Workday Earnings: Continued Strength in Renewals Shows no Sign of Slowdown; Raising Valuation

We are raising our fair value estimate for wide-moat Workday WDAY to $245 from $229 after the firm reported second-quarter results which surpassed our top- and bottom-line GAAP expectations. Following strong results in the quarter, management raised its full-year outlook for subscription revenue and profitability. With shares up around 4% afterhours, we view the high-quality stock as fairly valued. We continue to believe Workday will surpass SAP in terms of the global enterprise resource planning market share in a decade, further supported by the firm building on its momentum in the quarter.

Revenue increased 16% year over year in the second quarter to $1.8 billion, exceeding our expectations. Subscription revenue grew to $1.6 billion, representing 19% growth year over year. Despite ongoing macroeconomic uncertainty, the firm enjoyed early renewals coupled with longer contract durations in the quarter, signaling increasing stickiness as customers opt for Workday’s software across more functionalities. With this, the total subscription revenue backlog came to $17.9 billion, impressively up 32% year over year. Overall, non-GAAP operating margin of 24% was up from 20% a year ago, leading to non-GAAP earnings of $1.43 per share.

For fiscal 2024, Workday now expects subscription revenue between $6.57 billion and $6.59 billion, up from $6.55 billion to $6.58 billion. Non-GAAP operating margin is expected to be 23.5%, up 50 basis points from management’s previous guide. For the third quarter of fiscal 2024, Workday guides for subscription revenue of $1.679 billion at the midpoint, implying 17% year-over-year growth. Looking ahead, we anticipate that as the macroeconomic environment normalizes, subscription revenue will pick up momentum, and forecast 20%-plus growth in fiscal 2026.