Workday's Guidance 'Underwhelming'; Story Is By No Means Broken

Shares of Workday Inc WDAY have plunged more than 17 percent as solid third-quarter results were overshadowed by deal slippage commentary and trimming of fourth-quarter subscription revenue and billings expectations.

Quarterly Gist

• Q3 EPS: $0.03 vs. estimated $(0.04).
• Revenue: $409.6 million vs. estimated $400 million.
• FY 2017 Revenue Guide: $1.56 billion–$1.563 billion vs. estimated $1.56 billion.

The company expects some HR deals could slip in to next year due to political and macro uncertainty in the form of U.S. presidential election, Brexit and other pending European elections.

Further, Workday expressed a more cautious tone and said its fourth-quarter billings guidance (25 percent-26 percent growth) has conservatism baked in.

Analyst's Take

That said, William Blair reiterated its Outperform rating on Workday shares, saying the underlying fundamentals are strong, and investors need to exercise some patience with the stock.

“[W]e are frustrated by the change in tone quarter-over-quarter, but nothing has changed with our long-term view of Workday’s opportunity and its competitive positioning in the cloud ERP market,” analyst Justin Furby wrote in a note.

However, in the near term, the stock is a “show me” story going into the all-important fourth quarter.

Looking ahead, Workday sees fiscal 2018 subscription revenue growth of 30 percent versus William Blair’s preview of “30 percent-plus” and the Street’s published 35 percent estimate. Management expects a similar headwind to subscription revenue growth next year due to flexible bill terms and not expects this to flip to a tailwind until fiscal 2019.

Unexpectedly, the company also guided for fiscal 2018 subscription billings, which calls for growth in the mid-20s, which compares with the consensus view of north of 30 percent growth.

Workday also called for first quarter 2018 subscription billings growth of “low teens,” which was meaningfully below the Street.

Furby, however, said the recent partner surveys suggest demand and pipelines remains healthy. The analyst said the current weakness in shares creates a buying opportunity.

At last check, shares of Workday had fallen 16.6 percent on the day to $68.04.