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Workday's Q2 Earnings Beat on Solid Subscription Growth: Stock to Gain?

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Workday, Inc. (WDAY - Free Report) , a leading provider of enterprise-level software solutions for financial management and human resource domains, reported better-than-expected second-quarter results. Non-GAAP earnings of $1.75 per share surpassed the Zacks Consensus Estimate by 12 cents. The company recorded non-GAAP earnings of $1.43 in the year-ago quarter.

Revenues surged 16.7% year over year to $2.085 billion, surpassing the Zacks Consensus Estimate by $15 million. The solid customer wins in multiple verticals including education, financials, healthcare, public sector and more primarily drove the outperformance. The company currently boasts a customer base of more than 10,500 worldwide.

Workday, Inc. Price, Consensus and EPS Surprise

Workday, Inc. Price, Consensus and EPS Surprise

Workday, Inc. price-consensus-eps-surprise-chart | Workday, Inc. Quote

WDAY’s Segment Performance

Net sales from subscription services reached $1.903 billion up 17.2% year over year. The figure marginally beat our estimate of $1.89 billion. Total subscription revenue backlog increased 20.9% year over year to $21.58 billion, surpassing our estimate of $20.94 billion in the quarter.

Strong performance in Asia Pacific, EMEA (Europe, Middle East and Africa) and Australia are major growth drivers. Several contracts won in the region, including GE Vernova, First Bus and Sunrise Senior Living, have bolstered its market leadership in the human capital and financial management market. Strategic relationships with Terumo Corporation and Shizen Energy and business expansion with Tokyo Electron have also strengthened its foothold in Japan. 

Workday solution is increasingly gaining traction among government customers worldwide. The company was accepted to the government's Digital Transformation Agency Software Marketplace in Australia, significantly increasing its prospect among federal agencies in the country. Delaware County, County of San Joaquin and Santa Cruz County in the United States selected Workday’s solution in the quarter.

In healthcare, the company reported multiple customer wins including Grady Health System, Reid Health and Children’s National Medical Center. Florida A&M, the University of Mississippi and Clemson University opted to deploy WDAY’s full suite of solution to enhance the organizations’ HR and finance processes. Workday currently has more than 70 million users under contract with 2,000 plus customers in the financial management portfolio.

The company is putting a strong emphasis on AI advancements to enhance its product offerings. It introduced Workday Extend Developer Copilot powered by generative AI, which allows developers to build customized apps on the platform. Strategic partnerships with Equifax and Salesforce are driving innovation and have enhanced WDAY’s portfolio.

Professional services contributed $182 million, up from $163 million in the year-ago quarter. The net sales beat our estimate of $174.6 million.

Financial Position of Workday

In the July quarter, sales and marketing costs rose to $611 million from $524 million in the year-earlier quarter. Product development costs increased to $649 million from $610 million in the year-ago quarter.

In the second quarter, Workday generated $571 million in cash from operations compared with $425 million in the year-ago quarter.  In the first six months of fiscal 2025, the company generated $943 million in cash compared to $703 million in the prior-year period.

As of July 31, 2024, the company had $7.37 billion in cash and cash equivalents, with $2.98 billion long term debt.

In the second quarter, the company bought back 1.4 million shares worth $309 million from its total $500 million buyback authorization.

Workday’s Guidance

For fiscal 2025, the company expects subscription revenues in the range of $7.7 billion to $7.725 billion, indicating growth of 17% year over year. Professional services revenues are expected to be in the $680-$690 million range. The non-GAAP operating margin is anticipated to be 25.25%. Capital expenditure is approximated to be $330 million.

For the third quarter of fiscal 2025, Workday expects Subscription services revenues to be $1.955 billion. Revenues from Professional services are estimated to be $175 million. For the fiscal third quarter, the non-GAAP operating margin is approximated to be 25.25%.

Will Strong Earnings Boost WDAY’s Share Price?

Several initiatives to drive efficiency in its business operations and AI integration across its product suite are expected to boost sustainable and profitable growth at scale. Strong focus on innovation is expected to improve market share in the core HR and finance market in the upcoming quarters.

WDAY’s Price Performance

Workday’s shares have risen 9.5% over the past year compared with 32.9% rise of its industry.

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WDAY’s Zacks Rank & Stocks to Consider

Workday currently carries a Zacks Rank #2 (Buy).

Arista Networks, Inc. (ANET - Free Report) sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last reported quarter, it delivered an earnings surprise of 8.25%. It is engaged in providing cloud networking solutions for data centers and cloud computing environments. The company offers 10/25/40/50/100 Gigabit Ethernet switches and routers optimized for next-generation data center networks. 

Ubiquiti Inc. (UI - Free Report) carries a Zacks Rank #2 (Buy) at present. The company offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. Its excellent global business model, which is flexible and adaptable to evolving changes in markets, helps it to beat challenges and maximize growth. The company’s effective management of its strong global network of more than 100 distributors and master resellers has improved its visibility for future demand as well as inventory management techniques.

AudioCodes Ltd. (AUDC - Free Report) , carrying a Zacks Rank #2 at present, delivered an earnings surprise of 10.14%, on average, in three of the trailing four quarters. It is a vendor of advanced voice networking and media processing solutions for the digital workplace. AudioCodes enables enterprises and service providers to build and operate all-IP voice networks for unified communications, contact centers and hosted business services.


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