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Workday: A Market Leader Only For The Long Term

Mar. 05, 2020 9:10 AM ETWorkday, Inc. (WDAY)


  • Workday is market-leading in cloud HCM software, with 45% of the Fortune 500 as clients.
  • It has successfully expanded into financials, planning, and analytics, which keeps growth in the mid-20s, and there are still plenty of opportunities, especially internationally.
  • However, given the high level of stock-based compensation and related dilution, the company isn't profitable on a GAAP basis, and its GAAP EPS is actually trending down.
  • There isn't much operational leverage yet, so we feel investors need a fairly long time horizon.

Workday (NASDAQ:WDAY) has been an amazing company. In a short few years, it has established itself as the leading HCM (human capital management) cloud application, and it's now seemingly on course to repeat this with their financial management applications, taking on competition from Oracle (ORCL) and German SAP (SAP). Investors, of course, have noticed:

It's no surprise that the stock price has retreated recently in the market mayhem, and with companies like Nutanix (NTNX) and Microsoft (MSFT) warning about the impact of the coronavirus on their expected results, even if management argued during their FY2020 Q4CC that they hadn't experienced any impact from that.

Investors should be aware of both the ongoing revenue growth, nearly five-folding the size of the company in 5 years as well as the continuing GAAP deterioration, which, at first sight, is pretty shocking at nearly half a billion in GAAP losses the last year.

The non-GAAP figures are much better. Take, for instance, operating profit in Q4:

  • GAAP operating loss was a whopping $146M or an operating margin of -15%
  • Non-GAAP operating income was $116.6M, producing an operating margin of 11.9%

There are three questions here:

  • What is producing this large difference?
  • What is the trend?
  • What is the cash flow situation?

The answer to the first question is simple:

That is, share-based compensation is 23.7% of revenue. This is, of course, not free for investors:

As to the second question, about the trend:

It is at least moving in the right direction, although basically stalling since 2018. With respect to cash:

Unsurprisingly, the massive stock-based compensation is responsible for the positive cash flow. Without it, free cash flow would actually be negative. We think this is one reason the shares have

This article was written by

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