Needham Previews Workday's Q2, Downgrades To Hold

"We like WDAY's long-term strategy and believe its significant push into financials is the right strategic move, but our checks continue to suggest the high end of the HRMS market remains slow and competitive, along with Financials sales remaining difficult as customers don't seem ready for a Cloud solution, and functionality not quite complete yet," analyst Scott Berg wrote in a note.

Related Link: Stephens & Co. Initiates Coverage On Workday At Equal Weight

Berg's checks also showed that over the last 12 months, some large enterprise customers have switched from using Workday's payroll engine to other payroll Service Bureaus while retaining the company's core HRMS solution.

Workday is expected to announce its second-quarter numbers on August 24. Needham expects a loss of $0.04 a share, while consensus estimate calls for a loss of $0.02. Berg expects billings to be in line to nominal outperform versus his current $430 million estimate.

"We believe the result will be 2Q billings in line with recent decelerating trends for outperformance, and with a valuation trading at 9.5x EV/FY17 revenues and 7.x FY18, we believe the stock to be fully valued. We could become more constructive if our view on Financials proves too conservative," Berg added.

The analyst expects the company to announce the official LMS release during its customer conference in late September. On the earnings call, Berg would seek any incremental update on the new product, which with the new planning platform could yield incremental bookings in the second half from current expectations.

At time of writing, shares of Workday fell 3.75 percent to $79.00.

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