Why Is Workday (WDAY) Up 6.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Workday (WDAY). Shares have added about 6.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Workday due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Workday’s Q3 Earnings Surpass Estimates on Healthy Revenue Growth

Workday reported strong third-quarter fiscal 2025 results, with top and bottom lines surpassing the respective Zacks Consensus Estimate. The company reported revenue growth year over year, driven by solid customer wins across various industries, including education, financials, healthcare and more. Strategic expansions and strong contract renewals within the existing customer base also drove the top line. Management’s strong focus on innovations, AI integration and international expansion are positive factors.

Net Income

Net income on a GAAP basis was $193 million or 72 cents per share compared with a net income of $114 million or 43 cents per share in the year-ago quarter. The year-over-year growth was primarily due to higher revenues as the strategy to incorporate AI into the core of its products resonated well with the customers.

Non-GAAP net income rose to $569 million or $1.89 per share from $462 million or $1.56 per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 17 cents.

Revenues

Net sales during the quarter were $2.16 billion, up from $1.87 billion in the year-ago quarter. Rising demand for the company’s HCM (Human Capital Management) and financial management solutions fueled the increase. The top line surpassed the Zacks Consensus Estimate by $40 million. 

The strong revenue growth accentuates the diversity and robustness of Workday’s product portfolio. Along with several new customer wins, the company witnessed several strategic expansions and contract renewals within its existing customer base. 

New customers, including CommonSpirit Health, Fitness and Lifestyle Group in Australia, New Jersey Institute of Technology, and The Department for Science, Innovation and Technology in the UK, have opted to deploy WDAY’s Financial Management and HCM product suite. 

Subscription services revenues totaled $1.96 billion, up from $1.69 billion in the year-ago quarter. At the fiscal third-quarter end, the 12-month subscription revenue backlog was $6.98 billion, up 15.3% year over year, backed by higher contract renewals. Total subscription revenue backlog increased 20.3% year over year to $22.19 billion.

Revenues from professional services were $201 million compared with $175 million in the prior-year quarter.

Other Details

Operating income during the quarter was $165 million compared with $88 million in the year-ago quarter. Non-GAAP operating income was $569 million, up from $462 million a year ago, with respective margins of 26.3% and 24.8%.

Cash Flow & Liquidity

During the third quarter of fiscal 2025, the company generated $406 million of cash from operating activities compared with $451 million in the prior-year quarter. As of Oct. 31, 2024, it had cash and cash equivalents and marketable securities of $7.16 billion with long-term debt of $3 billion.

Outlook

For the fourth quarter of fiscal 2025, Workday expects Subscription services revenues of $2.025 billion. Revenues from Professional services are estimated to be $155 million. For the fiscal fourth quarter, the non-GAAP operating margin is approximated to be 25%.

For fiscal 2025, the company anticipates Subscription revenues of $7.703 billion, indicating growth of 17% year over year. Professional services revenues are expected to be $712 million. The non-GAAP operating margin is projected to be 25.5%. Capital expenditures are approximated to be around $300 million.

For fiscal 2026, management anticipates Subscription revenues of $8.8 billion, indicating growth of 14% year over year. The non-GAAP operating margin is projected to be 27.5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Workday has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Workday has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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