Workday shares plunge as it warns large contracts are delayed

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Enterprise software vendor Workday Inc. reported solid third-quarter earnings after the bell on Thursday, but warned that a number of proposed deals with large enterprise customers had been delayed because of “economic and political uncertainty.”

As a result, the maker of human relations, payroll and other business software in the cloud saw shares plunge by more than 12 percent in after-hours trading. That followed a 3 percent drop during the regular trading day, as tech stocks generally took a beating.

The software-as-a-service company reported a net loss of $110 million for the quarter, or 57 cents per share. Meanwhile, the company’s earnings before certain costs such as stock compensation were 3 cents a share on revenues of $409.6 million, a 34 percent increase year-over-year. Wall Street analysts on average had expected a loss of 4 cents per share on revenues of $400 million.

Workday also reported third-quarter subscription revenues totaling $335.7 million, an 38 percent increase from a year ago.

“We had a strong third quarter and saw healthy demand across all major geographies and industries,” Workday cofounder and Chief Executive Officer Aneel Bhusri said in prepared remarks. “We continue to lead with product differentiation, technology innovation, and real customer success, and believe these are significant differentiators for Workday in the market.”

Bhusri admitted in a conference call with analysts that some large contracts that were expected to close in the fourth quarter had been held up. Workday had been due to announced deals with an unspecified number of financial service firms in Europe, but these have been delayed by the customers due to uncertainty felt over the recent U.S. presidential election and Brexit votes.

Bhusri told analysts that the concerns were the result of “rhetoric around trade agreements and protectionism,” together with the potential impact of the U.K.’s decision to leave the European Union. The delays could well impact Workday’s fourth-quarter results, which are traditionally the company’s highest in terms of revenue, though Bhusri was optimistic that the deals would eventually close.

“We suspect and hope these are isolated events that will be short-lived,” Mr. Bhusri said.

Looking ahead, Workday revised its guidance for the rest of the year, and is now erring on the side of caution. The company said its forecasting fiscal 2017 revenues of around $1.28 billion, which is some way short of Wall Street’s earlier estimates of $1.56 billion in revenues.

Despite Workday’s more cautious outlook, Technology Business Research Inc. analyst Kelsey Mason said in a research note that she was bullish on the company’s prospects going forward. Mason expressed confidence that Workday would increase its emphasis on the midmarket, leveraging newly developed implementation tools and its partnership with Microsoft to make inroads into this segment. In addition, Workday will also find new ways to expose data to customers, and monetize that data to create new revenue streams, the analyst said.

“Most recently, Workday partnered with Microsoft to integrate Financial Management and HCM with Office 365,” Mason said. “This partnership will enable data to flow freely between the solutions, making Workday more attractive to the millions of commercial Office 365 customers. While the partnership does not differentiate Workday, as SAP has a similar partnership, Office 365 presents an ideal inroad for Workday in key customer segments. TBR believes an opportunity exists for a future expansion where Workday becomes the preferred HR service for Microsoft’s Dynamics 365, as Microsoft lacks a robust HR function.”

Image credit: Workday via Facebook