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Workday (WDAY) Q1 Earnings Miss Estimates, Revenues Beat

Zacks Equity Research

Workday, Inc. WDAY reported first-quarter fiscal 2021 non-GAAP earnings of 44 cents per share, which lagged the Zacks Consensus Estimate by 6.4%. However, the bottom line improved 2.3% year over year.

The bottom-line growth can primarily be attributed to an improvement of 23.4% in revenues, which amounted to $1.02 billion. The top line surpassed the Zacks Consensus Estimate by 1.7%. The upside was driven by solid growth in subscription and professional services revenues.

Coming to price performance, shares of the company are up more than 5% in pre-market trading on May 28. This can primarily be attributed to robust growth in revenues in fiscal first quarter despite ongoing macroeconomic headwinds.



Notably, Workday stock has gained 3.6% year to date, compared with the industry’s rally of 26.4%.

Quarter in Detail

Subscription services revenues (86.6% of total revenues) rallied 26% year over year to $882 million on the back of expanding customer base.

Backlogs from Subscription revenues came in at $8.19 billion, up 20% year over year, primarily driven by growth in net new bookings and deal renewals, and net retention of customers. Subscription revenue backlog that will be recognized within the next two years totaled $5.52 billion, up 21%. In fiscal first quarter, gross retention rate exceeded 95% and net retention, which includes upselling at the time of renewal, came in at 100%.

Professional services revenues (13.4% of total revenues) improved 10% from the year-ago quarter to $136.4 million.

Revenues outside the United States surged 30% to $256 million and contributed 25% to total revenues.

The company witnessed rapid deployment of HCM solution in the fiscal first quarter, which was selected by notable city government, the City of Los Angeles. Key deal wins also include EMEA-based utility company with over 80,000 employees and Asia Pacific-based large insurance company with over 50,000 employees.

Workday Financial Management customer base exceeded 900, with key wins including a Fortune 50 company — Fannie Mae. Louisville-Jefferson County Metro Government, a large health care company with more than 60,000 employees, and Okta, were other notable customers that selected Workday Financial Management. Moreover, RaceTrac Petroleum and Lithia Motors, were go-lives in the quarter.

Workday expanded partnership with Microsoft MSFT to help customers in utilizing Workday Adaptive Planning on Azure cloud platform. Management is optimistic regarding the fact that Microsoft has adopted Workday Adaptive Planning on Azure, to aid clientele with planning, budgeting and forecasting business processes with predictive analytics capabilities.

Synergies from Scout RFP aided Workday win multiple Fortune 500 customers, including “largest-ever” deal with a large health care company. Other notable wins were Lowe's LOW and Albertsons.

Workday is also benefiting from utilization of the cloud, which is enabling it to deploy customers virtually, and facilitated 90 customer go-lives in March and April. The key go-lives include Asia Pacific-based Jardine Matheson and EMEA-based John Lewis Partnership, which have more than 85,000 employees each.
 

Workday, Inc. Price, Consensus and EPS Surprise

Workday, Inc. Price, Consensus and EPS Surprise

Workday, Inc. price-consensus-eps-surprise-chart | Workday, Inc. Quote

Margin Highlights

Non-GAAP expenses pertaining to Product development, Sales and marketing, and General and administrative climbed 22.2% year over year to $631.5 million. As a percentage of revenues, the figure contracted 60 basis points (bps) on a year-over-year basis to 62%. In April, Workday paid a one-time cash bonus equating two weeks-pay to all non-executive employees, in a bid to support them during these times of crisis, which added $79 million to fiscal first quarter expenses. However, reduced spend on travel, program delays and more calculated hiring kept expenses in check.

The company generated non-GAAP operating income of $130.5 million, up 21.1% year over year.

Non-GAAP operating margin contracted 30 bps on a year-over-year basis to 12.8%.

Balance Sheet & Cash Flow

Cash, cash equivalents and marketable securities were $2.6 billion as of Apr 30, 2020, compared with $1.94 billion as of Jan 31, 2020.

Total debt (including current portion) came in at $1.77 billion as of Apr 30, 2020, compared with $1.26 billion as of Jan 31, 2020.

The company announced the closing of a term loan and a revolving credit facility, each worth $750 million, as part of its long-term capital structure strategy.

Workday generated operating cash flow of $264 million compared with prior-quarter figure of $297.1 million.

As of Apr 30, 2020, total unearned revenues (including non-current portion) were $2.09 billion, compared with $2.31 billion as of Jan 31, 2020.

Guidance

For second-quarter fiscal 2021, Workday expects subscription revenues in the range of $913-$915 million (indicating year-over-year growth of 21%). Professional services revenues are projected at $128 million. The company anticipates non-GAAP operating margin to be approximately 19%.

Workday, currently carrying a Zacks Rank #3 (Hold), revised fiscal 2021 guidance. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Management anticipates “some moderation in retention rates” at least in the near term, led by coronavirus crisis-induced increase in bankruptcies and reduction in employee count owing to layoffs. This, in turn, might affect contract renewals.

The company now expects subscription services revenues in the range of $3.67-$3.69 billion (previously $3.755-$3.770 billion). For fiscal 2021, Professional services revenues are now projected to be around $500 million (previously $580 million).

The company anticipates non-GAAP operating margin to be approximately 16%, up from the prior guidance of 14.5%.

Conclusion

Workday is well poised to gain from the growing clout of Financial Management, Business Planning Cloud, and Prism Analytics offerings. Further, synergies from Scout RFP and Adaptive Insights acquisitions, and strength in product suite, are expected to drive revenues in the quarters ahead. Latest partnerships with Microsoft with primary focus on Teams and Azure Active Directory, and salesforce’s CRM Work.com, are expected to aid the company acquire more customers, as enterprises increasingly seek to optimize employee work.

Moreover, incremental adoption of Workday Extend, formerly known as Workday Cloud Platform, integrated with enhanced capabilities, is expected to be a key growth driver.

The company has also rolled out Workday 2020 Release 1, with features including improved workforce planning with Workday Adaptive Planning. The customers can also benefit from utilization of Workday Assistant, an intuitive chatbot to enhance employees experience. These improved features are expected to boost adoption of its offerings, consequently boosting revenue base.

However, coronavirus crisis-induced layoffs and broader macroeconomic weakness, might affect contract renewals, and weigh on the company’s financial performance.

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