And yet, the stock opened for trading with a 4% loss. The obvious question to ask in reaction is, "Why?" As we discuss below, there are two likely explanations: 1) its billings growth wasn't as strong as expected, and 2) the valuation on the stock is pretty rich.
As noted above, WDAY is a provider of cloud-based human resources and financial software. Its Workday Human Capital Management application helps businesses and organizations manage typical HR functions, such as compensation, absence, employee benefits administration, talent management, and career and development planning. As of the end of Q1, Workday reported that the HR application’s customer base numbers over 2,200.
The company’s other core product is Workday Financial Management, which provides general ledger, accounting, accounts payable and receivable, cash management, employee expense and revenue management, and other functions. This product has been growing nicely for WDAY, up more than 50% in 1Q19; new customers secured during the quarter include Sprouts Farmers Market and RaceTrac Petroleum.
Circling back to the Q1 results, WDAY posted EPS of $0.33, beating the $0.26 consensus, and higher by 14% year/year. The performance here was boosted by record gross margin and by overall spending being slightly lower than had been expected.
On the top line, revenue jumped by 29% to $619 mln, also ahead of a $610 mln consensus. While still solid, this 29% growth is Workday’s slowest mark since going public in 2012. As the company grows in scale, it is natural that revenue growth will decelerate over time. What has some investors disappointed, though, is that billings growth came in at a rather modest +8% to $497 mln, which comes up short of the $520 mln consensus. Still, it should be noted that the weakness seems to be partially attributable to some billings being pushed into later quarters. So the issue is at least in part simply one of timing rather than of a tail-off in demand.
Looking at some of WDAY's other key metrics, subscription revenue backlog was $5.2 bln, up a healthy 31%, and operating cash flow hit a record high of $470 mln, up 28%.
Finally, WDAY also bumped its FY19 subscription revenue higher to $2.275-2.29 bln from $2.265-$2.28 bln. However, WDAY also stated during its post-earnings conference call that it expects Q2 operating margin in the range of 9-10%, reflecting a decline from Q1's 13.1%, as it prioritizes investment in growth opportunities over margin outperformance. That said, the company still anticipates operating margins of 12% for the full year.
To conclude, WDAY issued another solid report, brightened by better-than-expected earnings and revenue and record highs in gross margin and operating cash flow. But with a Forward P/S of about 10.5x, is the company has little room for error, which amplifies the importance of the quarter’s billings shortfall. Overall, though, WDAY's business is clearly healthy, and the billings miss looks like a hiccup in an otherwise solid performance.