Workday Accelerates Growth and Raises Guidance

Workday Inc. (WDAY 1.45%) announced yet another impressive quarter on Thursday after the market closed. This time, the company accelerated its already impressive growth on the strength of its core business and continued additions of large enterprise customers.

Shares are up nearly 10% in after-hours trading as the market absorbs the news. So let's open the books to get a better idea of what drove Workday over the past few months.

IMAGE SOURCE: GETTY IMAGES

Workday results: The raw numbers

DATA SOURCE: WORKDAY. *FOR THE QUARTER ENDED OCTOBER 31, 2018. GAAP = generally accepted accounting principles.

What happened with Workday this quarter?

• For comparison, in early September, Workday told investors to expect lower revenue in the range of $721 million to $723 million.
• Top-line gains were driven by a 34.7% increase in subscription revenue, to $624.4 million, and 29.4% growth in professional-services revenue, to $118.8 million.
• On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and acquisition costs, Workday generated net income of $73.5 million, or $0.31 per share, well above the $0.14 per share most investors were anticipating.
• Generated operating cash flows of $114.3 million and free cash flows of $58.9 million.
• Following last quarter's early August close of its $1.55 billion acquisition of business-planning cloud-platform company Adaptive Insights, Workday went live on Adaptive Insights' Business Planning Cloud product in only 10 weeks. Adaptive Insights also extended its flagship product with a new strategic workforce-planning solution.
• The company unveiled Workday People Analytics, using AI-powered analytics to provide key metrics on critical business activities.
• Notable new HCM (human capital management) customers this quarter included Bank of Montreal, Glencore International, and American Airlines subsidiary Piedmont Airlines. New Workday Financial Management customers included Atlanta Braves Baseball,  Spectrum Health, H&R Block, Fox, and an unnamed "large U.S.-based financial services organization."

What management had to say

Workday co-founder and CEO Aneel Bhusri stated:

We had a great third quarter and continue to see significant momentum across our suite of products. We extended our market leadership in HCM, welcoming more Fortune 500 customers to the Workday community, and accelerated adoption of Workday Financial Management as more finance organizations move to the cloud. As we look to the remainder of fiscal 2019, we are confident that our commitment to customer satisfaction and product innovation, coupled with our strong company culture, will continue to deliver meaningful growth and customer success.

Looking forward

For the current fourth quarter of fiscal 2019, Workday expects revenue of $775 million to $777 million, or growth of 33% at the midpoint, including subscription revenue of $663 million to $665 million (up 35% to 36%) and professional-services revenue of $112 million.

Workday raised its full fiscal-year 2019 outlook to call for revenue of $2.808 to $2.810 billion, up from its old guidance for $2.765 billion to $2.772 billion, including subscription revenue of $2.375 billion to $2.377 billion and professional services revenue of $433 million. Workday anticipates adjusted operating margin for both the fourth quarter and full fiscal-year will be roughly 10%.

Finally, with the caveat that it's still in its early planning stages, Workday offered preliminary guidance for fiscal 2020 subscription revenue to increase to a range of $3 billion to $3.01 billion -- good for growth of roughly 26.5% at the midpoint -- with adjusted operating margin expanding to around 12%. 

Put simply, this was an exceptional performance that effectively showcases the enviable momentum and expanding adoption of Workday's growing suite of HCM and financial-management products. Even with shares up more than 40% in the year leading up to this report, the stock is understandably soaring right now in response.