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How Workday’s New Acquisition Impacts Its Free Cash Flow Growth

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Aug. 31 2018, Updated 9:00 a.m. ET

$1.55 billion acquisition deal

Workday (WDAY) completed its acquisition of Adaptive Insights for $1.55 billion on August 1 in an all-cash transaction. The deal is expected to help the company integrate the Adaptive Insights Business Planning Cloud with its Human Capital Management (or HCM) and financial management cloud application products.

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FCF trend and outlook

Workday (WDAY) has witnessed an improving free cash flow trend, which has been buoyed by large order wins. In the last five years, the company has generated free cash flow at an average of ~$130.0 million per year.

The chart above illustrates Workday’s free cash flow growth over the last five years. The company projected 30.0% YoY (year-over-year) growth in operating cash flow in fiscal 2019. The company exited the fiscal first half of 2019 with free cash flow of ~$284.0 million compared with $243.0 million in the fiscal first half of the year.

The all-cash $1.55 billion acquisition Adaptive Insights affected Workday’s free cash flow. At the end of the fiscal first quarter of 2019,[1. fiscal Q1 2019 ended April 2018] its cash and short-term investments stood at ~$3.4 billion.

Peer comparisons

Among Workday’s IT peers, ServiceNow (NOW) and Splunk (SPLK) generated average free cash flow of ~$309.0 million and ~$102.0 million, respectively, in the last five quarters. In comparison, Workday generated free cash flow of $126.1 million in the same timeframe.

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