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Workday Tells Investors to Hurry Up and Wait for New Product Growth

By Steve Symington - Dec 5, 2019 at 4:02PM

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There was nothing wrong with the company's latest quarter. But the market jeered guidance for delayed growth from new products and acquisitions.

When Workday (WDAY -5.57%) announced stronger-than-expected fiscal third-quarter 2020 results late Tuesday, it was surprising at first to see shares of the human capital management (HCM) and financial software specialist plunging nearly 5% on Wednesday in response -- that is, until digesting management's underwhelming guidance for the coming year.

But before we get to that outlook, we need more perspective on what Workday accomplished over the past few months, starting with its headline numbers.

Workday results: The raw numbers


Fiscal Q3 2020*

Fiscal Q3 2019



$938.1 million

$743.2 million


GAAP net income (loss)

($115.7 million)

($153.3 million)


GAAP earnings (loss) per share




Data source: Workday. *For the quarter ended Oct. 31, 2019. GAAP = generally accepted accounting principles. 

Breaking it down

Workday's top-line growth was driven by a 27.9% increase in subscription revenue to $798.5 million, and 17.5% growth in professional services revenue to $139.6 million. Each of these figures arrived well above Workday's guidance provided in August, which called for lower total revenue of $918 million to $920 million, subscription revenue of $783 million to $785 million, and professional services revenue of $135 million.

On the bottom line, note that Workday's GAAP earnings include the impact of items like acquisition costs and stock-based compensation. On an adjusted (non-GAAP) basis, Workday generated net income of $126.1 million, or $0.53 per share, up from $0.31 per share and also well above analysts' consensus estimates for $0.37.

During the subsequent conference call, CEO Aneel Bhusri confirmed that the company added six new Fortune 500 customers and 11 Forbes Global 2000 customers for its core HCM product during the quarter, including Anheuser-Busch InBev, Magna International, Royal Bank of Canada, and Sutter Health. Workday continued to effectively build on its momentum from fiscal Q2, when management revealed it counted over 40% of the Fortune 500, half the Fortune 100, and 17% of the Global 2000 as HCM customers.

Meanwhile, Workday now boasts roughly 800 total customers for its financial management product, with notable new customers including the Asian-themed restaurant chain P.F. Chang's, the State of Iowa, advertising agency WPP Group, and an unnamed large "natural and organic grocery store chain with over 85,000 employees."

Finally, just subsequent to the end of the quarter, Workday announced a $540 million all-cash deal to acquire Scout RFP, a leading cloud-based strategic sourcing and supplier engagement platform.

Bhusri stated:

Companies of all sizes and industries continue to select Workday, and we're thrilled that as of the end of Q3, we have more than 3,000 customers and 42 million users. As our community grows, so do our applications. We recently announced plans to deepen our offering for the office of finance with the intended acquisition of Scout RFP. We also unveiled several ways our customers can leverage leading machine-learning capabilities that are powering our applications -- helping them to make more-informed decisions as they navigate this changing world of work.

On the impending impact of new products and acquisitions

CFO Robynne Sisco added that the company "executed well," noting that it is "well positioned as we enter our seasonally strongest quarter."

More specifically for the (current) fourth quarter of fiscal 2020, Workday sees revenue ranging from $962 million to $964 million, including subscription revenue of $828 million to $830 million, and professional services revenue of $134 million. Most analysts were expecting lower fiscal fourth-quarter revenue of $958 million.

Looking ahead to fiscal-year 2021, however -- and with the caveat that the company is still early in its planning cycle -- Sisco told investors that Workday is expecting full-year subscription revenue to increase roughly 21% year over year, to $3.73 billion. That figure was well below Wall Street's models for fiscal 2021 subscription revenue closer to $3.81 billion.

Sisco elaborated during the call that while Workday has "a lot of new products coming to market" next fiscal year, including Workday Cloud Platform, People Analytics, and its new Employee Experience product, those offerings "won't start to have any notable impact on [Workday's] revenue growth until fiscal 2022 and beyond." And the Scout RFP acquisition won't be much help in the near term, either, adding less than 1% to consolidated subscription revenue growth next year.

In the end, these might well be the right moves for Workday to continue finding sustained revenue growth from its ever-larger base. But our market hates being told to hurry up and wait, and the stock is responding in kind.

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