Ahead Of Workday's Q3 Earnings: Why This Analyst Maintains A Sell

Brean Capital warns that Workday Inc WDAY’s FY 2018 revenue growth guidance (at 31 percent) as well as Street's 29 percent FY 2018 billings growth estimate could be at risk, as its checks point to slowing traction for the company’s human capital management and financial products.

Quarterly Print Expectations

“[O]ur recent checks that indicate once promising traction global system integrators (SIs) for its core HCM (Human capital management) solutions seems to have stalled. Our checks continue to indicate lackluster demand environment for WDAY Financials in the large enterprise market,” analyst Yun Kim wrote in a note.

The comments came ahead of Workday’s third quarter results on December 1. Street expects a loss of $0.04 a share and revenue of $400.44 million. Kim estimates a loss of $0.04 a share and revenue of $399.3 million.

The analyst expects at least an in-line third-quarter results and at least in-line fourth-quarter guidance and said the company could at least maintain its FY 2017 revenue and billings guidance.

Hesitations

That said, Kim noted his contacts cited lack of urgency and lower priority on back office projects, which is weighing on Workday’s HCM solutions.

Further, Kim pointed out increasing competition in Europe from SAP SE (ADR) SAP, which is aggressively protecting its installed base from migrating over to Workday with special programs.

Financials Concerns

With respect to financials, Kim said a typical large-scale financials system implementation takes at least nine months, which could make it difficult for many large corporations to pursue such project next year (CY 2017) ahead of a major accounting change at the start of 2018.

But, Workday’s high valuation implies the company gaining sizable market share in the $27 billion financials app market, which would be tough unless strong traction in the enterprise market and sizable billings ramp in the second half of this year.

“Until that traction emerges, we believe risk/reward is not favorable at current valuation levels. Maintain Sell and $62 TP,” Kim added.

At last check, shares of Workday fell 2.23 percent to $81.98.