Workday Inc. sees rating upgrade to ’BBB+’ at S&P due to stronger cash position

Investing.com -- S&P Global Ratings has upgraded Workday Inc (NASDAQ:WDAY). to ’BBB+’ from ’BBB’ due to the company’s increased net cash position and business resilience. The upgrade comes despite increased share repurchases and acquisition spending in fiscal 2025, which ended on January 31. The firm’s growing free operating cash flow (FOCF) and conservative capital allocation history have led to a record high reported net cash position of approximately $5 billion.

Workday’s core human capital management (HCM) market leadership and strategic execution have nearly doubled its revenue base and more than doubled its annual EBITDA and FOCF over the past four fiscal years. The company’s resilience is supported by the mission-critical nature of its products, its increased scale, and the secular demand for digital transformation solutions.

S&P Global Ratings also raised the issue-level rating on Workday’s senior unsecured notes to ’BBB+’ from ’BBB’. The stable outlook reflects the expectation that Workday will maintain at least 10% revenue growth in 2025, with EBITDA margins and FOCF expected to improve due to operating leverage gains. The company is expected to rapidly reduce leverage below 2.5x even in the event of a large acquisition of well over $10 billion.

Workday’s increasing FOCF and relatively conservative capital allocation have led to a record high net cash position. The company’s large and growing EBITDA base is driven by multiple revenue growth vectors and a strategic focus on increasing profitability with internal efficiencies and targeted investments. Its growth vectors include increasing the customer penetration of its financial management solutions, expanding its international and mid-market presence, growing its partner ecosystem, and AI product innovation.

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The company has good revenue visibility given its subscription-based model with a 12-month remaining performance obligation backlog of $7.6 billion, which is about 87% of its fiscal 2026 subscription revenue guidance. It maintains a 98% gross revenue retention rate, reflecting the mission-critical nature of its solutions and its large enterprise customer base.

Workday’s strong FOCF generation and robust liquidity position allow for considerable financial flexibility. Despite EBITDA margins of about 30% being weaker than some of its cloud software peers like ServiceNow (NYSE:NOW) Inc. and Autodesk Inc (NASDAQ:ADSK)., it maintains a high FOCF conversion rate of typically 90%-100% of S&P Global Ratings’ adjusted EBITDA. The company is expected to generate reported FOCF of about $2.5 billion in fiscal 2026, stemming from EBITDA growth, modest cash interest expense, and capital expenditure (capex), along with a growing deferred revenue balance.

The stable outlook also reflects the expectation that Workday will maintain at least 10% revenue growth over the next few fiscal years, even with ongoing macroeconomic uncertainties. Workday is expected to continue to adhere to its existing financial policy targets, supporting its ability to maintain its net cash position over the near term and rapidly reduce leverage below 2.5x in the event of a sizable acquisition.

S&P Global Ratings could lower its ratings on Workday if it pursues a more aggressive acquisition or shareholder return strategy than anticipated, such that it is forecasted to maintain adjusted debt to EBITDA of more than 2.5x in the long run. Conversely, the ratings could be raised if Workday adopts a more conservative leverage target of 2x or less, or if it continues to maintain solid revenue growth and increase its FOCF generation and business diversity, while sustaining EBITDA margins well above 30%.

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