Morningstar | Workday’s Financial Suite Brings Sweet 3Q Results; Maintaining $152 FVE
Workday’s third-quarter earnings surpassed our expectations as the financial management suite gained more traction and overall enterprise migration to cloud services accelerated. The third quarter was the first in which Adaptive Insights was integrated into product offerings. However, the successful quarter wasn’t carried by the integration alone. After factoring in the increased full-year revenue guidance of $2,808 million-$2,810 million, we continue to maintain our $152 fair value estimate for this narrow moat company. We believe substantial growth is still in the cards for this all-cloud ERP provider.Third-quarter revenue rose by 34% versus the prior-year period to $743 million, with international growth of 47% to $170 million (representing 23% of total revenue). Subscription revenue rose by 35% year over year while subscription backlog grew by 31% year over year to $5.9 billion, $140 million driven by Adaptive Insights. Management pointed to increasing acceptance of the cloud by enterprise decision-makers and growing popularity in Workday’s financial management platform as the causes. We believe the financial management suite will continue to be one of Workday’s top growth drivers, as the suite is picking up momentum not only in medium enterprises, but large as well. Management also views the suite as a major avenue for international revenue growth.
For the quarter, adjusted EPS was $0.31 per share, up from $0.24 in the third quarter of last year. Despite the strong bottom line growth, management stressed that revenue growth remains the firm's focus even at the cost of operating margins. We believe this is the way to go, as management hinted at renewal rates significantly better than their 100% plus norm.
In other news, this quarter marked the first in which people analytics was introduced as an offering in the HCM suite. Once other analytics tools are introduced, Workday intends to bundle all tools under a Prism product line. Workday’s progress in this direction is compelling, as net new average contract value of Prism (which currently only offers Prism analytics) comes in at triple-digit growth when compared with third quarter last year.
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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