 billion as of Jan 31, 2021.

Workday generated operating cash flow of $452.4 million compared with the prior quarter’s figure of $553.7 million.

As of Apr 30, 2021, total unearned revenues (including non-current portion) were $2.426 billion compared with $2.637 billion as of Jan 31, 2021.

Guidance

For second-quarter fiscal 2022, Workday expects subscription revenues of $1.095-$1.097 billion (indicating year-over-year growth of 18%). Professional services revenues are projected to be $145 million. The company anticipates a non-GAAP operating margin of 20%. Management projects 24-month subscription revenue backlog growth in the fiscal second quarter to be 17%.

The company now expects fiscal 2022 subscription services’ revenues to be $4.425-$4.44 billion compared with earlier guidance of $4.38-$4.40 billion. The company continues to project Professional services revenues of $590 million. The company anticipates non-GAAP operating margin to be 18-19%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 48.81% due to these changes.

VGM Scores

At this time, 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 D on the value side, putting it in the bottom 40% 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 upward for the stock, and the magnitude of these revisions looks promising. 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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