Workday (WDAY) Earnings & Revenues Surpass Estimates In Q3

Workday Inc. (NASDAQ:WDAY) reported third-quarter fiscal 2020 non-GAAP earnings of 53 cents per share, which soared approximately 71% year over year and beat the Zacks Consensus Estimate by 39.5%.

Robust growth can primarily be attributed to an improvement of 26.2% in revenues, which totaled $938.1 million. The figure outpaced the Zacks Consensus Estimate for revenues by 1.9%. The upside was driven by solid growth in subscription and professional services revenues.

Quarter in Detail

Subscription services revenues (85.1% of total revenues) rallied 27.9% year over year to $798.5 million on the back of expanding customer base. The figure surpassed management’s guidance of $783-$785 million.

Workday ended the fiscal third quarter with more than 42 million users and 3,000 customers.

Further, synergies from Adaptive Insights acquisition and strength in product suite drove revenues in the reported quarter. Management is optimistic regarding the growing clout of Workday Financial Management, Business Planning Cloud, and Workday Prism Analytics offerings.

Backlogs from Subscription revenues came in at $7.19 billion, up 21.8% year over year, primarily on the back of growth in net new bookings and “add-on business and net retention.”

Professional services revenues (14.9% of total revenues) grew 17.5% from the year-ago quarter’s tally to $139.6 million and surpassed management’s guidance of $135 million.

Revenues outside the United States improved 38% to $234 million and contributed 25% to total revenues.

The company witnessed rapid deployment of HCM solution in the fiscal third quarter. The company added 11 Global 2000 and six Fortune 500 companies in the reported quarter.

Key deal wins include Royal Bank of Canada, Anheuser-Busch InBev, Magna International, and Sutter Health. Moreover, companies like the Dow Chemical Company (NYSE:DOW), Glencore (LON:GLEN) National AG, and Telstra Corporation, went live with Workday’s solutions during the fiscal third quarter.

Operating Margin Details

Non-GAAP expenses pertaining to Product development, Sales and marketing, and General and administrative climbed 11.8% year over year to $568.6 million.

The company generated non-GAAP operating income of $142.6 million, up 186.9% year over year.

Non-GAAP operating margin expanded 850 bps on a year-over-year basis to 15.2% on higher revenue base and expense control measures. The company had anticipated non-GAAP operating margin of approximately 10.5%. Notably, the company had anticipated expenses pertaining to marketing initiatives and hiring, which have moved into the fiscal fourth quarter.

Balance Sheet & Cash Flow

Cash, cash equivalents and marketable securities were $2.10 billion as of Oct 31, 2019 compared with $1.93 billion in the previous quarter.

Workday generated operating cash flow of $258 million compared with prior-quarter figure of $100.3 million.

Current unearned revenues came in at $1.795 billion, reflecting annual growth of 23%. Total unearned revenues (including non-current portion) were $1.881 billion, up 19.8% from the year-ago quarter’s level.

Guidance

For fourth-quarter fiscal 2020, Workday expects subscription revenues in the range of $828-$830 million (indicating year-over-year growth of 23%). Professional services revenues are projected at $134 million.

The company raised fiscal 2020 guidance for subscription services revenues. It now expects subscription services revenues in the range of $3.085-$3.087 billion (previously $3.06-$3.07 billion). Professional services revenues are now projected to be around $529 million (previously $520 million).

The company continues to expect non-GAAP operating margin to be approximately 13%, up from the prior guidance of 12.3%. The guidance takes recently announced acquisition of Scout RFP for approximately $540 million in cash into account. The company expects the buyout to close in fourth-quarter fiscal 2020.

For fiscal 2021, management expects subscription services revenue of approximately $3.73 billion, indicating growth of approximately 21% year over year. Scout RFP is anticipated to contribute less than 1% to subscription services revenue growth.

For fiscal 2021, non-GAAP operating margin is anticipated at 14%. Excluding the Scout acquisition, non-GAAP operating margin is envisioned at approximately 15.5%. Over the long-term, Workday is committed to achieve non-GAAP operating margin of more than 25%.

Zacks Rank & Key Picks

Workday currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Marchex, Inc. (NASDAQ:MCHX) , Fortinet, Inc. (NASDAQ:FTNT) and Commvault Systems, Inc. (NASDAQ:CVLT) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Marchex, Fortinet and Commvault Systems is currently pegged at 15%, 14% and 10%, respectively.

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