On Friday, Needham & Company maintained their Buy rating on shares of Workday, Inc. (NASDAQ:WDAY), with a consistent price target of $350.00. The technology company, known for its enterprise cloud applications for finance and human resources, has seen an upside in its revenue and earnings per share (EPS). Despite this, Workday has chosen not to adjust its full-year subscription guidance due to ongoing macroeconomic challenges.
The company's sales commentary indicated a stagnant quarter-over-quarter environment, which has led to more conservative growth expectations in the intermediate term. In response to the current sales climate and evolving headcount growth dynamics, Workday is realigning its strategy to prioritize profitability.
Management has announced an increase in its fiscal year 2027 operating margin (OM) guidance by 500 basis points, now aiming for over 30%, even as it reduces its fiscal year 2025 revenue projections by 250 basis points.
The strategic shift towards profitability is deemed a prudent move by Needham, given the lackluster sales environment. Further details on how Workday intends to achieve margin leverage are anticipated to be shared during the company's analyst day in September.
It is expected that a significant portion of this leverage will derive from savings in sales and marketing (S&M), particularly as the company has previously made substantial investments in marketing its financial management solution, known as Fins.
Workday's new growth target is set at 15%, which is expected to be a sustained objective. The company acknowledges that as it grows larger, the likelihood of accelerating beyond this target diminishes due to the 'law of large numbers', which suggests that growth rates typically slow as a company expands.
In other recent news, Workday, a key player in enterprise cloud applications, reported steady performance in its second quarter fiscal 2025 earnings call. The company saw a 17% increase in subscription revenue, reaching $1.903 billion, and a 16% growth in the 12-month backlog. In addition to the financial performance, Workday announced a new $1 billion share repurchase program.
Piper Sandler, after evaluating Workday's performance, maintained an Overweight rating on the company's stock, raising the price target to $285 from the previous $262. Despite a slight slowdown in subscription revenue growth due to macroeconomic challenges, the firm found positives in Workday's performance, including full suite deals, partner engagement, international market expansion, and advancements in AI.
Workday has also revised its medium-term financial targets, aiming for non-GAAP operating margins of 30% by fiscal year 2027, up from the previous target of over 25%. Recent developments include significant customer acquisitions, including J.B. Hunt, Nissan (OTC:NSANY), Target, and Trinity Health, and strategic partnerships with Salesforce (NYSE:CRM) and Equifax (NYSE:EFX). The company projects approximately 15% annual subscription revenue growth and a non-GAAP operating margin of 30% for FY '26 and FY '27, expecting the current IT spending environment to persist.
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