Workday (WDAY 0.52%) announced its third-quarter earnings recently, delivering results that were better than analyst expectations. Estimates called for $205 million in revenue, with the actual sales coming in at $215.1 million,putting revenues for the quarter up 68% year over year. Losses were also lower than anticipated, thanks to better-than-expected sales and margins. Even with solid results, shares have fallen since the release, largely because of projections of slowing sales growth.
After the earnings release, CEO Aneel Bhusri, CFO Mark Peek, and Investor Relations officer Mike Haase participated in a conference call to shed some light on the period's results and what the future looks like. Here are five key takeaways, with quotes courtesy of SeekingAlpha.com.
Customer satisfaction is very high
One of the most encouraging pieces of data to come out of the earnings release was the increase in revenue from subscriptions. Sales from this segment hit $164.4 million, representing roughly 76% of total quarterly revenues and 75% growth year over year. This is one of the most important metrics to watch for Workday investors, as it essentially establishes a new sales baseline thanks to high customer satisfaction levels.
Our company goal is to always have at least 95% customer satisfaction rate. We are very pleased to announce that for the third year in a row Workday achieved a 97% customer satisfaction rate.
Recording several years at a 97% customer approval rating is a significant achievement for Workday, particularly as brand and perceived reliability are big assets in the enterprise software market, and as the company competes with more established companies like Oracle and SAP AG.
The company sees Workday Insight Applications as a potential game-changer
At the annual Workday Rising conference in early November, the company unveiled Insight Applications, a new product suite that will use big data, machine learning, and predictive analytics to provide management suggestions for expenses management, employee career paths, and other business scenarios. CEO Aneel Bhusri stated toward the beginning of the call that these applications could usher in a new era of business analytics and give Workday customers a significant competitive edge. Here's Bhusri on some of the potentials of the new engine and platform:
In the old days, we would have said here is a set of tools and you can slice and dice the data any way you would like and figure it out. Now, we can actually tell them with 70% confidence, this career path will lead to a successful employee down the road, this one won't.
Bhusri also clarified that Insight Applications was a distinct suite that would lead to incremental sales growth, rather than just a strengthening of its broader product ecosystem. While it wasn't specified in the call, the SYMAN engine that drives Insight Applications will be applied across other products, so general enhancements to Workday's platform will also arrive with rollout of the new suite.
Workday is recording big wins in Europe and other territories
In order to deliver the growth needed to sustain and drive its share price, Workday needs to improve its presence in territories outside North America. Towards the beginning of the call, Bhusri pointed to the signing of U.K. companies like Unilever and Rolls Royce as big wins for the company. He later indicated that the company views its position in the U.K., France, and the Netherlands as strong, and hinted at significant expansion and building momentum in Europe:
And now we are going to begin to move into the other large economies in Europe and I would just say stay tuned on that. So we are seeing the same patterns that we did in the U.S. And in terms of adoption, it's been slower to get going in Europe and now that is going. You see one big company after another looking at a true cloud solution as a right path for them.
Workday could record positive non-GAAP operating margins in fiscal 2016, but cash flow is bigger focus
Explaining the company's $2.9 million non-GAAP operating loss for the quarter, CFO Mark Peek stated that Workday is focused on driving growth in the short term in order to promote long-term profitability. This has been the company's standard, and reasonable, way of contextualizing losses; however, Peek indicated that the company could soon see quarters with positive non-GAAP operating margins, before returning the focus to growth:
We have been focused on operating cash flows particularly looking at on a trailing-12-month basis and we had another strong trailing 12 and it's the eighth consecutive quarter of positive operating cash flows. And so we tend to focus more on the cash flows than we do on the non-GAAP operating margins.
The CFO's comments on this matter may be taken as an encouraging sign on multiple fronts. With a -1.4% non-GAAP operating margin in its most recently completed quarter, the company sees the possibility for positive non-GAAP margins in the next fiscal year, particularly in the latter half of the term. Taken in conjunction with a reaffirmed preference for growing sales, this is somewhat comforting news, as the company's projected 40% growth for the next year is much lower than previous rates.
Workday's balance sheet is solid
In order to deliver the necessary product adoption and revenue growth, Workday will be increasing spending in key areas like sales and marketing. For a young company that has yet to record a profitable quarter, this could be a problem, but Mark Peek's balance sheet outline suggests there's not much to worry about on that front:
Our balance sheet remains strong with more than $1.8 billion of cash and marketable securities and over $500 million of unearned revenue. Trailing four quarter operating cash flows were positive for the 8th consecutive reporting period.
Peek later added that the company's cash and marketable securities had increased $12 million from the previous quarter, and that the quarter's $13 million in free cash flows put trailing-12-month free cash flows at -$5 million. Solid cash reserves and some positive balance sheet momentum are reassuring as the company looks to devote between $100 million and $110 million to capital expenditures this fiscal year, and a capex increase looks probable next year. The balance sheet also supports potential acquisitions, which could be needed to drive growth in key areas.
