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WDAY rallies 10% on upbeat operating margin outlook

AInvestFriday, Aug 23, 2024 8:51 am ET
2min read

Workday (WDAY) reported its Q2 earnings, delivering results that exceeded analyst expectations on both revenue and EPS. The company posted adjusted EPS of $1.75, up from $1.43 year-over-year, beating the consensus estimate of $1.64. Revenue came in at $2.09 billion, marking a 17% increase year-over-year and slightly surpassing the expected $2.08 billion. Subscription revenue, a key metric for the company, matched estimates at $1.90 billion, also reflecting a 17% year-over-year increase. Professional services revenue was $182 million, exceeding the $175.1 million forecasted by analysts, up 12% year-over-year.

Key metrics showed strong performance, with the backlog reaching $21.58 billion, a 21% year-over-year increase, slightly ahead of the $21.52 billion estimate. The company's adjusted operating margin improved to 24.9%, up from 23.6% in the same period last year, and above the 24.7% that analysts had anticipated. These results underscore Workday's ability to manage costs and drive efficiency even in a challenging macroeconomic environment.

Workday provided guidance that suggests a cautious but optimistic outlook for the coming quarters. The company forecasted Q3 subscription revenue of $1.96 billion, aligning with its strategy to maintain steady growth. For the full fiscal year, Workday adjusted its operating margin forecast to 25.3%, slightly above the 25% guidance provided earlier and exceeding the 25.1% consensus estimate. Notably, the company raised its long-term operating margin target to 30% by FY2027, up from the previous target of 25%. This reflects management's confidence in their ability to drive margin expansion through cost management and operational efficiencies.

Several key drivers contributed to Workday's solid performance this quarter. The company's continued traction in its Financial Management (FINS) segment, international growth, and a strong partner ecosystem were highlighted as significant factors. The company also benefited from its AI strategy, which is enhancing customer efficiency and is supported by a vast data repository, giving Workday a competitive edge in the market.

Management did, however, reset its medium-term subscription revenue growth guidance to 15%, down from the previous 17-19% range. This adjustment reflects the current macroeconomic uncertainties and elevated deal scrutiny, which have led to moderated headcount growth and a more cautious approach to new deals. Despite this, analysts view the revised guidance as a de-risking move that balances growth with increased profitability, making Workday's financial outlook more achievable and attractive to investors.

In addition to the earnings results, Workday announced a $1 billion share buyback program, signaling confidence in its long-term growth prospects and a commitment to returning value to shareholders. This buyback authorization is likely to provide additional support to the stock, especially in light of the positive revisions to the company's long-term margin targets.

Overall, Workday's Q2 results and updated guidance indicate a company that is well-positioned to navigate the current economic challenges while continuing to deliver solid financial performance. The focus on improving margins and a more realistic revenue growth outlook has been well-received by the market, as reflected in the positive response from analysts and the subsequent increase in price targets from several firms. As Workday continues to execute its strategy, investors will be closely watching for further updates at the upcoming Financial Analyst Day on September 17th.

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