Workday's (WDAY -1.19%) stock jumped 5% on Aug. 25 after the cloud-based software company issued its latest earnings report. For the second quarter of fiscal 2024, which ended on July 31, its revenue rose 16% year over year to $1.79 billion and exceeded analysts' expectations by $20 million. Its adjusted net profit grew 74% to $378 million, or $1.43 per share, and also cleared the consensus forecast by $0.17 per share.
That earnings beat was impressive, but does Workday still have room to run after its year-to-date rally of more than 40%? Let's dig deeper to find out.
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Another quarter of slower but stable growth
Workday's human capital management (HCM) platform provides staffing and payroll tools as cloud-based services. It offers additional tools for managing budgets, analyzing data, and make data-driven decisions. It went public in 2012 and currently serves over 10,000 organizations worldwide, including more than half of the Fortune 500.
Between fiscal 2013 and 2023 (which ended in January 2023), Workday's revenue logged a compound annual growth rate (CAGR) of 37%. It generated 90% of its revenue from subscriptions last year. As the following table illustrates, its growth in subscription revenue cooled off over the past year, but its total subscription backlog continues to grow. which implies there's still plenty of pent-up demand for its HCM services. Its adjusted operating margins have also been expanding.
|
Metric |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
22% |
21% |
20% |
17% |
16% |
|
Subscription revenue growth (YOY) |
23% |
22% |
22% |
20% |
19% |
|
Total subscription backlog Growth (YOY) |
27% |
29% |
28% |
32% |
33% |
|
Adjusted operating margin |
19.6% |
19.7% |
18.5% |
23.5% |
23.6% |
Data source: Workday. YOY = year-over-year.
During its latest conference call, co-CEO Carl Eschenbach said Workday still hadn't "seen any pullback" that could be directly attributed to the "macro headwinds." Instead, he suggested Workday's "value proposition is only resonating more" in this tough market as companies "look to consolidate" their HCM services to cut costs. That's why its net revenue retention rate -- which gauges its year-over-year growth per existing customer -- remains above 100% as its backlog expands.
Workday also raised its full-year subscription revenue guidance from $6.55 billion-$6.58 billion to $6.57 billion-$6.59 billion, which would represent an 18% increase. Analysts expect its total revenue to climb 16% in fiscal 2024, compared to its 21% growth in fiscal 2023. Furthermore, it lifted its full-year adjusted operating margin forecast by 50 basis points to 23.5%, which would represent a 400-basis-point improvement from fiscal 2023. Wall Street expects its adjusted EPS to increase 47% for the full year.
In its earnings release, Workday said it would maintain a "disciplined approach of investing in long-term growth while expanding margins." It trimmed 3% of its workforce earlier this year, but it still plans to increase its head count for the full year. Therefore, Workday is merely streamlining its business for future growth instead of aggressively cutting costs through mass layoffs. It expects its operating cash flow to rise 18% to $1.95 billion in fiscal 2024 even as it hires more workers.
Does Workday's stock still have room to run?
Workday's steady growth, confident outlook, and rising margins set it apart from many of its cloud-based software peers. Its stock also still looks reasonably valued at 45 times forward earnings. ServiceNow and Salesforce, two cloud software leaders that are expected to generate slower earnings growth than Workday in their current fiscal years, trade at 58 and 28 times forward earnings, respectively.
Based on those comparisons, I believe Workday still has room to run this year. It's still more than 20% below its all-time high from November 2021, and it could head a lot higher as the broader macroeconomic environment improves.
