Workday, Inc. Q3 FY2023 earnings

Workday closed fiscal 2023 third quarter with total revenue of $1.60 billion, up 20.5% from the prior-year quarter. For the first nine months of fiscal 2023, revenue reached $4.57 billion, up 21.4%. Headcount grew 23% to 17,522. Cash, cash equivalents, and marketable securities totaled $5.49 billion as of October 31, 2022, up from $3.55 billion a year earlier. Those figures point to a business that continues to add customers and workers even as the macro backdrop darkens.

Profitability was the weak spot. GAAP operating loss was $26.3 million, a swing from operating income a year earlier, and GAAP operating margin was negative 1.6%, down 3.5 percentage points. Net loss was $74.7 million, and diluted loss per share was $0.29, both down from a year earlier. For the nine months, GAAP operating loss was $133.2 million and net loss was $241.1 million, with diluted loss per share of $0.95. On a non-GAAP basis, operating income was $314.2 million, or 19.7% of revenue, compared with $332.2 million, or 25.0% of revenue, in the prior-year quarter. Non-GAAP diluted net income per share was $0.99, down from $1.10. The gap between GAAP and non-GAAP results reflects the company's large share-based compensation expense, which it excludes from its non-GAAP measures.

Cash generation remained positive but decelerated on a year-to-date basis. Operating cash flow was $408.7 million for the quarter, up 6.2% from a year earlier. For the nine months, operating cash flow was $962.7 million, down 7.0%. Deferred revenue, current portion, was $2.82 billion, up 16.2% from a year earlier. Workday also announced a share repurchase program authorizing up to $500 million of Class A common stock over 18 months. Management said the program is designed to reduce future dilution from employee stock issuances and reflects a view that shares are undervalued.

Guidance for full-year fiscal 2023 was raised at the low end. Workday guided subscription revenue to $5.555 billion to $5.557 billion, or 22% growth, and lifted its non-GAAP operating margin outlook to 19.2%. The company reported a year-to-date non-GAAP operating margin of 19.8%. The company continues to invest in product development, sales and marketing, and data center capacity. It also rolled out a performance-based cash bonus program that replaced an equity-based PRSU bonus program. Return to travel and in-person events added costs as well.

The main risks are macro and execution related. Management cited rising inflation, the U.S. Federal Reserve raising interest rates, the Russian invasion of Ukraine, and the COVID-19 pandemic as sources of economic uncertainty. It said it has started to experience lengthening of certain sales cycles, particularly within net new opportunities. If uncertainty continues, Workday warned of potential negative effects on customer renewals, sales and marketing efforts, revenue growth rates, customer deployments, customer collections, product development, or other financial metrics. The company also highlighted competition, pricing pressures, security breaches, service outages, and its ability to manage growth as risk factors.

Operationally, Workday kept its product and partner push going. It launched Industry Accelerators, introduced low-code no-code app development in Workday Extend, and introduced next-generation skills technology built on an AI and machine learning foundation. It was named a Leader in the 2022 Gartner Magic Quadrant for Cloud HCM Suites for 1,000+ Employee Enterprises for the seventh consecutive year and placed highest for overall Ability to Execute. The quarter showed solid top-line momentum and positive cash flow, but GAAP profitability swung to a loss and non-GAAP margins compressed. The balance sheet gives Workday room to keep investing, while the sales cycle commentary and expense growth are the near-term watch items.