During a television interview on CNBC’s Squawk Box at the World Economic Forum in Davos, Switzerland, on January 18, 2024, Workday co-CEO Carl Eschenbach spoke about the company’s recent successes. Workday shares rose as much as 14% on Friday, buoyed by the company’s release of fiscal second-quarter results that beat Wall Street forecasts, along with an ambitious plan to increase adjusted operating margin by 2027.
Financial Highlights
- Earnings per share (EPS): $1.75 adjusted, beating forecast of $1.65
- Income: Reported at $2.085 billion, beating expectations of $2.071 billion
Workday reported a 17% annual increase in both total revenue and subscription revenue for the quarter ended July 31. The company’s net income rose to $132 million, or 49 cents a share, from $79 million, or 30 cents a share, a year earlier.
Future projections and strategies
In a recent earnings call, Workday Chief Financial Officer Zane Rowe detailed the company’s financial outlook, raising its adjusted operating margin expectation to 25.25% for fiscal 2025, an increase from previous guidance. By fiscal 2026 and 2027, Rowe expects adjusted operating margin to reach 30%, with annual subscription revenue growth expected to be 15%.
“Our strategic focus on streamlining our operations is evident as we simplify our product and market approaches,” Rowe said. “We are recalibrating our growth investments, ensuring a balance between product innovation and market expansion efforts.”
Market analysts’ reactions
Deutsche Bank, led by analyst Brad Zelnick, revised its 12-month price forecast for Workday from $265 to $275, while maintaining a hold rating. “The revised operating margin target of 30% was a significant and unexpected positive development,” Zelnick noted.
Further positive assessments came from analysts at Citi, Evercore ISI and Piper Sandler, who also revised their price targets upwards following the report.
Economic challenges and conditions
Despite the positive financial performance, Rowe acknowledged that organizations are cautious in signing new contracts and that growth in employee numbers in their customer base is slowing. This caution reflects the broader economic challenges that software companies have faced recently.
However, potential relief appears to be on the horizon, as Federal Reserve Chairman Jerome Powell hinted at potentially beneficial policy changes for cloud software companies like Workday, with a possible lowering of benchmark interest rates. This change could reverse the trend of investors moving toward more conservative investments expected during rate hikes in 2022.
The WisdomTree Cloud Computing Fund, which includes Workday, rose 2% in value during trading on Friday.
Business Outlook
Despite the uncertain market conditions, Eschenbach remains confident in Workday’s positioning. “We believe this challenging IT spending environment is the new normal. However, our strong product offerings position us well for these ongoing conditions,” he said.
As Julie Biel argues, software investments, especially in small-cap companies like Workday, offer promising returns due to their recurring revenue model.
