Workday Beats Expectations, Raises Guidance on Broad Strength

Workday Inc. (WDAY -0.66%) announced fiscal third-quarter 2017 results on Wednesday after the market closed, highlighting sustained momentum across its entire business with the help of both new customers and add-on sales to existing loyal clients. The human-capital management solutions leader also increased its full fiscal-year guidance yet again.

But with shares down modestly in after-hours trading, it seems the market isn't particularly pleased. Let's take a deeper look at what Workday accomplished over the past few months, as well as what investors can expect going forward.

Image source: Workday.

Workday results: The raw numbers

Data source: Workday, Inc. *For the quarter ended Oct. 31, 2017. 

What happened with Workday this quarter?

• Subscription revenue grew 37.2% to $463.6 million.
• Professional services revenue increased 21.4% to $91.8 million
• These results were comfortably above Workday's latest guidance for revenue of $538 million to $540 million, including expected subscription revenue of $450 million to $452 million.
• On an adjusted non-GAAP basis, Workday's net income was $56.9 million, or $0.24 per share, up from adjusted net income of $0.05 per share in the same year-ago period. This was also well above investors' expectations for adjusted earnings of $0.15 per share.
• Generated operating cash flow of $144.0 million and free cash flow of $107.7 million.
• Workday has maintained a customer satisfaction rating of 98% year to date.
• Announced the availability of Workday Prism Analytics, which enables customers to bring together and analyze data from both Workday and outside sources to perform more effective business analytics.
• Introduced Workday Benchmarking, which delivers key performance metrics for any customer relative to their peers.

What management had to say

Workday co-founder and CEO Aneel Bhusri stated:

Workday had a great third quarter, driving demand across all product areas and geographies, expanding our value proposition with the delivery of new products, and once again demonstrating our commitment to keeping customer satisfaction among the highest in the industry. The outlook for the remainder of fiscal 2018 and beyond is bright as we continue to add new customers for HCM and Financial Management, and unlock new growth drivers such as Workday Prism Analytics and the Workday Cloud Platform.

CFO Robynne Sisco elaborated that subscription revenue growth this quarter was helped by a combination of high renewal rates, add-on sales with existing customers, and strong net new customer growth.

"We continue to invest for long-term growth," Sisco added, "while delivering consistently solid operating and cash flow margins."

Looking forward

For the fourth quarter, Workday expects revenue in the range of $571 million to $573 million -- the midpoint of which represents growth of 30% -- assuming subscription revenue of $482 million to $484 million. Here again, that's well ahead of consensus estimates for fiscal Q4 revenue of $556.3 million.

To be fair, that does represent a notable deceleration in year-over-year growth rates. But Workday management already warned investors of as much last quarter, noting that comps would be more difficult toward the end of this fiscal year as they lap an acceleration in subscription revenue growth that began around this time last year.   

Thus, Workday increased its full fiscal-year revenue guidance to a range of $2.132 billion to $2.134 billion, above estimates for $2.10 billion and representing growth of 35% to 36%.

All things considered, there was little not to like about this impressive quarter from Workday. The company's core HCM and Financial Management platforms remain healthy and popular with both new and current customers alike. And it continues to launch promising new solutions with the aim of securing incremental growth in the quarters ahead. With that in mind, I think patient, long-term investors should be more than pleased with where Workday stands today.