Carl Eschenbach, Workday Co-CEO, speaking on CNBC’s Squawk Box at the World Economic Forum’s annual meeting in Davos, Switzerland on January 18, 2024.
Adam Galici | CNBC
Working day Shares jumped as much as 14% on Friday, a day after it issued fiscal second-quarter results that beat analysts’ estimates and announced plans to further expand its adjusted operating margin through 2027.
Here’s how the company did, compared to the LSEG consensus:
- Earnings per share: $1.75 adjusted vs. $1.65 expected
- Annuity: $2.085 billion vs. $2.071 billion expected
Weekday revenue rose about 17% year over year in the quarter ended July 31, according to statement. Subscription revenue growth was up 17%. Net income, at $132 million, or 49 cents per share, was up from $79 million, or 30 cents per share, in the same quarter last year.
On guidance, Workday is now looking for an adjusted operating margin of 25.25% for fiscal 2025, compared to the 25% forecast it provided in May.
On a conference call with analysts Thursday, Zane Rowe, Workday’s chief financial officer, said he expects the company’s adjusted operating margin to grow to 30% in fiscal years 2026 and 2027, along with annual subscription revenue growth of 15%. In September 2023, working day he said it was targeting an adjusted operating margin of 25% for fiscal 2027 and subscription revenue growth of between 17% and 19%.
“We are relentlessly focused on scaling all of our processes across the company as we look at our product and go-to-market initiatives,” said Rowe. “We are also becoming increasingly targeted in our development investments, balancing product development with marketable resources.”
Deutsche Bank analysts led by Brad Zelnick raised their 12-month price target on Workday stock to $275 from $265. They have a hold rating on the stock.
“The 30% increased operating margin target was the big upside surprise, as it now binds both earlier and longer than most expected,” the analysts wrote.
Analysts at Citi, Evercore ISI and Piper Sandler also raised their price targets for the business days following the company’s report.
However, conditions are not ideal for weekdays. Organizations are still more cautious than usual before agreeing to sign contracts, Rowe said, adding that headcount growth in the existing client base has slowed.
Many other software companies have pointed to tougher economic conditions in recent quarters. But on Friday, Federal Reserve Chairman Jerome Powell said “the time has come to adjust policy,” a sign that the central bank will cut the benchmark interest rate. This can benefit growing cloud software companies like Workday. Investors moved away from these assets and opted for more defensive investments in 2022 as they expected interest rate hikes to stave off inflation.
The WisdomTree Cloud Computing Fund, an exchange-traded fund that includes the business day, rose about 2% during the session on Friday.
But Workday CEO Carl Eschenbach didn’t suggest market conditions will improve anytime soon.
“In fact, we think the current IT spending environment and the environment we’re selling in is not something that’s been here for the last couple of quarters,” he said. “We think it’s the new norm for the future. We’re prepared because we have a great product.”
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