Workday Falls Despite Punching in Another Great Quarter

Workday Inc. (WDAY 2.90%) may have released a solid fiscal third-quarter 2017 report on Thursday evening, but that strength wasn't enough to overcome the financial and human capital management software company's subsequent weak guidance. But before we get there, let's take a closer look at what drove Workday's latest quarterly beat.

IMAGE SOURCE: WORKDAY, INC.

Workday results: The raw numbers

Data source: Workday, Inc.

What happened with Workday this quarter?

• Subscription revenue climbed 38.3% year over year, to $335.7 million.
• Professional services revenue grew 18.1% year over year, to $73.9 million.
• For perspective, Workday's guidance called for lower revenue in the range of $398 million to $400 million, and assumed more modest 37% growth in subscription revenue, with 7% growth in professional services revenue.
• Workday generated operating cash flow of $71.5 million, and free cash flow of $43.9 million.
• The company ended the quarter with cash and equivalents of $1.9 billion.
• Total derived billings -- or the sum of revenue and the sequential change in total unearned revenue -- grew 33% year over year, to $454 million.
• Subscription billings -- or the sum of subscription revenue and the sequential change in total unearned revenue -- rose 37%, to $380 million.
• The company announced general availability of Workday Learning, Workday Planning, and Workday Student, and enjoyed subsequent strong demand across the board for all three new applications.
• Workday is seeing particular excitement surround Workday Planning, which has already signed up more than 70 customers.
• During Workday's Annual User's Conference this quarter, the company revealed that it has achieved a 97% annual customer-satisfaction rating.
• Workday enjoyed strong adoption of its financial applications, with notable new customer additions during the quarter including Panera and Denny's.
• Other notable customer additions included Iowa State University, Zillow Group, and a prominent investment-management company whose name will be disclosed in the coming months.
• The company saw no significant changes in competitive dynamics during the quarter, with win rates against major competitors remaining consistent with prior quarters.
• That said, during the subsequent conference call, management revealed that, early in the fiscal fourth quarter, a few large deals with multinational customers were delayed.
• Workday co-founder and CEO Aneel Bhusri suggested the delay was attributed to "global uncertainties such as Brexit, the U.S. presidential election, and pending elections in other G8 countries." As such, Bhusri elaborated, Workday "suspected and hopes these are isolated events that will be short-lived, but felt it was noteworthy enough to mention on this call."
• Apart from these few delayed deals, the pipelines for Workday's human capital management and financial products remain healthy and growing.

What management had to say

Workday CEO Aneel Bhusri stated: "We had a strong third quarter and saw healthy demand across all major geographies and industries. We continue to lead with product differentiation, technology innovation, and real customer success, and believe these are significant differentiators for Workday in the market."

Looking forward 

For the current quarter, Workday expects revenue between $427 million and $430 million, good for growth of 32% to 33%. This includes 9% growth in professional services revenue, to $67 million, and 38% to 39% growth in subscription revenue, to a range of $360 million to $363 million. By comparison -- and though we don't usually pay close attention to Wall Street's near-term expectations -- analysts were anticipating fiscal fourth-quarter 2017 revenue of $433.6 million, slightly above the high end of Workday's guidance.

"We continue to prioritize growth over margins while maintaining our long-term goal of 20% plus non-GAAP operating margins," added Workday CFO Robynne Sisco.

Finally, for the full fiscal-year 2017, Workday now anticipates fiscal year 2017 revenue of $1.56 billion to $1.563 billion (an increase from its previous range of $1.548 billion to $1.558 billion), full-year derived billings of $1.887 billion to $1.892 billion (up from $1.88 billion to $1.89 billion previously), and subscription revenue of $1.282 billion to $1.285 billion (a slight increase to the bottom end of previous guidance for $1.278 billion to $1.285 billion).

All things considered, this was as strong a quarter as Workday investors could have hoped for. And the company not only continues to enjoy a more pervasive presence for core financial and human capital management solutions, but has enjoyed encouraging early demand for its newest Learning, Planning, and Student applications.

But the market loathes the uncertainty created by the orders that have slipped early in Workday's current quarter. As such, until Workday receives more clarity that those troubles are indeed temporary in nature, it's hard to blame investors for taking a small step back today.