Workday's Lowered Outlook Reflects Increasing Uncertainty In Business

Workday Inc WDAY reported its FQ3 results ahead of the consensus, estimates and guidance, while issuing weak guidance for FQ4 and FY 2018.

Brean Capital’s Yun Kim maintains a Sell rating on the company, with a price target of $62.

Rising Uncertainty

“What's perhaps surprising to us is how much a few slipped deals in the first month of the quarter is impacting its business going forward,” Kim mentioned.

Since Workday has not raised its FY 2017 subscription revenue guidance, despite the better-than-anticipated subscription billings over the past two quarters, the analyst believes some investors might question the quality of billings.

“We also highlight the increasing seasonality in its business going forward as it guided to surprisingly low 1Q18 subscription billings growth in the low teens, which implies a sequential decline in its deferred revenue,” Kim stated.

Given the incremental uncertainty and variability in the company’s business, Workday’s ability to execute on large cross-sell opportunity related to add-on products becomes crucial.

Waiting For Traction

Although this represents a significant and incremental growth opportunity, Kim believes it might also lead to disruption if not managed properly, since sales might become less focused on acquiring new accounts.

“Fundamentally, our checks continue to indicate a lackluster demand environment for WDAY Financials in the large enterprise market,” the analyst noted, while adding that “the stock's current high valuation reflects gaining sizable market share in the $27 billion financials app market, which requires strong traction in the enterprise market.”

Unless such traction emerges, the risk/reward profile would not be favorable at the current valuation levels.