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John Engle
John Engle
Articles (238) 

Workday: More Growth Story Than Value Play

Revisiting this zippy human capital management company since it jumped 20%

January 07, 2019 | About:

In July 2018, we outlined our views on Workday Inc. (WDAY), a SaaS-based human capital management software vendor.

At the time, we pointed to a solid upward revenue trend and its high number of recurring customer subscriptions as reasons to be positive about the stock, while at the same time cautioning that high costs needed to be reigned in and that the company would have to move into profitability in the future to fully transition into a mature tech company.

Six months down the line, we revisit Workday to see what has changed.

Financial performance

Since we last discussed Workday, shareholders have had an up-and-down few months. Following a great third-quarter earnings call, however, shares have shot up to around $163 per share, a 19% increase from its July price. What exactly was the cause of such investor ebullience?

For the third quarter, Workday posted revenues of $743.2 million, beating analyst expectations of $723.3 million and representing a 34% increase year over year. The story on the bottom line is somewhat more nuanced. The company reported GAAP net losses of $153.3 million, up from $85.5 million year over year. However, on an adjusted non-GAAP basis, excluding the costs of stock-based compensation and acquisitions, Workday reported net income of $73.5 million, which translates to earnings of 31 cents per share, significantly beating expectations of 14 cents, and it was this non-GAAP figure that investors reacted so positively to.

Management also provided guidance for the fourth quarter of fiscal year 2018 and for the entirety of 2019. Fourth-quarter revenue was forecast to come in at between $775 million and $777 million, which would represent 33% growth at the midpoint. Total revenue for 2019 was forecast to be in the $2.808 billion to $2.810 billion range, which would be a 31% increase year over year.

Product expansion

Workforce has continued to expand and refine its suite of offerings, in particular through its $1.55 billion acquisition of Adaptive Insights, a leading cloud-based provider of financial planning services. Workforce is in the process of integrating their entire basket of services with Adaptive, allowing users to access all their data on one single platform with a single unified security system. CEO Aneel Bhusri had this to say on the subject:

“Our ability to offer a full platform solution across HR, payroll and finance with lowered implementation costs have enhanced our already strong competitive position and accelerated our growth in that segment of the market. With the success of Workday launch in the U.S. we are now planning to take that program overseas in fiscal year 2020 to target medium enterprise businesses outside the U.S.”

Increasingly, chief financial officers and chief information officers are opting to use software that allows them to unify all of their human resources and financial data under one proverbial roof. In this context, the pricey acquisition of Adaptive Insights is certainly a forward-thinking one.

Verdict

We note with satisfaction that revenue growth has continued at a healthy clip, and that management has a long-term view of the direction that Workday should be heading in.

That said, more conservatively minded investors may be spooked by the disparity between GAAP and non-GAAP income and may want to wait to see a more definite move to profitability. Furthermore, at a price-sales ratio of 13.3, the company is not cheap - industry rivals Salesforce (NYSE:CRM) and Oracle (NYSE:ORCL) have price-sales ratios of 8.5 and 4.7.

The story of Workday is certainly one of growth, rather than of value.

(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)

Disclosure: No positions.

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About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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