Workday Q2 2020 beats estimates, cautiously ups its forecast for the full year

Profile picture for user gonzodaddy By Den Howlett August 29, 2019
Summary:
Workday posts a record Q2 2020, ups its outlook but remains cautious. On this occasion, they're right to do so.

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I can't count the number of times I've written it before but here we go. Oops - they did it again. Workday beats on forecasts for Q2 2020 (press release) and raises its outlook for the remainder of the financial year. How long has it been since we wrote a similar headline? All of three months. 

By the numbers:

Total revenue increased year over year by 32.2% to $887.8 million with sup 33.9% to $757.2 million. The operating loss rose sharply from $89 million to $122.5 million, increasing from 10.1% to 13.2% of revenue. Much of that increase was due to an oversized increase in the cost of delivering professional services but as always, stock-based compensation was the main culprit, weighing in at $209 million. Workday generated an operating cash flow of $100.3 million in the period.

Going forward, Workday is forecasting full-year revenue of $3.06 to $3.07 billion. On an analyst call, Robynne Sisco, co-president and chief financial officer emphasized that in order to meet the current aggressive targets that the company has 'a very tough comp coming into Q3 and Q4.'

Commenting on the impact of Adaptive, Aneel Bhusri said:

There's no question that it has helped...and it broadens the appeal. I think Prism Analytics does that as well...It is a strong performer and continues to be so. I think you'll see a set of applications on top...it's very exciting.

In answer to a question about the impact of macro-economic issues such as Brexit and the escalating trade war between the U.S. and China, Bhusri was cautious:

We are taking a wait and see approach and trying to read the tea leaves the same as everyone else.

Talking to the issue of HR market penetration opportunity, Bhusri said of the Fortune 500,

There are probably 200 companies that haven't yet made a decision...when you look at the Fortune 500, candidly, none of our competitors have customers in production with 100,000 employees or even 50,000. 35 of 50 of the Fortune 100 are live. It's a huge advantage. 

Addressing the question of the gap (sic) between GAAP and non-GAAP numbers, Sisco said that Workday will continue to set aside around 20% of revenue for stock-based compensation until 2020 at which point she expects that the disparity will reduce substantially. That is definitely one to follow for a company that has racked up just shy of $2.4 billion in losses. Even so, the market liked what it heard and pushed the stock price up 2.6% in after-hours trading. 

My take

It only seems yesterday that I was forecasting Workday as a billion-dollar business when competitors didn't think it had much on offer and yet here we are with the company seemingly firing on all cylinders. 

Bhusri has always had the vision that Workday would be both an HR and financials system of record so to hear that a year in, the company could report

The addition of more than 800 new Adaptive Insights customers, machine learning advancements, the completion of the first phase of the Adaptive Insights integration with Workday as part of the Power of One 

must be giving the Workday team a sense of comfort that it is no longer just perceived as an HR vendor. 

International macro-economic issues remain in sight. Today, Workday mostly sells into English speaking countries but that doesn't provide any comfort when considering the long term health of the overall market. 

Workday earnings releases routinely show some sort of upside surprise but on this occasion, the company was careful to dial down any rhetoric that might suggest outsized results in the back half of the year. On this occasion, I'd say that was wise.