Brean Sees Workday Meeting FY17 Billings Target, But Warns Street's FY18 Billings View 'At Risk'

Brean Capital said Workday Inc WDAY has several growth catalysts to achieve its FY17 billings target without having to gain sizable traction for the Financials product within the large enterprise market.

However, the brokerage maintained its Sell rating saying that the Street's FY18 billings growth estimate of 28 percent "could be at risk" if the company's Financials product fails to gain traction in the enterprise arena.

Related Link: Workday's Guidance May Be Conservative

"We note that implementation time for a typical large scale Financials system is at least 9 months. Hence, we believe that a major accounting change scheduled at the start of CY2018 could prevent many large global corporations from pursuing a complete overhaul of its financial system and migrating it over to the cloud in CY2017," analyst Yun Kim wrote in a note.

Investors are cheering Workday results with shares touching a new 52-week high of $85.96 following the 38 percent growth in its second quarter billings beating Brean/Street growth estimate of 35 percent.

Meanwhile, Workday raised its third quarter subscription revenue guidance by $2 million. The analyst felt guidance is conservative as "we would expect $17-19M in Q2 ACV billings upside (from our/Street estimates) to provide at least $4M incremental subscription revenue each quarter going forward."

For the full fiscal-year 2017, Workday now expects derived billings of $1.88 billion to $1.89 billion and total revenue of $1.548 billion to $1.558 billion.

The revenue outlook now assumes fiscal 2017 subscription revenue of $1.278 billion to $1.285 billion. The company raised its FY17 subscription revenue guidance by only $3 million rather than $8 million implied from its second quarter billings beat.

"While we remain optimistic regarding WDAY's long-term fundamental growth prospects, we continue to be cautious in the near term. With shares representing one of the highest valuation multiples in the software industry, we believe risk/reward remains unfavorable," Kim added.