Why Workday's Q4 Beat Is Still Being Called A 'Disappointing' Quarter

Despite better-than-expected fourth-quarter results, Deutsche Bank is not ready to budge its Hold rating on Workday Inc WDAY, saying the upside is not enough and termed the performance as the company’s second straight disappointing quarter.

Analyst Karl Keirstead said billings were down from 33 percent – 38 percent in each of the prior three quarters and 2 percent above the high end of guidance, a normal beat. Subscription revenue growth of 39 percent to $365 million is also consistent with the last few quarters.

Analyst Commentary

“Given the number of large HCM deals (including WMT) closing in 4QF17, the beat was likely below investor expectations,” Keirstead wrote in a note.

As such, shares of Workday were in red as investors were expecting bigger upside on the back of some very large HCM deals and disappointed with Workday’s decision to stop giving billings guidance.

Instead, Workday guided to FY 2018 operating cash flow growth of 20 percent and in-line revenue growth of 27 percent–29 percent.

“If the guide for 20 percent OCF growth in FY18 is a loose proxy for billings growth, then this is below our previous FY18 billings growth estimate and the investor bogey for high-20 percent growth,” Keirstead continued.

Related Link: A Closer Look At Workday's Student Opportunity

Elaborating further on the company’s decision to stop billings guidance, Keirstead wonders if Workday has over-indexed on large deals, or is offering unusual invoicing terms due to tough competition from Oracle Corporation ORCL and SAP SE (ADR) SAP. Notably, Workday didn’t announce any big financials wins.

The analyst noted that the new 606 accounting rule impact on billings isn’t large enough to fully explain the decision to no longer give billings guide.

On a positive note, the company’s first-quarter guide for 40 percent plus subscription revenue growth is a slight acceleration from prior quarters and the 63 percent growth in unbilled backlog to $2.54 billion is very strong.

“However, a deceleration to 28 percent billings growth in 4QF17 and the decision to no longer give billings guide will likely halt the near-term momentum in the stock,” Keirstead added.

At last check, shares of Workday had fallen 7.35 percent at $83.56. The analyst has a price target of $85.