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Workday (WDAY) Earnings & Revenues Beat Estimates in Q2

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Workday Inc. WDAY delivered second-quarter fiscal 2019 non-GAAP earnings of 31 cents per share, which beat the Zacks Consensus Estimate of 26 cents. The figure also improved 29.2% year over year.

Strong growth can primarily be attributed to 27.9% jump in revenues, which totaled $671.7 million. The figure surpassed the Zacks Consensus Estimate for revenues of $663 million. The robust top-line performance was driven by solid growth in subscription and professional revenues.

Subscription revenues (84% of total revenues) surged 30% year over year to $656.7 million, on the back of expanding customer base and robust net new ACV growth. The figure surpassed the guidance of $557-$559 million.

Professional services revenues (16% of total revenues) grew 17% from the year-ago quarter to $106 million and were better than the guidance of $104 million.

Revenues outside the United States climbed 48% to $156 million, representing a record 23% of total revenues in the reported quarter.

Workday’s shares have gained 44.4% year over year, outperforming the industry’s rally of 43.2%.

Business Highlights

During the reported quarter, Workday extended capabilities and tools in Workday HCM with new customer experience.

Workday has more than 2,200 customers. During the reported quarter, the company added Eli Lilly and Company, Bridgestone Americas, Siemens Healthineers and DBS Bank as its new HCM customers. The clientele now includes two Fortune 500 customers, one of which is a Fortune 100 company.

The company was ranked #4 on the list of the 100 Best Workplaces for Millennial by Fortune and Great Place to Work Institute. Additionally, the company was ranked #6 on the list of the Best Large Workplaces in Europe by Great Place to Work Institute.

Workday recently signed an agreement to acquire all outstanding shares of Adaptive Insights Inc for $1.55 billion in a cash-stock deal. The purchase is likely to aid Workday pursue its goal of emerging as an industry leader in better business decisions and operational expertise. It will also aid the company evolve as a provider of enterprise-level software solutions for financial management as well as human resource domains.

The company also acquired Stories.bi and Rallyteam during the quarter. Both the companies have know-how in leveraging machine learning to power Workday products in order to drive customer satisfaction.

Operating Results

Non-GAAP gross margin expanded 100 basis points (bps) from the year-ago quarter to 73%, primarily due to favorable mix toward higher-margin subscription revenues.

The company reported non-GAAP operating profit of $68.1 million compared with $48.9 million in the year-ago quarter. Non-GAAP operating margin came in at 10.1% during the quarter as compared with 9.3% reported in the year-ago quarter.

Balance Sheet

Cash, cash equivalents and marketable securities were $2.99 billion as of Jul 31, 2018, compared with $3.36 billion reported in the previous quarter.

Operating cash flows were $57.6 million and free cash flows were $4.3 million during the reported quarter.

Unearned revenues were around $1.5 billion, up 21% from the year-ago quarter. Current unearned revenues (that will be recognized over the next 12 months) were $1.4 billion, representing annual growth of 25%.

Non-current unearned revenues declined 14% year over year as fewer customers opted for paying more than one year of subscription fees upfront.

Guidance

For third-quarter fiscal 2019, Workday expects subscription revenues in the range of $609-$611 million (up 31% to 32%), this includes $18 million from Adaptive Insights buyout.

Professional services revenues are projected at $114 million (with $4 million from Adaptive Insights buyout).

Workday anticipates non-GAAP operating margin of 4%.

Workday raised fiscal 2019 guidance. The company now expects subscription revenues in the range of $2.341-$2.348 billion (previously $2.275-$2.290 billion). Professional services revenues are now expected to be around $424 million (previously $405 million).

The company now expects non-GAAP operating margin to be almost 9% (previously 12%).

The company anticipates operating cash flow growth for fiscal 2019 to be approximately $550 million, reflecting the impact from the Adaptive Insights acquisition.

Zacks Rank & Other Stocks to Consider

Workday carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the broader technology sector include NetApp, Inc. NTAP, Salesforce.com Inc CRM and Xilinx, Inc. XLNX, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NetApp, Salesforce and Xilinx have a long-term expected EPS growth rate of 14.1%, 25% and 9.5%, respectively.

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