Cloud-based financial and human resources enterprise services provider Workday (NYSE: WDAY) recently reported its third quarter results that unsurprisingly surpassed all market expectations. But the company’s outlook for the next fiscal was disappointing and that sent the stock tumbling. Post the result announcement, the stock fell 5% in the after-hours trading session.
For the third quarter, Workday revenues grew 26% over the year to $938.1 million, ahead of the Street’s forecast of $920.1 million. Net loss was $115.7 million or $0.51 a share. Adjusted earnings was $0.53 per share compared with $0.31 a year ago and the market’s forecast of $0.37 per share. This was the 12th consecutive quarter that Workday beat analyst expectations.
By segment, Subscription services revenues grew 28% to $798.5 million, ahead of the market’s forecast of $785 million. Professional services revenues grew 18% over the year to $139.6 million and exceeded the management’s guidance of $135 million for the quarter.
For the fourth quarter, Workday expects to earn subscription revenues of $828-$830 million, ahead of the Street’s expectations of $827 million. Professional services revenues are expected to be $134 million for the quarter. It expects to end the current year with subscription revenues of $3.085-$3.087 billion and professional services revenues of $529 million.
Workday forecast its subscription revenues to grow by 21% next year to $3.73 billion. The market was forecasting a growth of 24% for the segment to $3.81 billion. Analysts were concerned by the suggested slowdown since Workday did not appear to be worried by macroeconomic conditions. Some believe that the deceleration in annual subscription growth may just be a conservative view presented by the management. The stock reacted negatively to the outlook and registered a 4.8% decline in the after-hours session.
During the quarter, Workday announced the $540 million acquisition of Scout RFP, a leading cloud-based platform for strategic sourcing and supplier engagement. San Francisco-based Scout RFP was set up in 2014 to help transform a spreadsheet-based RFP process to a simpler, smarter, and a more streamlined one. Its intuitive, cloud-based platform covers everything from project intake through sourcing pipeline to contract and supplier management to close the loop on sourcing. It empowers collaboration, centralizes data, and makes the procurement processes more transparent to drive better business outcomes.
Workday is already treating spend management as one of its focus areas. It has designed Workday Procurement and Workday Inventory as part of its single system to streamline the procure-to-pay process, drive operational efficiency, reduce costs, and improve supplier collaboration and engagement. It plans to leverage Scout RFP to accelerate its efforts in the area.
Prior to the acquisition, Scout RFP was privately held having raised $60.3 million in funding from investors including Salesforce Ventures, Workday Ventures, Menlo Ventures, Scale Venture Partners, NewView Capital, New Enterprise Associates, and Drummond Road Capital. Workday believes that Scout RFP will contribute less than 1% in its annual subscription-based revenues for next year.
Workday’s expansion into the procure-to-pay market appears to be a smart move. With the HCM market maturing, it will need to diversify its addressable market to maintain its growth trajectory. According to a recent report, the global Procure To Pay Software Market was valued at $5 billion in 2018 and is expected to reach $9.2 billion by 2026 at a CAGR of 7.6%.
Workday appears to be building a comprehensive ERP suite to complement its enterprise offerings. Besides its core HCM and the financial software, it has already established its presence in analytics and the sourcing market through acquisitions. Its next big step could be the acquisition of a CRM player like Zendesk or Freshworks. Zendesk ended 2018 with $599 million in revenue and expects to end the current year with revenues of $813-$815 million. It is trading at a market capitalization of $8.5 billion.
Freshworks has raised $399 million in funding so far from investors including Sequoia Capital India, Accel, Google, Tiger Global Management, and CapitalG. Its last round of funding was held earlier last month when it raised $150 million in a round led by Google at a valuation of $3.5 billion. Just over a year ago, Freshworks was valued at $1.5 billion when it had raised $100 million. Freshworks does not disclose detailed financials, but it did reveal that it had crossed annual recurring revenues of $200 million. It was profitable as of last year.
Workday’s stock is trading at $160.97 with a market capitalization of $36.7 billion. It had touched a 52-week high of $226.83 in July this year. It had fallen to a 52-week low of $141.70 in December last year.
This segment is a part in the series : Cloud Stocks