UPDATED 18:55 EDT / AUGUST 30 2017

CLOUD

Workday sales surge on strength of cloud financial applications

Thanks to strong growth in new and renewing customers, Workday Inc. today easily exceeded revenue estimates for the fiscal second quarter and raised guidance for the remainder of the year.

But investors who have already watched shares rise more than 62 percent this year apparently wanted even more. Workday stock rose less than half a percentage point in after-hours trading, though shares had risen 3 percent in regular trading today. Update: On Thursday, shares closed up about 2 percent, to $109.76 a share.

There wasn’t much for investors to complain about in the key numbers, though. Subscription revenues jumped 42 percent to $435 million, driven by strong new customer growth and renewing customers that increased the value of their contracts, said Chief Financial Officer Robynne Sisco. More than 90 percent of subscription revenue came from deferred contracts, indicating a high level of predictability.

Operating profits of $49 million were up sharply from $6.1 million in the same quarter last year. Operating profit comprised 9.3 percent of revenues, compared with just 1.6 percent a year ago. Net income of 24 cents per share handily beat analyst expectations of 15 cents and was up significantly from 4 cents a year ago.

However, Sisco said margins will continue to fluctuate from quarter to quarter as the company invests heavily in hiring. Workday added 500 employees this quarter to bring its total employment to 7,400.

Focus on finance

Although Workday built its business on human capital management, executives speaking on the quarterly conference call stressed that financial applications, where SAP SE and Oracle Corp. rule, are a growing area of focus. Gartner Inc.’s publication of his first Magic Quadrant for cloud financial management services in June was a major step, said Aneel Bhusri (pictured), co-founder and chief executive of Workday.

“As companies get through their [customer relationship management] and HCM projects, they see financials as the logical next place to go,” he said. Sisco added, “We don’t see any reason why financials can’t mirror the HCM opportunity over time.”

Workday raised its full-year fiscal 2018 outlook to between $2.093 billion and $2.1 billion, which would represent a 33 percent increase over the previous year. That’s up slightly from earlier forecasts of $2.038 billion to $2.053 billion. Estimates of subscription revenues were raised to between $1.75 billion and $1.757 billion from earlier estimates of between  $1.705 billion to $1.720 billion.

Sales and marketing expenses rose 36 percent year-over-year, which was below the 41 percent overall revenue increase. That indicates that word-of-mouth is increasingly driving sales, a dynamic that Bhusri stressed in his comments. He said he recently got a call from a chief information officer that the company has been trying to connect with for five years.

“He said he’s heard many good things from customers, so why don’t we come in and see him?” Bhusri said. “A couple of years ago people would wait to see what SAP and Oracle were delivering, but now at least we’re under consideration.” He cited a recent major contract win with Siemens AG as evidence that Workday is now able to compete with giants like SAP SE in the German software giant’s own back yard.

Image: Twitter

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