UPDATED 20:35 EDT / MAY 28 2019

APPS

Workday beats earnings targets again but investors not so happy

Updated:

Enterprise software company Workday Inc. has extended its positive streak, posting results today that came in above expectations and raising its outlook for the next quarter and full year.

The company, which sells financial management and human capital management software, reported first-quarter earnings before certain costs such as stock compensation of 43 cents per share on revenue of $825.1 million, up 33% from the year before. Wall Street was looking for earnings of just 41 cents per share on revenue of $814.3 million.

Workday added that its subscription revenue for the first quarter rose 34%, to $701 million, while professional revenue topped $124 million, up 29%. The company reported a net loss of $116.3 million, however. This was wider than the $74.4 million net loss it posted a year ago.

Still, the performance was good overall, marking the third successive quarter in which Workday has beaten expectations. And that could continue, as the company updated guidance for the current quarter and full year. The company said it’s now expecting subscription revenue of $746 million to $748 million in the next quarter, versus the analyst consensus of $741.7 million. For the full year, Workday predicts subscription revenue of $3.04 billion to $3.06 billion, versus Wall Street’s forecast of $3.047 billion.

With all the good news, it might have been reasonable to expect a positive reaction from shareholders, but its share price remained more or less flat in after-hours trading after an initial drop. Shares rose 1% in regular trading on confidence ahead of the results, on a mildly down day for the markets. Update: Shares fell 4.5% in Wednesday trading.

“Overall, Workday’s solid results and positive outlook bode well for the company,” said Charles King, an analyst with Pund-IT Inc. “The goals for any subscription services based organization include expanding both its customer base and commercial engagements with clients.”

And expand is exactly what Workday is doing. While not revealing any numbers, Workday Chief Executive Officer Aneel Bhusri (pictured) noted some key customer acquisitions in the quarter just gone, including the likes of Carl Zeiss AG, Cisco Systems Inc., Daimler Trucks North America, Old Mutual Ltd. and Procter & Gamble Co. in its HCM business. Bhusri added that Workday also saw existing customers increase spending.

“If any dark clouds cast shade on this sunny announcement, they relate to Workday’s expenses rising alongside its business growth,” King added. “That’s to be expected from businesses in expansion mode and so long as it doesn’t get out of hand, investors are likely to go along.”

Workday’s growth is being driven by the ongoing shift among enterprises to cloud-based applications they can use to manage their payrolls and human resources. The company committed itself to this trend in a big way with its $1.55 billion acquisition of Adaptive Insights Inc. last June. Since then, its began selling a new workforce planning module for the Adaptive Insights Business Planning Cloud, which is used to create and test complex business scenarios. The new product, which is really more a set of templates to use with the existing business planning engine, enables better collaboration between the finance and human resources departments for workforce planning, analysis and reporting.

With the new product, Workday is trying to position itself as a provider of comprehensive back office services for small and medium sized businesses. However, Bhusri said that while Adaptive Insights added about 150 new customers in the last quarter, most of those were in fact larger companies.

Workday also saw encouraging growth in its financial management software business, where Bhusri said the company “continued momentum in Q1 with over 50% customer in net new ACV growth.”

“Workday keeps growing and it looks like its suite gamble is paying off, confirming that enterprises want to buy integrated applications suites to make their business move faster and to accelerate as an enterprise,” said Holger Mueller, principal analyst and vice president of Constellation Research Inc. “It’s also good to see Workday also addressing more product depth, for instance in recruiting. On the financial side though, the quest of the path to profitability has gotten a little longer. The next few quarters will have to show how Workday is working towards narrower losses.”

Photo: Amazon Web Services Inc.

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