Workday Business Is Decelerating, New Research Shows

• Workday Inc (NYSE: WDAY) shares are up 7 percent in the past one month, even after hitting a low of $77.05 on October 27.
• Wedbush’s Steve Koenig downgraded the rating on the company from Outperform to Neutral, while reducing the price target from $99 to $84.
• Workday’s business appears to be decelerating at a pace faster than was earlier expected, Koenig mentioned.

Workday reported a revenue beat for 3Q, reporting a figure that was $2M higher than the consensus estimate. Analyst Steve Koenig stated, however, that the revenue performance was “somewhat disappointing.”

Workday’s subscription growth has declined 8-9 points, from 63 percent in 1Q to 48 percent in 3Q. The company has been offering more flexible payment terms to new customers, in response to the aggressive pricing tactics adopted by Oracle Corporation (NYSE: ORCL) with HCM Cloud.

“We believe the impact from more flexible payment terms on WDAY’s subscription revenue was minimal in 3Q, although WDAY’s new sales tactics are expected to result in a three point headwind to 4Q subscription revenue and five points next year, then normalizing by FY18,” Koenig wrote.

Workday announced disappointing revenue guidance for 4Q at $317M - $320M, below the consensus and Wedbush’s estimate. “We had already modeled some impact from WDAY’s new payment terms, but it looks as if the impact is bigger than we thought,” Koenig said. Management did not provide an initial FY17 revenue guidance.

Although Workday was expected to decelerate, while growing from a larger base, and its sales tactics are creating a temporary headwind, “the pace of WDAY’s deceleration is surprising us,” the analyst commented.