A month has gone by since the last earnings report for Workday (WDAY). Shares have lost about 0.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Workday Earnings & Revenues Top Estimates in Q4
Workday, Inc. reported fourth-quarter fiscal 2021 non-GAAP earnings of 73 cents per share, which outpaced the Zacks Consensus Estimate by 32.7%. Moreover, the bottom line improved 46% year over year.
Bottom-line growth can primarily be attributed to an improvement of 15.9% in revenues, which amounted to $1.132 billion. The top line surpassed the Zacks Consensus Estimate by 1.53%. The upside was further aided by solid growth in subscription services’ revenues.
Quarter in Detail
Subscription services
revenues (88.9% of total revenues) rallied 19.8% year over year to $1.01 billion on the back of expanding customer base. Management had anticipated subscription revenues to be $991-$993 million.
Backlogs from Subscription revenues were $10.09 billion, up 21.6% year over year, primarily driven by robust growth in new ACV bookings through both net new and add-on business domains, deal renewals, and net retention of customers. Also, the company raked in net new business, which aided growth.
However, management stated that the company is still witnessing headwinds pertaining to COVID-19 business impacts. This is anticipated to weigh on the current fiscal year’s subscription revenues.
Nevertheless, management anticipates those headwinds to diminish and expects the renewal base to re-grow in fiscal 2023.
Subscription revenue backlog that will be recognized within the next two years totaled $6.53 billion, up 19%. In the fiscal fourth quarter, gross retention rate exceeded 95% and net retention, which includes upselling at the time of renewal, was 100%.
Professional services
’ revenues (11.1% of total revenues) declined 8.2% from the year-ago quarter to $125.4 million. Professional services revenues were projected to be $121 million.
Revenues outside the United States climbed 16% year over year to $283 million and contributed 25% to total revenues.
The company witnessed the rapid deployment of HCM solution in the fiscal fourth quarter, which was selected by Nike, ABB, Anthem, Cognizant Worldwide, Cox Enterprises, First Rank Bank, Laboratory Corporation of America, among others.
Key go-lives in the reported quarter included Comcast Cable, Caterpillar, Cisco Systems, PF Changs and Spectrum Health.
The company has also been witnessing momentum in its latest offerings, including Workday Adaptive Planning, Spend Management and Prism Analytics. Synergies from Scout RFP acquisition aided Workday to win multiple customers. Markedly, Scout RFP is fully integrated and has been re-branded as “Workday Strategic Sourcing,” which is part of spend management domain.
Further, the company is gaining from solid uptick in its two new offerings, VIBE Central and VIBE Index, that aid HR leaders boost inclusivity, and accelerate belonging and diversity (B&D) initiatives within the workplace. Workday noted that VIBE is the acronym for Value Inclusion, Belonging, and Equity.
Additionally, the availability of Workday Accounting Center and Workday Talent Marketplace is bolstering adoption. Also, Workday People Analytics — an augmented analytics application that delivers deep insights regarding risks and opportunities related to a company’s workforce — is gaining traction.
Management is optimistic on the growing pipeline of the latest offerings, including Health, Accounting Center, Extend, and People Analytics, which drove the add-on sales in the reported quarter.
The company inked multiple FINS plus solutions customer wins, including one new Fortune 500 core financial solutions’ deal in Franklin Tempesto. Solid momentum across healthcare, professional services, education and government agencies, and a solid pipeline of deal wins are also encouraging.
Further, the company witnessed strength across both large and medium enterprise vertical. Moreover, robust performance across the Unites States remained notable.
Margin Highlights
Non-GAAP expenses pertaining to Product development, sales and marketing, and general and administrative climbed 6.7% year over year to almost $663 million. As a percentage of revenues, the figure contracted 500 basis points (bps) on a year-over-year basis to 58.6%. Reduced spend on travel and marketing, amid COVID-19 induced shelter-in-place guidelines, and more calculated hiring kept expenses in check.
The company generated non-GAAP operating income of almost $211 million, which soared 81% year over year.
Consequently, non-GAAP operating margin expanded 670 bps on a year-over-year basis to 18.6%.
Balance Sheet & Cash Flow
Cash, cash equivalents and marketable securities were $3.54 billion as of Jan 31, 2021, compared with $2.95 billion as of Oct 31, 2020.
Total debt (current plus non-current) was $1.795 billion as of Jan 31, 2021, compared with $1.792 billion as of Oct 31, 2020.
Workday generated operating cash flow of $553.7 million compared with the prior-quarter figure of $293.8 million.
As of Jan 31, 2021, total unearned revenues (including non-current portion) were $2.637 billion compared with $2.069 billion as of Oct 31, 2020.
Guidance
For first-quarter fiscal 2022, Workday expects subscription revenues of $1.018-$1.020 billion (indicating year-over-year growth of 16%). Professional services revenues are projected to be $139 million. The company anticipates a non-GAAP operating margin of 19%. Management projects subscription revenue backlog growth in the fiscal first quarter to be 18%.
Workday is encouraged by robust fiscal fourth-quarter performance, strong backlog and solid pipeline.
The company expects fiscal 2021 subscription services’ revenues to be $4.38-$4.40 billion, indicating year-over-year growth of 16%. The company projects Professional services revenues of $590 million. The company anticipates non-GAAP operating margin to be 17%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 59.9% due to these changes.
VGM Scores
At this time, Workday has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 these revisions looks promising. Notably, 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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