The open

Today's theme: who really pays for stock pay, and what a true toll looks like by comparison.

• $WDAY: stock pay takes 53.42% of operating cash, absorbed by $2.92B of buybacks.
• $HUBS: $514.71M of twelve-month stock pay takes 60.10% of operating cash.
• $VRSN: a 66.93% operating margin on contracted .com fee steps with almost no capital need.

$WDAY: The backlog is real, and so is the second payroll

Workday holds $27.40B of subscription backlog and grew its 12-month backlog 14%. Q2 GAAP operating margin rose to 11.82%. On the surface, that is a durable subscription franchise getting more profitable.

Two details complicate the picture. A $305M tax benefit lifted net income, so the bottom line flatters the quarter. And stock pay takes 53.42% of operating cash, absorbed by $2.92B of buybacks. In plain terms, more than half of the cash the business generates goes to offsetting the shares it hands to employees.

Our thesis: Workday's backlog is a genuine moat. Customers have signed multiyear commitments for systems that are hard to rip out. But owners only keep what is left after the second payroll. When buybacks mostly absorb dilution, they are a cost of running the company rather than a return of capital.

What to watch: whether 12-month backlog growth holds near 14%, whether GAAP operating margin keeps rising without tax help, and whether stock pay falls as a share of operating cash. A falling share would mean the backlog is finally turning into owner cash.

​Read the $WDAY research​

Quick hits

• $IBM is now 45% software: $22.62B of $50.18B nine-month revenue. Data software grew 19.12% in Q3 after the Confluent deal.
• $PEGA Cloud ACV grew 20% to $975.99M, but maintenance ACV fell 12% and total ACV slowed to 6%. The filing says clients are scrutinizing technology spend amid superintelligence disruption.
• $CVLT SaaS ARR grew 38% to $424.3M while perpetual support shrank 18.97%. The $900M convert is fully covered by cash.
• $AGYS grew fiscal Q2 subscription and maintenance revenue 21.99% to $62.16M, two thirds of revenue, and paid off its debt.
• $APPF earns 78.44% of revenue from payments, screening and risk mitigation. Q3 revenue grew 18.58% to $295.69M.

$HUBS: Customers grow, and buybacks cover the shares

HubSpot grew Q2 revenue 19.83% and customers 14.35% to 306,446. That is a broad base still adding logos at a healthy clip, and operating cash is strong.

The cost sits underneath. Twelve-month stock pay was $514.71M, which takes 60.10% of operating cash. Over six months, HubSpot spent $748.70M on buybacks, which offset the dilution. The cash is real, but most of it is spoken for before an owner sees it.

Our thesis: HubSpot and Workday are the same pattern at different stages. Both have real franchises, both generate strong operating cash, and both route a large share of that cash back into absorbing stock pay. Growth that looks self-funding on an adjusted basis is partly funded by owners through buybacks.

What to watch: whether customer growth keeps pace with revenue growth, and whether stock pay falls as a share of operating cash. If it does, the buyback can shift from defense to a genuine return. If it does not, the headline cash flow overstates what owners keep.

​Read the $HUBS research​

$VRSN: The toll that needs almost no road work

For contrast, consider a business with almost no second payroll problem and almost no capital need. VeriSign runs the .com and .net registries under contract, with 182.5 million names. It has the right to raise the .com fee up to 7% a year.

That contract is the moat. Every .com name pays the registry, and the fee steps are written in advance. Operating margin is 66.93%. Growth comes from contracted price steps rather than from new data centres or a sales force chasing logos.

Our thesis: VeriSign is close to a pure toll gate. Most software companies have to keep spending, on capacity, on stock pay or on acquisitions, to defend their position. VeriSign's position is defined by contract, so the cash it generates is not consumed by the business that produced it.

What to watch: whether the name count holds near 182.5 million, and whether the contracted fee steps keep being used. A toll gate is only as good as the traffic through it, so name count is the variable that matters most.

​Read the $VRSN research​

By the numbers

60.10%

The share of $HUBS operating cash taken by twelve-month stock pay. At $WDAY it is 53.42%.

Reply HUBS and I'll send you the downside case.

The model's read, not advice.

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