How Wal-Mart Contract Will Boost Workday Revenue

Workday Inc WDAY announced its biggest deal ever after signing retail giant Wal-Mart Stores, Inc. WMT, which will go a long way in boosting Workday’s brand value and will also set the stage for further high-profile deals in the future.

Huge Wal-Mart Deal

Wal-Mart, the largest employer in the United States, employing over 2.3 million people worldwide, would subscribe to Workday’s HCM, recruiting, learning, and planning solutions. The deal is a validation of Workday's product portfolio and ability to support one of the most demanding customers in the world.

Moreover, the mega HR contract with Wal-Mart soothed investor concerns after weakness with large deals in early November resulted in soft fourth-quarter outlook, leading to a sharp selloff in Workday shares in early December.

“Beyond the financial implications of today's win, we believe this deal has important psychological implications for the stock and the company's brand with leading organizations around the world,” Brian White of Drexel Hamilton wrote in a note.

Assuming all of Wal-Mart’s 2 million plus employees subscribe to Workday, White estimates the deal could be worth $100 million to $200 million in annual revenue.

However, Workday did not specify the number of Wal-Mart employees who will be part of this subscription. Also, a deal of this size will take some time to ramp. Thus, the analyst is not expecting the full revenue impact be felt in the first year or two. Recall that Workday did not change its guidance for 2017's fourth quarter or FY 2018.

Prior To Wal-Mart Deal

Before signing Wal-Mart, Workday clientele included International Business Machines Corp. IBM, 350,000 employees; HP Inc HPQ, 300,000 employees; Bank of America Corp BAC, 300,000 employees; and FedEx Corporation FDX, 250,000 employees.

“While already an impressive list, even the largest previously publicly announced customer (IBM) is smaller than one-sixth the size of Walmart,” Baird analyst Steven Ashley wrote in a note.

Beyond the geo-political disruption, Ashley noted billings face additional headwinds in the form of reduced subscription revenues due to flexible deal terms, slowed long-term deferred revenue growth and slowed professional services revenue growth.

A Positive Look Forward

That said, the company’s business is gaining momentum, especially regarding financials. The company would announce the marquee customer it recently signed for Workday Financials in the fourth-quarter call. Ashley expects Workday to post a strong financials quarter in the fourth quarter.

In fact, White believes the biggest market opportunity for Workday remains in financials (over $27 billion), followed by analytics (over $19 billion) and HCM (over $13 billion).

White has a Buy rating with $104 price target and Ashley rates Workday Outperform with a target price of $90.

At last check, shares of Workday had fallen 3.62 percent to $78.74 on Thursday after closing 10 percent higher on Wednesday.