Key drivers of unearned revenue growth
Workday (WDAY) generated strong growth in unearned revenues, triggered by new contracts. The growth in the number of its Fortune 500 clients, coupled with growing demand for enterprise cloud application services in the US and international markets, has led to growth in deferred revenues.
The company’s strategic partnership with leading IT players like IBM (IBM) and Accenture (ACN) attract more customers, leading to deferred revenue growth. In the last five quarters, Workday’s unearned revenues grew at a CAGR (compound annual growth rate) of 39.0%.
The company’s strategy to move toward a software-based business model may not only drive the company’s large deal momentum but also accelerate its deferred revenue. Higher demand for cloud management solutions across all enterprises may boost its deferred revenue growth.
From the graph above, we can see that Workday’s unearned revenues maintained an increasing trend, buoyed by growth in its premium customer size.
In fiscal 2018, Workday’s unearned revenues, inclusive of its short-term and long-term deferred revenues, came in at nearly $1.5 billion for a 26.0% YoY (year-over-year) increase. The company maintained average unearned revenues of nearly $941.0 million per year.
At the end of fiscal 4Q18, Workday generated deferred revenues of nearly $308.0 million. In the quarter, the company gained nine new Fortune 500 customers. Workday expects its non-current unearned revenues to decline YoY, while its current unearned revenue growth is expected to fluctuate in fiscal 2019.