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Why Is Workday (WDAY) Up 9.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Workday (WDAY). Shares have added about 9.8% 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 its most recent earnings report in order to get a better handle on the important drivers.

Workday Tops Q3 Earnings & Revenues Estimates

Workday Inc. delivered third-quarter fiscal 2019 non-GAAP earnings of 31 cents per share, surpassing the Zacks Consensus Estimate of 15 cents. The figure also improved 29.2% year over year.

Strong growth can primarily be attributed to a jump of 33.8% in revenues, which totaled $743.2 million. The figure outpaced the Zacks Consensus Estimate for revenues of $723 million. The robust top-line performance was driven by solid growth in subscription and professional revenues.

Subscription revenues (84% of total revenues) surged 34.7% year over year to $624.4 million, on the back of expanding customer base and robust net new ACV growth. Further, synergies from Adaptive Insights acquisition and strong product suite positively impacted the reported quarter’s revenues. The figure surpassed the guidance of $609-$611 million.

Professional services revenues (16% of total revenues) grew 29.4% from the year-ago quarter to $118.8 million and were better than the guidance of $114 million.

Revenues outside the United States climbed 47% to $170 million, representing a record 23% of total revenues in the reported quarter.

Business Highlights

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

Workday has more than 8,500 customers. During the third quarter, the company added Bank of Montreal, Glencore International, and Piedmont Airlines, a subsidiary of American Airlines as its new HCM customers. The clientele now includes more Fortune 500 customers driven by higher adoption of Workday Financial Management.

The company was ranked #3 on the list of the 100 Best Workplaces for Millennials by Fortune and Great Place to Work Institute. Additionally, the company was ranked #1 on the Fortune Future 50 list.

Workday recently went live on Adaptive Insights business planning cloud. The move 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.

Workday unveiled Workday People Analytics, powered by artificial intelligence to aid customers with critical activities in their business.

Operating Results

The company reported non-GAAP operating profit of $49.7 million compared with $50.1 million in the year-ago quarter. Non-GAAP operating margin came in at 5.7% during the quarter under review compared with year-ago quarter’s figure of 9%.

Balance Sheet

Cash, cash equivalents and marketable securities were $1.58 billion as of Oct 31, 2018, compared with $2.99 billion reported in the previous quarter.

Operating cash flows were $114.3 million and free cash flows were $58.9 million during the reported quarter.

Unearned revenues were around $1.6 billion, up 27.8% from the year-ago quarter. Current unearned revenues (that will be recognized over the next 12 months) were $1.46 billion, representing annual growth of 29%.

Guidance

Total revenues for the fourth quarter are expected to be in the range of $775 million to $777 million.

For fourth-quarter fiscal 2019, Workday expects subscription revenues in the range of $663-$665 million (up 35% to 36%). Professional services revenues are projected at $112 million.

Workday anticipates non-GAAP operating margin of approximately 10%.

Workday raised fiscal 2019 guidance. The company now anticipates subscription revenues in the range of $2.375-$2.377 billion (previously $2.341-$2.348 billion). Professional services revenues are now expected to be around $433 million (previously $424 million).

The company now expects non-GAAP operating margin to be almost 10% (previously 9%).

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

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

Currently, Workday has an average Growth Score of C, 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 bottom 20% quintile for this investment strategy.

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

Outlook

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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