Enterprise software maker Workday Inc. (NASDAQ: WDAY) beat 1st quarter revenue and profit expectations and reported strong subscriber growth on Tuesday. The stock price, which had rallied hard ahead of the results, initially fell as much as 4% on Wednesday.
Workday’s quarterly revenue topped $825 million, up 33.4% from a year earlier and $10.8 million ahead of analyst estimates. Non-GAAP EPS of $0.43 also beat estimates by 2 cents, a year-on-year gain of 30%. On a GAAP accounting basis, the company made a net loss of $0.52 per share, versus $0.35 a year earlier.
Revenue Growth Driven by Robust Subscriber Growth
Subscription revenue, which makes up 85% of total revenue, grew 34% over the prior year to $701 million. The company’s key products are its human capital management and financial management applications. Analysts were specifically looking for an uptick in the financial application’s subscriber numbers, but a segment breakdown was not provided.
Several new high-profile clients using these applications include Carl Zeiss AG, Cisco Systems, Daimler Trucks North America, Old Mutual Limited, Procter & Gamble, and E-Trade Financial Corporation. Adaptive Insights, which Workday acquired in 2018, also added 150 new clients during the quarter. The unit provides cloud-based business planning software.
Growth Expected to Be Sustained Through 2020
Guidance for the current quarter and 2020 full year were also raised. The company now expects 2nd quarter subscription revenue of around $747 million, $4 million ahead of analyst expectations. Subscription revenue for the full year is expected to be close to $3.05 billion, marginally ahead of market consensus.
While top-line growth of 34% was impressive, the GAAP net loss was 56% wider than a year earlier. This was partly due to increased stock-based compensation.
Is All The Good News Priced In?
Analysts have raced to increase their price targets since the results were released. This may keep the price momentum going, though investors may need to be realistic about their expectations.
Workday’s share price has already risen 30% this year, and several analysts were concerned that the market was expecting too much from this set of results. While the market won’t be disappointed with the result, it may bring the valuation into focus.
Workday is trading at over 15 times its trailing 12-month sales and at around 13 times 2020’s projected sales. That isn’t cheap considering the company is losing money and expenses are growing faster than revenue.
Revenue growth has been the price driver for Workday, and the biggest risk to the stock price would be stalling growth. Given that the company has just raised its guidance for the year, that may not happen in the next few quarters.
The other and perhaps more likely risk would be that the market begins to question the valuations of cloud businesses and cloud software businesses. If that happens, Workday will be very vulnerable. Investors will need to keep an eye on similar businesses like Adobe and Salesforce for signs of a change in sentiment.
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