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Stock Analyst Update

Workday Remains Strategically Focused on Financials

We view shares as slightly undervalued but would wait for a larger margin of safety before investing.


Narrow-moat Workday’s (WDAY) third quarter indicated that its strategic vision is increasingly set on cloud financials, bolstered by its recent acquisition of strategic sourcing company Scout RFP. The company believes that large enterprises have an appetite for the firm’s Cloud Financials suite (which includes core Financials, Adaptive Planning, procurement, PRISM Analytics and Scout RFP) as more and more Fortune 500 companies are starting to show up in Workday’s pipeline. Meanwhile, the company’s core HCM business continued to show strength, adding six more Fortune 500 companies in the quarter and approaching 50% penetration within this group of 500 firms. While Workday’s third-quarter results exceeded guidance and management raised its outlook for the remainder of the year, we are leaving our fair value estimate unchanged at $183 as the initial outlook for subscription revenue for fiscal 2021 came in below our expectations. With shares trading near $170, we view shares as slightly undervalued but would wait for a larger margin of safety before investing.

Workday’s third-quarter results came in ahead of guidance on increased sales execution and operating costs being pushed out into future quarters. Subscription revenue was $798.5 million, ahead of guidance of $783 million to $785 million and up 28% year over year. Subscription revenue was $139.6 million, also ahead of guidance of $135 million and up 17.5% year over year. The outperformance came from particularly strong sales execution in the first month of the quarter. Sales are typically backloaded to the last month of the quarter. Non-GAAP operating margins were 15.2%, up from 6.7% in the same quarter last year. The better than expected profitability (guidance 10.5%) came from some marketing spend and hiring being pushed out into the fourth quarter.

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John Barrett does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.