Workday Proves Its Value in Solid Q4

Wide-moat Workday posted solid fourth-quarter results, beating our expectations. Workday proved its value add even in the wake of more critical decision-making by its clients. Looking ahead, management is baking in a more neutral year based on overall uncertainty. While we have lowered our expectations for fiscal 2024 as a result, we share management’s sentiment that the company can return to 20%-plus top-line growth when the macro environment normalizes. In the meantime, we think Workday’s moat is helping the firm weather headwinds. For example, Workday claimed they did not see any significant price erosion on deals, which we think speaks to both a mix of its strong switching costs as well as it being early in newer enterprise resource planning, or ERP, capabilities leveraging artificial intelligence, or AI, and machine learning that are less commoditized.

We are maintaining our fair value estimate for the wide-moat name of $229 per share, which makes Workday shares attractive, in our view. We think the market is not fully baking in the pace at which Workday can continue to gain ERP market share. In fact, we expect Workday to surpass SAP’s ERP market share by 2033.

Sales grew 20% year over year in the fourth quarter to $1.65 billion. Subscription revenue grew to $1.5 billion, an increase of 22% year over year. Altogether, it’s apparent to us that Workday is becoming better at making larger, strategic deals, showing the recent Salesforce win did not happen by accident. In the quarter, Workday won seven new Fortune 500 customers and 11 new global 2000 customers. Some of the wins included customers migrating off of legacy vendors like SAP, which is line with our overall thesis that Workday will continue to gain ERP market share at Oracle and SAP’s expense. On profitability, non-GAAP operating margin of 18.5% was up from 17.2% in the prior year period due to revenue overachievement and cost control.