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Factors Likely to Influence Workday's (WDAY) Q2 Earnings

Zacks Equity Research

Workday, Inc. WDAY is scheduled to report second-quarter fiscal 2020 results on Aug 29. Notably, the company has surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 39.7%.

Past-Quarter Performance

In the last reported quarter, Workday non-GAAP earnings of 43 cents per share, which beat the Zacks Consensus Estimate by a couple of cents. The figure also improved from 33 cents reported in the year-ago quarter.

Strong growth can primarily be attributed to a rise of 33.4% in revenues, which totaled $825.1 million. The figure outpaced the Zacks Consensus Estimate for revenues of $814 million. The upside was driven by solid growth in subscription and professional services revenues.

What to Expect in Q2?

For second-quarter fiscal 2020, Workday expects subscription revenues in the range of $746-$748 million (up approximately 32% sequentially). Professional services revenues are projected at $124 million.

The Zacks Consensus Estimate for revenues is pegged at $872.2 million, indicating an improvement of approximately 29.9% from the year-ago quarter.

We note that the Zacks Consensus Estimate for earnings has remained unchanged in the past week. The Zacks Consensus Estimate for the quarter under review is pegged at 35 cents per share, suggesting growth of around 12.9% from the year-ago quarter’s reported figure.

Notably, Workday stock has returned 26.7% in a year’s time, substantially outperforming the industry’s rally of 3.3%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Workday is leaving no stone unturned to enhance customer experience by adding extended capabilities and tools in Workday HCM and Workday Financial Management in order to bolster adoption.

The incremental adoption of the offerings is expected to favor the top line in the to-be-reported quarter. We believe improving customer satisfaction rate is another positive.

In the quarter under review, market research firm Gartner’s May 2019 “Magic Quadrant for Cloud Core Financial Management Suites for Midsize, Large, and Global Enterprises” report put Workday in the “Leaders” quadrant, which reflects the company’s growing clout in the cloud market. Notably, Workday was recognized as a Leader for the third year in a row.

The company was ranked #1 on San Francisco Business Times’ list of the best place to work in Bay Area. Additionally, the company was ranked #1 on the list of the Best Large Workplaces in the U.K. by Great Place to Work Institute.

In the to-be-reported quarter, the company unveiled, Workday 32, with more than 500 latest features to aid resource managers support skills resources to projects and provide deeper integration between Workday and Adaptive Insights.

Further, the company witnessed rapid deployment of HCM solution. It was chosen by the likes of Carl Zeiss AG, Cisco Systems, Daimler Trucks North America, Old Mutual Limited and Procter & Gamble. This is likely aid the upcoming quarterly results.

Additionally, the growing influence of Workday Cloud Platform, Workday Prism Analytics and Workday Marketplace bode well.

Partnerships with Duo Security and SkipFlag are also anticipated to aid Workday in expanding business in the to-be-reported quarter.

Further, the acquisitions are likely to enhance and expand machine learning (ML), AI and data analytics capabilities to drive customer satisfaction, which in turn will positively impact the upcoming quarterly results.

Moreover, strong focus on product innovation and higher investments in introducing products is expected to provide the company a competitive edge against its peers, which in turn is likely to impact the top line in the to-be-reported quarter.

However, intensifying competition from peers and higher marketing expenditure are major headwinds at least in the near term.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Workday has a Zacks Rank #3 and an Earnings ESP of 0.00%. This combination makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are some better-ranked stocks, which you may consider as our model shows that these have the right combination of elements to post an earnings beat in its upcoming release:

The Cooper Companies, Inc. COO has an Earnings ESP of +1.50% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Coupa Software Inc. COUP has an Earnings ESP of +6.6% and a Zacks Rank #2.

Dollar General Corporation DG has an Earnings ESP of +2.64% and a Zacks Rank #3.

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