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Workday (WDAY) Tops on Q2 Earnings & Revenues, Stock Rises

Radhika Pujara
·7 min read

Workday, Inc. WDAY reported second-quarter fiscal 2021 non-GAAP earnings of 84 cents per share, which outpaced the Zacks Consensus Estimate by 29.2%. Moreover, the bottom line improved 90.9% year over year.

Bottom-line growth can primarily be attributed to an improvement of 19.6% in revenues, which amounted to $1.062 billion. The top line surpassed the Zacks Consensus Estimate by 1.8%. The upside was driven by solid growth in subscription services’ revenues.

Following the stellar fiscal second-quarter results and raised fiscal 2021 guidance, shares of the company moved up more than 11% in pre-market trading on Aug 28. This can primarily be attributed to robust growth in revenues and earnings, and upbeat expansion in operating margin despite ongoing macroeconomic headwinds.



 

On a year-to-date basis, Workday stock has gained 46.8% compared with the industry’s rally of 67.9%.

Quarter in Detail

Subscription services revenues (87.7% of total revenues) rallied 23.1% year over year to $931.7 million on the back of expanding the customer base.

Backlogs from Subscription revenues were $8.6 billion, up 22.3% year over year, primarily driven by robust growth in new ACV bookings through both net new and add-on business domains, and deal renewals, and net retention of customers.

Subscription revenue backlog that will be recognized within the next two years totaled $5.78 billion, up 21%. In the fiscal second quarter, gross retention rate exceeded 95% and net retention, which includes upselling at the time of renewal, was 100%.

Professional services’ revenues (12.3% of total revenues) declined 0.3% from the year-ago quarter to $130.3 million.

Revenues outside the United States surged 21.8% year over year to $257 million and contributed 24% to total revenues.

The company witnessed the rapid deployment of HCM solution in the fiscal second quarter, which was selected by IB, Air Liquide, the State of Oklahoma and notable manufacturing company based in Germany, Thyssenkrupp. The company also expanded its Fortune 50 clientele with one of the leading U.S. telecommunications services company, adopting its HCM offerings. Key HCM go-lives in the reported quarter included General Motors GM, The Hartford, Eli Lilly LLY and Bridgestone Americas.

Workday Financial Management customer base continued to expand, with key wins, including a Comerica Bank. Notably, The Amenity Collective, Sharp Healthcare, and American Financial Group selected both HCM and core financial solutions. Moreover, Nebraska Medicine and Prisma Health were the key core financials go-lives in the quarter.

Also, Shelter Insurance and CNA, "early adopters of Workday Accounting Center," went live in the quarter. Management noted that Workday Accounting Center is on track to be commercially available in the fall of 2020.

The company is witnessing momentum in the latest offerings, including Workday Adaptive Planning, Spend Management and Prism Analytics. Synergies from Scout RFP acquisition aided Workday to win multiple customers. Markedly, three Fortune 500 companies, which selected the solution in the fiscal first quarter, went live and are in production.

During the quarter under review, the company launched Workday Help and Workday Journeys solutions to expand the capabilities of its employee experience offering –– Workday People Experience. Additionally, it rolled out Workday People Analytics — an augmented analytics application that delivers deep insights regarding the risks and opportunities related to a company’s workforce. Management is optimistic on the growing pipeline of the latest offerings.

In the large enterprise domain, the company inked nine new Global 2000 (G2K) HCM customer wins and two new G2K financial solutions’ deals. Solid momentum across education and government agencies, and a solid pipeline of state and local government deal wins are encouraging.

The company also witnessed strength across medium enterprise vertical. Moreover, robust performance across North America and APAC remained notable. Meanwhile, improvement in the business across Europe bodes well.

Workday recently expanded partnership with IBM Corporation IBM with the rollout of a joint return-to-workplace focused solution to help enterprises reopen safely. The integrated solution combines Workday’s Adaptive Planning and HCM solutions, and IBM’s Watson Works.

 

Workday, Inc. Price, Consensus and EPS Surprise

Workday, Inc. Price, Consensus and EPS Surprise
Workday, Inc. Price, Consensus and EPS Surprise

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

The company recently announced the promotion of Chano Fernandez from co-president to co-CEO position alongside Workday co-founder Aneel Bhusri, who was earlier the sole CEO.

Margin Highlights

Non-GAAP expenses pertaining to Product development, sales and marketing, and general and administrative climbed 3.9% year over year to $569.1 million. As a percentage of revenues, the figure contracted 810 basis points (bps) on a year-over-year basis to 53.6%. Reduced spend on travel and marketing, program delays, canceled events and more calculated hiring kept expenses in check.

The company generated non-GAAP operating income of $257.7 million, which soared 119.2% year over year.

Consequently, non-GAAP operating margin expanded from 13.2% in the year-ago quarter to 24.3%.

Balance Sheet & Cash Flow

Cash, cash equivalents and marketable securities were $2.75 billion as of Jul 31, 2020, compared with $2.6 billion as of Apr 30, 2020.

Total debt (current plus non-current) was $1.79 billion as of Jul 31, 2020, compared with $1.77 billion as of Apr 30, 2020.

During the quarter, Workday settled a $250-million convertible note using cash proceeds from the final funding of term loan. At the end of the fiscal second quarter, the company had access to $750 million of the untapped capacity of revolving credit facility.

Workday generated operating cash flow of $157.2 million compared with the prior-quarter figure of $264 million.

As of Jul 31, 2020, total unearned revenues (including non-current portion) were $2.07 billion compared with $2.09 billion as of Apr 30, 2020.

Guidance

For third-quarter fiscal 2021, Workday expects subscription revenues of $948-$950 million (indicating year-over-year growth of 19%). Professional services revenues are projected to be $135 million. The company anticipates a non-GAAP operating margin of 19%. Management projects subscription revenue backlog growth in the fiscal third quarter to be in the high-teens.

Workday, currently carrying a Zacks Rank #3 (Hold), revised the fiscal 2021 guidance on the heels of robust fiscal second-quarter performance, strong backlog and solid pipeline. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The company now expects subscription services’ revenues to be $3.73-$3.74 billion (previously $3.67-$3.69 billion). For fiscal 2021, Professional services revenues are now projected to be $525 million (previously $500 million).

The company anticipates non-GAAP operating margin to be 18%, up from the previously mentioned 16%.

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. The latest partnership with IBM is expected to aid the company to acquire more customers as enterprises increasingly seek to optimize employee work.

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

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

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