Why Is Workday (WDAY) Down 2.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Workday (WDAY). Shares have lost about 2.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Workday due for a breakout? 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 Q4 Earnings & Revenues Estimates

Workday delivered fourth-quarter fiscal 2019 non-GAAP earnings of 41 cents per share, which beat the Zacks Consensus Estimate by 9 cents. The figure also improved 46.4% year over year.

Strong growth can primarily be attributed to a rise of 35.4% in revenues, which totaled $778.6 million. The figure outpaced the Zacks Consensus Estimate for revenues of $776.8 million. The upside was driven by solid growth in subscription and professional services revenues.

Quarter in Detail

Subscription services revenues (85.4% of total revenues) rallied 37.5% year over year to $673.5 million on the back of expanding customer base and robust net new ACV growth. Further, synergies from Adaptive Insights acquisition and strong product suite drove revenues in the reported quarter. The figure surpassed management’s guidance of $663-$665 million.

Professional services revenues (14.6% of total revenues) grew 24.4% from the year-ago quarter’s tally to $115.1 million and surpassed the guidance of $112 million.

Revenues outside the United States improved 41% to $184 million and contributed approximately 23.3% to total revenues.

Expanding Customer Base & Product Enhancements: Key Catalyst

During the reported quarter, Workday achieved a milestone as it enabled customers for the first time to run Workday Human Capital Management (HCM) and Workday Financial Management applications on Amazon’s public cloud platform — Amazon (NASDAQ:AMZN) Web Services (AWS).

Workday ended the quarter with more than 2,600 customers. During the fourth quarter, the company added Bank of Caterpillar (NYSE:CAT), A.P. Moller-Maersk, Wyndham Worldwide (NYSE:WYND) Operations and Sumitomo Chemical as new HCM customers. Notably, Siemens AG (DE:SIEGn), McKesson Corporation (NYSE:MCK), and Lloyds (LON:LLOY) Bank Plc, were a few companies to recently deploy HCM solution.

In the quarter, the adoption of Workday Financial Management solution by Allina Health, Ryder Truck, Ameriprise and Banner Health among others is notable. Recent prominent deal wins include Quicken Loans and Alight Solutions.

Management is also optimistic regarding the growing clout of Workday Prism Analytics and Adaptive Insights business planning cloud offerings. Per the company, Workday Prism Analytics witnessed triple-digit growth in ACV in the fourth quarter.

The clientele now includes approximately 40% Fortune 500 and “half of the Fortune 50” customers driven by higher adoption of Workday Financial Management.

Operating Results

The company generated non-GAAP operating profit of $93 million in the quarter, contributing 11.8% to total revenues.

Non-GAAP operating margin expanded 230 basis points on a year-over-year basis to 11.8%.

Balance Sheet

Cash, cash equivalents and marketable securities were $1.78 billion as of Jan 31, 2018 compared with $1.58 billion in the previous quarter.

Workday generated operating cash flow of $250.5 million compared with previous quarter’s figure of $114.3 million.

Current unearned revenues came in at $1.84 billion, representing annual growth of 29%. Total unearned revenues were around $1.95 billion, up 26.8% from the year-ago quarter’s level.

Fiscal 2019 at a Glance

In fiscal 2019, the company reported revenues of $2.82 billion, up 31.7% from fiscal 2018 tally.

Subscription services revenues grew 33.4% year over year to $2.39 billion and contributed 84.5% to total revenues. Professional services revenues grew 22.9% year over year to $436.4 million and accounted for 15.5% to total revenues.

Non-GAAP earnings surged 32% year over year to $1.36 per share.

Guidance

For first-quarter fiscal 2020, Workday expects subscription revenues in the range of $692-$694 million (up approximately 33%). Professional services revenues are projected at $120 million.

Workday anticipates non-GAAP operating margin of approximately 13%.

Workday raised fiscal 2020 guidance for subscription services revenues. The company now expects subscription services revenues in the range of $3.03-$3.045 billion (previously $3-$3.01 billion). Professional services revenues are projected to be around $500 million.

The company expects non-GAAP operating margin to be almost 12.3%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 11.24% due to these changes.

VGM Scores

Currently, Workday has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Workday has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.