Morningstar | Workday Extending HCM Success into Financials and Planning; Raising FVE to $183
We are raising our fair value estimate to $183 from $167, due to stronger expected adoption of Workday’s Financial Management and Adaptive Planning applications. This new fair value estimate implies a fiscal 2020 enterprise value/sales ratio of 11 times. We expect top line revenue to have a CAGR of 23% over the next five years. This assumes that average contract value grows 4% per year, while the number of customers grows from just north of 2,000 to over 8,700 by 2029. Workday believes it has 33,000 potential customers, implying a 25% penetration rate.We expect subscription revenue, which is generally recurring, to grow at a 22% average annual pace, while services revenue grows at a 10.5% clip. This will result in a 100-basis-point mix shift per year for the next decade, ending in 96% of revenue in subscriptions by 2029.
The revenue mix shift should result in gross margin expansion as the segments have very different gross margin profiles. The subscription segment has had around 85% gross margin over the past few years, while services has been a 0% gross margin business over the same period. We project the mix shift toward subscriptions will drive gross margins to expand from 70% in fiscal 2019 to over 80% by fiscal 2029.
Workday incurred a 16% GAAP operating loss in fiscal 2019 and has yet to have a quarter with positive GAAP operating margins. We project that GAAP operating margins will turn positive for the first time in fiscal 2022 before reaching an operating margin of 32% in 2029. While the company states its long-term non-GAAP operating margin target is 25%, we believe this is conservative and expect Workday to exceed it in the long term. Several reasons for believing this include the HCM business already achieving non-GAAP operating margins above 25% and operating leverage expected to be attained when Workday’s outsize research and development expense ratio begins to fall in line with SaaS peers.
Workday is a provider of enterprise cloud applications for finance and human resources. The company's products include: Workday Financial Management, an application with financial capabilities, analytics and metrics, and auditable process management; and Workday Human Capital Management, which includes global human resources management (workforce lifecycle management, organization management, compensation, absence, and employee benefits administration) and global talent management (goal management, performance management, succession planning, and career and development planning). The company's other solutions include Adaptive Insights Business Planning Cloud, as well as Workday Data-as-a-Service.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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