Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (2024)

Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (1)

Workday, Inc. (NASDAQ:WDAY) share price is up by more than 38% over the past year and now trades near all-time highs. Although most loss-making momentum stocks in the technology space are still way down from their late 2021 highs, WDAY seems to be an exception.

Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (2)

The company is scheduled to report its first quarter earnings later this week, and the expectations for better-than-expected results are running high.

When it comes to the quarterly earnings, things could easily go either way, but there are some important areas that investors should focus on. As a company that prioritizes Non-GAAP figures and is expected to grow at mid-teen rates, WDAY share price could be subject to significant fluctuations in either direction even if quarterly results meet analysts' expectations.

All About The Margins

About a year ago, I did a thorough piece on Workday's profitability and the need for its management to focus on GAAP margins. Since then, the company reported three quarterly results with positive operating results, which has been encouraging.

As a result, the profitability gap with its major peers has narrowed down in recent months and WDAY's operating margin now stands at mid-single digits.

Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (4)

Gross profitability also improved over the past year, which is yet another reason for shareholders to believe that Workday's management has followed in the steps of Salesforce (CRM) by prioritizing profitability over growth at any cost.

Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (5)

Nonetheless, the first quarter of FY 2025 could easily swing back into operating loss on a GAAP basis, with current guidance for non-GAAP operating margin being 24.5% and 24% lower on a GAAP basis.

The large difference between GAAP and Non-GAAP figures is almost entirely due to share-based compensation, which should increase meaningfully if the aforementioned guidance proves to be accurate.

This is unlikely to be well-received by shareholders, as WDAY's management has been gradually decreasing its reliance on share-based compensation, which currently stands at almost $350m per quarter.

With that in mind, WDAY shareholders should not rely solely on Non-GAAP figures. A notable jump in stock-based compensation could be ill-received by the market as a conformation that the company would not be able to meet its growth targets without generous compensation packages.

Revenue Growth And Multiples

The quarterly trend in Workday's revenue surprise has been quite low in recent years at around 1% (see below). During the last quarter, however, it fell significantly, which could be an early sign that the company's abnormal growth is normalizing.

The same is true when we look at the actual quarterly revenue growth for the company and account for seasonality. The second quarter of each fiscal year (ending in July) is usually the one with the highest reported growth rate, and it has been declining from 7.3% in calendar year 2021, to 7.0% in 2022 and 6.1% last year. The same trend holds true for Q1 results, which usually mark the lowest point in terms of growth. Therefore, a quarterly revenue growth of 2.3% or below would confirm the downward trend in Workday's revenue.

At the same time, analysts remain very optimistic that the company could sustain its historical growth of above 16% and expect a similar result in the year ahead.

Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (11)

Even though WDAY share price has fallen sharply in recent months, sell-side analysts remain reluctant to downgrade the company, and this has resulted in a wide-gap between the consensus price target and the actual share price. The last time when this happened was in late 2021, which was followed by a sharp drop in Workday's stock price.

Back in 2021, WDAY was trading at 12-times sales which is significantly higher than the current multiple of around 9 times sales and this could create an illusion that this time around downside is limited.

Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (13)

But as I warned back in February of this year - Workday continues to trade at a significant premium to its peers in the software space, and the double-digit expected growth rate is what supports this premium valuation. That is why, sustaining the current growth trajectory and reassuring the market that the company would continue growing at similar rates for the foreseeable future is of paramount importance, even as the stock trades at lower multiples on a historical basis.

Conclusion

Workday now trades at much lower multiples than it used to back in late 2021 and investors could get a false sense of security that the market is being conservative. This is not true and even at the currently lower multiples on a historical basis, the expectations for Workday to deliver are running high. When it comes to profitability, GAAP figures would be very important this time around, and any hint that revenue growth for FY 2025 would be below 16% could have serious consequences for WDAY share price.

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Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (14)

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Workday Q1 2025 Earnings Preview: GAAP Earnings Matter And High Growth Is The Norm (WDAY) (2024)
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