Workday Crushes Estimates With the Help of Medium Enterprises

Workday Inc. (NYSE: WDAY) announced fiscal second-quarter 2017 results Wednesday after the market closed. The human-capital management solutions company once again delivered accelerated revenue growth, narrowed its quarterly losses, and enjoyed the continued adoption of its solutions by the world's largest companies. But Workday isn't just landing the biggest fish; medium-enterprise customers served as an effective supplementary source of growth this quarter.

Let's take a closer look at how Workday finished the first half of the year, as well as what investors can expect from the company in the quarters ahead.

Workday results: The raw numbers

What happened with Workday this quarter?

• Subscription revenue increased 42% to $434.5 million, marking Workday's fourth straight quarter of at least 40% subscription growth. Professional services revenue grew 34.3% to $90.8 million.
• By comparison, Workday's latest financial guidance (provided in early June) called for revenue of $505 million to $508 million, assuming lower subscription revenue of between $420 million and $423 million.
• On an adjusted (non-GAAP) basis, which adds perspective by excluding items like stock-based compensation, Workday generated net income of $0.24 per share. That's well above consensus estimates for an adjusted profit of $0.15 per share, and up from $0.04 per share in last year's fiscal second quarter.
• Workday generated operating cash flow of $15.1 million during the quarter and negative free cash flow of $23.4 million. Workday ended the quarter with cash, cash equivalents, and marketable securities of $2.1 billion, flat from last quarter.
• Workday enjoyed continued momentum among medium-sized enterprise customers, with notable deployments for companies including Aberdeen Asset Management (NASDAQOTH: ABDNF), Bill Gosling Outsourcing, Patagonia, CustomInk, WeWork, Skandia, Ensono, and ALK.
• The company announced its intention to open the Workday Cloud Platform as a Platform-as-a-Service (PaaS) offering, allowing clients to build custom extensions and applications for business-specific needs.

What management had to say

Workday co-founder and CEO Aneel Bhusri stated:

Looking forward

Given its relative strength this quarter, Workday now expects full fiscal-year 2018 revenue to be in the range of $2.093 billion to $2.100 billion (up from $2.038 billion to $2.053 billion previously), including subscription revenue of $1.750 billion to $1.757 billion (up from $1.705 billion to $1.720 billion before). For the current fiscal third quarter, Workday anticipates total revenue of $538 million to $540 million -- well above the $521.9 million Wall Street was modeling -- including subscription revenue of $450 million to $452 million.

Bottom line: This was another straightforward beat-and-raise scenario from Workday as its products continue to gain traction. Workday has fast grown to become an indispensable part of the finance and HR needs for large- and medium-enterprise customers alike. And while it certainly can't sustain this torrid pace of growth forever -- management warned that comps will become more difficult in the second half of the year, for example -- it's hard to ask much more of Workday than it delivered in this strong report.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Workday. The Motley Fool has a disclosure policy.