Workday brings home the bacon in Q3 2015 – Wall Street doesn’t like the flavor

SUMMARY:

Workday’s numbers come in above expectations and get trashed in after hours trading. What’s happening?

Workday Dashboard
Workday Dashboard

Let me get this right. Workday brings Q3 2015 revenue numbers a bit better than expected but because the forward forecast is a bit light on expectations the stock price gets hammered. OK. What’s going on? Let’s review the numbers – from the blurbs.

  • Total revenues were $215.1 million, an increase of 68% from the third quarter of fiscal 2014. Subscription revenues were $164.4 million, an increase of 75% from same period last year.
  • Operating loss was $51.5 million, or negative 23.9% of revenues, compared to an operating loss of $40.4 million, or negative 31.6% of revenues, in the same period last year. Non-GAAP operating loss for the third quarter was $2.9 million, or negative 1.4% of revenues, compared to a non-GAAP operating loss of $19.9 million last year, or negative 15.6% of revenues.1
  • Operating cash flows for the third quarter were $41.0 million and free cash flows were $13.3 million. For the trailing twelve months, operating cash flows were $88.5 million and free cash flows were a negative $4.8 million.2
  • Cash, cash equivalents and marketable securities were approximately $1.8 billion as of October 31, 2014. Unearned revenue was $508.1 million, a 44% increase from last year.

So far, so good. But it was when we got to the forward forecast that things got sticky. Per Mark Peek CFO:

Total revenues for the fourth quarter are expected to be within a range of $219 million to $222 million or growth of 54% to 56% as compared to the prior year. Subscription revenues are anticipated to be within a range of $176 million to $178 million reflecting year-over-year growth of 59% to 61%.

It was at that point after hours traders hammered the stock price, at one point it was trading lower by 8%, a sizeable sell off but not remarkable for a market that has been white hot in the last several years and where any whiff of perceived weakness is hit hard. But then this isn’t a weak forecast. It is in line with expectations. And there’s the rub.

Based upon the company’s forecasts of no more than 40% increase in sales, the revenue run rate for 2015-16 is slightly above where I had it pegged two years ago at $1 billion. But Workday has a history of forecasting conservatively and then over delivering. It has done the same with the current numbers but not lifted its Q4 forecast. And it is holding back on providing additional guidance until it gets past the year end. Shame on it 😉 What else might be worrying analysts?

My sense is that Workday management continues to exercise restraint in looking forward but that on this occasion it is being ultra cautious at a time when macro economic trends are uncertain and where its expansion into Europe is at an early though interesting stage with wins like Unilever and Rolls Royce under its belt. Analysts typically are looking for more bullish statements.

It is also early on the Insights tools where, according to the company, they’re still working out how best to price these, given they also require access to a different database from that used by the transactional system.

Finally, Workday has dropped providing customer numbers until it reaches certain milestones. So for example it passed 100 customers on financials with 50% live today.

Overall then, my sense is that analysts have less visibility into where Workday is going. Take that with a relatively low growth number for fiscal 2016 compared to the past and it is not surprising that the stock price is falling. If anything, I would argue that Workday’s stock price has been overvalued in the past as analysts got over excited about the Workday opportunity.

However, the company has plenty of new products to add into the mix: Insights is new, Recruiting is doing well but it is early days, the new Student applications are new but with a potential market of 2,000-3,000 higher education organizations in the US alone.

In short – we all have to wait and see what Q4 brings and with it, a forecast with which both the Street and Workday can live.

Disclosure: Workday is a premium partner at time of writing.