Workday Earnings: Shares Approach Our $229 Fair Value Estimate Upon Strong Start to the Year

Wide-moat Workday’s WDAY first quarter was solid, beating our top- and bottom-line GAAP expectations. We are reiterating our $229 fair value estimate upon the broad-based beat, as our long-term projections remain intact. With shares rising by 8% upon the beat, we are pleased to see that shares have now approached our fair value estimate—bringing the high-quality name within 3-star territory. We continue to believe Workday will be able to surpass SAP in terms of the global enterprise resource planning market share in a decade—and this quarter’s results indicates to us that the company is well on this path.

Sales grew 17% year over year in the first quarter to $1.68 billion, exceeding our expectations. Subscription revenue grew to $1.53 billion, an increase of 20% year over year. We were very pleased to hear that customers opted for early renewals, despite the weak macroeconomic environment, and lengthened the duration of contracts. The reason for the early and lengthier renewals was demand for add-on capabilities—which strengthens our confidence that Workday software will become even stickier, with customers using the platform for more functionalities. In addition, while growth was broad-based, financial services were a highlight. Overall, non-GAAP operating margin of 24% was up from 20% a year ago, leading to non-GAAP earnings of $1.31 per share.

Workday’s 2024 subscription revenue guidance was raised at the lower end to now be between $6.55 billion and $6.58 billion. For the second quarter of fiscal 2024, Workday expects subscription revenue to grow at a midpoint of $1.61 billion, which would represent 18% year-over-year growth. Management stressed that while the macroeconomic environment is uncertain, after the eye of the storm, Workday expects subscription revenue to return to 20%-plus growth. We second this sentiment, as we bake in a return to 20%-plus growth for subscription sales in fiscal 2026.