2023-12-01 08:41:08 ET
Summary
- Workday's fiscal year Q3 2024 performance exceeded expectations, with strong revenue and subscription income growth.
- The company's ability to secure significant subscription contracts and expand into international markets has strengthened its position in the industry.
- Workday's financial and valuation analysis shows robust growth, improved profitability, and potential undervaluation compared to peers.
Workday ( WDAY ) continues to demonstrate strong growth in the highly competitive cloud services market. Its fiscal year Q3 2024 performance, with revenue exceeding expectations and robust subscription income, provides a promising outlook for the company's future. Workday's ability to secure significant subscription contracts, expand its installed base, and penetrate international markets like EMEA effectively, has propelled it to a position of strength within the industry. This article delves into an in-depth analysis of Workday's fiscal performance, post-earnings call insights, as well as a financial and valuation analysis.
Earnings Analysis
Workday financial performance in the third quarter of fiscal year 2024 (F3Q24), ended in October 2023, was favorable, with the results exceeding expectations. The company's revenue for the quarter was $1.87 billion, a year-on-year increase of 17%, surpassing the consensus estimate. Subscription revenues, a key income stream for the company, grew by 18% year-on-year to $1.69 billion, beating our forecasted growth rate of 16%.
The earnings before interest and tax (EBIT) margin was 24.8%, significantly higher than the guided 23.5%. Earnings per share came out at $1.43, slightly above the consensus. The subscription contract backlog also displayed robust growth, reaching $17.85 billion, a 33% increase from the previous year.
WDAY's strong Q3 results were driven by full platform and Financial Management Solutions deals, performance in the Europe, Middle East, and Africa (EMEA) region, an increased installed base, and early renewals. The company's margin was boosted by revenue upside and the timing of expenses.
Guidance for F4Q24 is in-line with FactSet estimates. Subscription revenues are expected to be $1.755 billion, a 17% increase year-on-year. Professional service revenues are projected at $158 million, and an EBIT margin of 23.5% is anticipated.
For FY25, the company has guided for a subscription revenue between $7.725 billion and $7.75 billion, representing a 17-18% increase year-on-year. This aligns with consensus estimates of $7.763 billion. The EBIT margin is expected to expand from FY24 levels.
Further Analysis Post Earnings Call
In our opinion, Workday Inc.'s Q3 2024 earnings call presented a very robust and positive outlook for the company. Based on our analysis of the provided document, the company’s performance indicates strong fiscal health and a promising future.
Workday's decision to raise its subscription revenue guidance for FY '24 to $6.598 billion, which represents a 19% YoY growth, is indeed a significant one. This upward adjustment not only illustrates the company's confidence in its business model but also implies a strong demand for its services. The 18% growth in subscription revenue and non-GAAP operating margin of 25% achieved in Q3 further substantiates this point.
In our view, the increase in total subscription revenue backlog to $18.45 billion (a growth of 31%) indicates a healthy pipeline of future earnings. This, we believe, is a testament to the company's ability to secure long-term commitments from its customers, which can provide a steady stream of revenue and greater financial stability.
We also note positively the company's assertion about exceeding its full-year targets for the number of partners. This suggests a successful expansion of its ecosystem, which we believe is crucial for sustaining growth in the highly competitive cloud services market.
However, our analysis also identifies some potential areas of concern. The expectation that GAAP operating margins for Q4 and FY will be 20 and 22 percentage points lower than non-GAAP margins, respectively, indicates a substantial difference between the company's reported earnings and its actual profitability. This discrepancy, in our opinion, could potentially impact investor sentiment and might require further clarification from the company.
Additionally, the company's outlook about the macroeconomic environment not improving or getting worse might be a cause for concern. In our view, this statement suggests potential external headwinds that could impact the company's future performance.
Despite these concerns, we are optimistic about Workday's decision to raise its operating cash flow outlook for FY '24 to $1.975 billion, representing a 19% YoY growth. This suggests that the company is not only generating strong revenue but also converting it effectively into cash, enhancing its financial flexibility.
The decision to discontinue disclosing 12-month, 24-month, and total backlog is an interesting move. We believe that while this might result in a decrease in transparency, the company's promise to provide guidance on 12 months going forward suggests its commitment to maintaining investor confidence.
The Q&A highlights also provide some valuable insights. From our perspective, the positive validation of the hiring wave of FINS-dedicated sales reps suggests that the company's investment in expanding its sales force is beginning to pay off. Moreover, the company's focus on AI and machine learning, as indicated by the discussion around GenAI, suggests an innovative approach that we believe could give it a competitive edge in the longer term.
Finally, the company's approach to spending and growth, as revealed through the Q&A, indicates a disciplined and strategic approach to investment. This, in our opinion, is a positive sign for the company's future sustainability and growth.
In conclusion, our analysis suggests a generally positive outlook for Workday Inc. based on its Q3 2024 earnings call. While there are potential concerns, the company's robust financial performance and strategic focus on growth and innovation position it well for the future, in our opinion. However, as always, we recommend keeping a close eye on the company's performance in the upcoming quarters to validate these insights.
Financial & Valuation Analysis
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
In terms of financial trends, WDAY is demonstrating robust growth. The company's revenue has grown by a CAGR of 19.7% over the past three fiscal years, and consensus forecasts expect this growth to continue at a rate of 16.3% this fiscal year, reaching $7.2 billion. The following fiscal year is projected to maintain a similar growth rate of 16.8%, taking revenues to roughly $8.4 billion.
The company's EBIT margin also grew by 6.1% over the last three fiscal years, increasing from 13.4% to 19.5%. This is a clear indicator of improved profitability. Furthermore, consensus forecasts predict an expansion of the EBIT margin by 410 basis points this fiscal year to 23.6% and another increase the following year to 24.3%.
However, there's a less positive side to the company's financials. Over the past three years, WDAY spent 21.8% of its revenue on share-based compensation (SBC), causing the number of outstanding shares to increase by 13.0%. This level of dilution can be a concern for existing shareholders, as it has the potential to reduce earnings per share.
Despite this, the EPS has grown at a CAGR of 24.6% over the past three fiscal years, outpacing its revenue growth. The consensus forecast predicts the EPS to increase by 54.0% to $5.61 this fiscal year, and by another 17.1% to $6.56 the following fiscal year.
The company's free cash flow is expected to reach $1,668 million this fiscal year, reflecting a margin of 23.1%, compared to four fiscal years ago when it was $588 million with a 16.2% FCF margin. This demonstrates a substantial increase in the efficiency of its cash flow generation. On average, over the past four fiscal years, the company generated $1,056 million in FCF, with an average margin of 22.7%.
The company's capital expenditure, averaging 6.2% of revenue, indicates a moderate capital intensity. WDAY has a strong balance sheet, with a net cash of $2,732 million.
In terms of valuation multiples, WDAY is currently trading at an EV/Sales multiple of 7.8, an EV/EBIT multiple of 32.0, a P/E multiple of 40.0, and a FCF multiple of 33.3. When compared to the S&P 500, WDAY is trading at quite a premium. The premiums are: 223.2% for EV/Sales, 88.8% for EV/EBIT, 116.4% for P/E, and 55.7% for FCF.
Looking at WDAY's historical valuations, the current forward 12-month P/E of 37.1 is relatively low when compared to its 5-year mean of 73.7. This suggests that the stock could be undervalued.
When we compare WDAY to its peers, ServiceNow ( NOW ) and Adobe ( ADBE ), WDAY seems to be trading at a lower forward 12-month P/E of 37.1, compared to NOW's 53.3 and ADBE's 34.7. This could suggest that WDAY might be undervalued compared to its peers, potentially representing a more attractive investment opportunity.
Conclusion
Workday's Q3 2024 performance paints a generally favorable picture, with the company exhibiting strong fiscal health and a positive growth trajectory. While potential concerns do exist, such as the discrepancy between GAAP and non-GAAP margins and the company's cautious outlook on the macroeconomic environment, these are overshadowed by Workday's robust financial performance. The company's commitment to expansion, innovation, and maintaining a healthy pipeline of future earnings all bode well for its future prospects. However, to fully understand the investment worthiness of Workday, ongoing monitoring of its performance in the upcoming quarters is essential.
Workday's financial trends, including its revenue growth and EBIT margin expansion, further validate its strong position. Despite some shareholder dilution due to share-based compensation, the company's EPS growth and free cash flow efficiency demonstrate its financial prowess. While its valuation multiples are trading at a premium to the S&P 500, a comparative analysis with peers suggests potential undervaluation, offering an attractive investment opportunity.
For further details see:
Workday's Strategic Growth: An Analysis Of Fiscal Year Q3, 2024 Performance