On Friday, Deutsche Bank (ETR:DBKGn) adjusted its price target on shares of Workday (NASDAQ:WDAY), increasing it to $275 from $265, while keeping a Hold rating on the stock. The adjustment reflects the company's latest financial disclosures and future projections.
Workday, known for its financial and human capital management software, reported second-quarter results that aligned with analyst expectations and provided guidance for the third quarter and fiscal year 2025. The company's updated mid-term targets have slightly reduced subscription revenue growth expectations to 15%, but more notably, raised operating margin goals to 30% by fiscal year 2027.
The firm's analysis noted that despite Workday continuing to make strides in its growth initiatives, such as expanding its Financial Management Systems (FINS), international market presence, and partnerships, as well as penetrating the HCM and full-platform market down-market, macroeconomic pressures and a potential saturation in the large enterprise HCM sector are likely contributing to a slowdown in growth.
The revised operating margin target was highlighted as a significant positive surprise, as it commits to achieving this goal sooner and to a greater extent than previously anticipated. This implies an annual margin expansion of approximately 250 basis points in fiscal years 2026 and 2027, compared to an expected 200 basis point increase in fiscal year 2025, adjusted for changes in the useful life accounting.
Management's commitment to operational efficiency, including reducing its real estate footprint and transitioning to lower-cost geographies, was also emphasized. While there are some concerns regarding the timing of significant FINS migrations and revenue growth beyond fiscal year 2027, the outlook for mid-teen growth rates over several years seems plausible, especially considering Gartner (NYSE:IT)'s forecast for SaaS ERP growth of around 16%.
In other recent news, Workday Inc . has seen a series of significant developments. Workday's second-quarter fiscal year 2025 performance exceeded expectations, reporting adjusted earnings per share of $1.75 and revenue of $2.09 billion, a 16.7% increase year over year. However, the projected third-quarter subscription revenue of $1.955 billion and maintained full-year subscription revenue guidance of $7.700 billion to $7.725 billion did not meet investor expectations.
Analysts from Wells Fargo (NYSE:WFC), BMO Capital Markets, BofA Securities, Jefferies, Evercore ISI, DA Davidson, and Citi have adjusted their price targets for Workday, reflecting confidence in the company's financial outlook. The company has raised its total revenue guidance by approximately $30 million due to outperformance in its Professional Services segment. The company also announced a new $1.0 billion share repurchase program.
Workday's 12-month subscription revenue backlog grew 16.1% year over year to $6.80 billion, while the total subscription revenue backlog increased 20.9% to $21.58 billion. Workday's shift towards delivering higher margins and a revised mid-term framework for approximately 15% growth and around 30% operating margin by fiscal year 2027 is anticipated to drive a meaningful re-rating of the shares. The company's focus on improving margins is expected to be further emphasized at its Analyst Day event.
InvestingPro Insights
Following the recent updates from Deutsche Bank on Workday's (NASDAQ:WDAY) financial prospects, it's worth noting that Workday holds a strong liquidity position, as indicated by an InvestingPro Tip which highlights that the company holds more cash than debt on its balance sheet. This could provide Workday with the financial flexibility to navigate through the macroeconomic pressures mentioned. Additionally, Workday's stock generally trades with low price volatility, offering a degree of stability to investors amidst uncertain market conditions.
InvestingPro data also shows that Workday is trading at high valuation multiples, which includes a high earnings multiple and high EBITDA valuation multiple. This suggests that the market has high expectations for the company's future earnings growth, aligning with the company's raised operating margin goals. It's worth mentioning that analysts predict Workday will be profitable this year, which is a significant factor for investors to consider, especially when the company is also committed to improving operational efficiency.
For those seeking more in-depth analysis and additional insights, there are 11 more InvestingPro Tips available for Workday, which can be accessed through the InvestingPro platform.
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