Workday Shares Nosedive Due To Weak Q2 Guidance

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May 28, 2015
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Workday Inc. (WDAY, Financial) recently reported its first quarter results for fiscal 2016 with non-GAAP loss of $4.0 million or $0.02 a share that topped the consensus estimate of loss of $0.08 a share but declined on year-over-year basis compared to non-GAAP net loss of $23.9 million or $0.13 a share reported in the prior year quarter. At the same time, on a GAAP basis, the cloud computing software maker logged net loss of $61.6 million or $0.33 a share, widening the year-ago quarter’s net loss of $59.4 million or $0.32 a share. The company also provided a slightly downbeat guidance for Q2 2016, following which the Workday shares saw a massive drop of 7.29% to $85.75 in after-hours trading.

Escalated Expenses Drag Earnings

Workday reported a whopping 57% year-over-year growth in sales in Q1 2016 to $251 million, beating the consensus estimate of $245 million. The company had logged revenues of $159.74 million for the first quarter of FY2015. At the same time, Workday also saw 63% growth in subscription revenues during the quarter to $201.0 million. The company also logged unearned revenues of $653.4 million, up 41% compared to the year-ago quarter, but falling short of the company’s expectation of 60% growth.

However, while sales climbed and the company saw growth in its subscriber base, higher stock-based compensation expenses and other costs amounting to $304.4 million more than offset the revenue gains for the quarter, resulting in a marked drop in net earnings. During the year-ago quarter Workday had logged costs and expenses of just $211.8 million. Workday’s operating cash flows for the first quarter stood at $94.1 million while free cash flows stood at $63.9 million. This compares to operating cash flows of $174.4 million and free cash flows of $50.4 million for the trailing twelve months. Further, the company logged cash, cash equivalents and marketable securities of around $1.9 billion as of April 30, 2015.

Following the results, Workday also provided guidance for the second quarter of fiscal 2016. The company projected revenues in the $270 to $274 million range, in line with the consensus estimate of $272.4 million. Although the figure indicates a 45% to 47% year-over-year growth in revenues, investors were expecting a more upbeat outlook. Consensus estimates peg the company’s non-GAAP EPS at a net loss of $0.37 a share, while for the full fiscal, Workday is expected to post net loss of $1.37 a share.

Final Thoughts

Workday’s rivals are Oracle Corp (ORCL, Financial), Salesforce.com Inc. (CRM, Financial) and Europe's biggest software group SAP SE (SAP, Financial). With Salesforce.com Inc posting better-than-expected results for Q1 2015, all eyes were on rival Workday to see if the company followed suit. Consequently, investors were disappointed with the widening of the company’s GAAP net loss compared to the year-ago quarter, although non-GAAP net loss beat the consensus estimate. Further, while the company provided a rather lacklustre guidance for Q2 2016 considering that it has provided above-consensus guidance more often than not since its IPO, experts are also sceptical regarding the company’s short to mid-term growth prospects. Although the average annual earnings growth rate for Workday stands at 35% over the next five years, experts are looking at a negative 18% to negative 24% year-over-year growth for the company during the immediate four years. Consequently, the Workday stock currently carries a ‘sell’ guidance for the short-term.