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Morningstar | Workday Extending HCM Success into Financials and Planning; Raising FVE to $183

Narrow-moat Workday kicked off its fiscal 2020 by showing that its prowess with cloud HCM extends into financials and planning as well. Recently acquired planning application Adaptive Insights has been making an early impact with the ability to sell into Workday’s customer base. Workday’s financial management application is also continuing to show strength with new and existing Workday customers. We are raising our fair value estimate to $183 per share, from $167, due to a superior long-term outlook for platform adoptions. However, with shares near $210, we still believe the stock is overvalued.

First-quarter subscription revenue came in at $701 million, above management’s guidance of $692 to $694 million, representing 34% year-over-year growth. Non-GAAP operating margins were 13.1%, consistent with the same quarter last year. Adaptive Insights, which Workday acquired in August 2018 for $1.55 billion, is already starting to make an impact, with over 200 customers adopting the product in the quarter, up from 80 reported on the prior earnings call. Most noteworthy in our view was the adoption upmarket at companies like Airbus, AstraZeneca, and H&R Block. All three customers were existing Workday customers and we expect platform adoptions at large companies to continue. Management also reported strength in financials with net new ACV growth over 50%.

Workday raised full-year subscription revenue guidance to $3.045 billion to $3.06 billion, an increase of $150 million on both ends of the range. While management noted that revenue would be more heavily weighted toward the fourth quarter than in previous years, this is likely due to longer sales cycles with large companies. Management kept its full-year outlook for professional services revenue at $500 million and still anticipates 200 basis points of margin improvement for the full year.