Workday, Inc. Q2 FY2023 earnings

Workday's fiscal 2023 second quarter showed steady top-line growth but a much weaker GAAP bottom line. Total revenue rose 21.9% to $1.54 billion, and revenue for the six months ended July 31, 2022 was $2.97 billion, up 22.0% year over year. The GAAP operating loss was $34.1 million, or negative 2.2% of revenue, and the loss widened. Net loss was $64.2 million, a swing from positive net income a year earlier. Diluted EPS was negative $0.25. For the first half, the operating loss was $106.9 million, or negative 3.6% of revenue, and net loss was $166.3 million, with diluted EPS of negative $0.66. Growth is holding up, but the company is not converting that growth into GAAP profit. The quarter's GAAP loss reflects a business that is still investing heavily in growth.

The non-GAAP view is more favorable, though it also softened. Non-GAAP operating income was $301.6 million, or 19.6% of revenue, compared with $291.8 million, or 23.2%, in the prior-year quarter. Non-GAAP basic and diluted net income per share were $0.86 and $0.83, compared with $1.29 and $1.23. Those figures exclude share-based compensation and other items, so the gap between GAAP and non-GAAP results remains large. Non-GAAP operating expenses were $1.2 billion, up 27% year over year, driven by higher headcount and a new performance-based cash bonus program. Cash generation also slowed. Operating cash flow was $114.4 million in the quarter, down 42.4% year over year, and $554.1 million for the first half, down 14.9%. The decline came even as revenue grew, which points to higher cash payments for hiring, travel, and in-person events. Deferred revenue, current portion, was $2.89 billion, up 17.7%. Workday ended the quarter with 16,918 employees, up 26%, and management said gross retention remained over 95%.

Operational highlights point to continued demand and market expansion. Workday achieved FedRAMP Authorized status at the Moderate security impact level, which marks its entry into the U.S. federal government market. Gartner positioned Workday in the Leaders quadrant of the inaugural 2022 Magic Quadrant for Cloud ERP for Service-Centric Enterprises. The company also added Wayne Frederick, president of Howard University, to its board as an independent director, and was included in JUST Capital's 2022 Workforce Equity and Mobility Ranking. Guidance was a mixed signal. Management maintained full fiscal year 2023 subscription revenue guidance of $5.537 billion to $5.557 billion, representing 22% year-over-year growth. For the next quarter, it guided subscription revenue to $1.418 billion to $1.420 billion, growth of 21%. It raised full fiscal year 2023 non-GAAP operating margin guidance to 19.0%, citing the scalability of the model and a commitment to longer-term margin expansion. The guidance suggests management sees durable demand but is balancing that view against the current macro environment.

The main risks are macro and execution related. Management flagged rising inflation, Federal Reserve interest rate increases, the Russian invasion of Ukraine, and the COVID-19 pandemic as sources of uncertainty. If conditions worsen, Workday said it could see pressure on new business, customer renewals, sales and marketing, revenue growth rates, customer deployments, collections, and product development. The company also lists security breaches, data center disruptions, service outages, deployment delays, competition, regulatory risks around new technologies such as machine learning and artificial intelligence, and delays in information technology spending. In the third quarter, the 2022 Notes become due, and through the filing date the principal balance converted or requested for conversion was not material. Workday plans to keep investing in product development, sales and marketing, and data center capacity. It expects those expenses to increase in absolute dollars, while expecting product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over the longer term. It also expects professional services revenue growth to decline over time and remain lower than subscription revenue growth.