Can Workday Clock Another Quarterly Beat?

By Markets Fool.com

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Image source: Workday Inc.

Workday Inc. (NYSE: WDAY) is set to announce fiscal second-quarter 2017 results this Wednesday, August 24, 2016, after the market close. With shares of the HR and finance enterprise-application company trading roughly flat so far this calendar year despite handily beating expectations for each of its pasttwoquarters,now is a great time for investors to start thinking about what we should expect to hear when Workday's latest release hits the wires.

Workday's headline numbers

For perspective, three months ago, Workday told investors fiscal Q2 revenue should arrive in the range of $371 million to $373 million, good for year-over-year growth of roughly 31% to 32%. This range assumes 35% to 36% growth in subscription revenue, to a range of $303 million to $304 million, and "just" 15% to 17% growth from Workday's professional services segment. Workday CFO Robynne Sisco reminded investors last quarter that the latter, more modest range was the "result of our pushing more services to our ecosystem."

Workday will also break down its total derived billings -- or the sum of revenue and the sequential change in unearned revenue -- which are expected to grow 34% year over year, to around $420 million.

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Digging deeper

In addition, listen for color from management on both competitive dynamics in the industry and Workday's typically high win rates as related to its primary competitors. Last quarter, Workday CEO Aneel Bhusri insisted the company's pipeline remains healthy -- and especially so when looking at the second half of this fiscal year -- with little to no change in competitive dynamics.

That said, Bhusri did note Workday plans to shift those dynamics in its favor by placing more emphasis going forward on selling and servicing medium-sized businesses. For that, Workday will look to its new lower-cost deployment technologies built specifically to serve this segment of the market. So assuming those plans are now in motion, I'll be interested to hear more on Workday's progress capitalizing on this key incremental growth opportunity.

We should also hear comments on whether demand remains strong for Workday's core financial management and human capital management (HCM) products, the latter of which acts as a gateway through which Workday can upsell customers to complementary products. To that end, we'll also want to see if Workday remains on track to deliver several innovative new products later this year, including Workday Planning, Workday Learning, and Workday Student, the successful adoption of which should accelerate Workday's momentum going forward.

Looking ahead

Relatedly, subsequent to the end of fiscal Q2, Workday announced a new multiyear strategic partnership with IBM, under which Workday has adopted IBM cloud as the foundation for its development and testing environments. According to Bhusri, this partnership will serve to "continue accelerating Workday's internal development and testing efforts to support our ongoing global expansion."

Moreover, Workday hinted in its press release of plans to "expand the use of IBM Cloud over time beyond development and testing," namely by building on the companies' partnership, which already includes IBM's global Workday Consulting Services, IBM's acquisition of Workday services partner Meteorix last year, and IBM's existing use of Workday HCM for its global workforce.Listen for any added clarity this week, then, on the impending expansion of Workday's collaboration with Big Blue.

Finally, depending on the gravity of any out- or under-performance this quarter, look for any changes to Workday's existing full fiscal-year 2017 guidance. As it stands, that guidance calls for fiscal 2017 revenue to increase 31% to 32% year over year, or to a range of $1.87 billion to $1.885 billion, and for subscription revenue to increase 37% to 38%, or to a range of $1.275 billion to $1.285 billion. Workday also most recently expected operating and free cash flow growth (excluding owned real estate investments) to be approximately in line with growth in billings for fiscal 2017.

Given this impressive growth, it might be surprising to see shares of Workday trading even with the start of 2016 as of Tuesday's close. To be fair, shares have also rebounded nearly 70% from their 52-week low, which was set after a painful start to the year as many high-flying, fast-growing tech companies pulled back. But if Workday manages to continue its recent habit of under-promising and over-delivering, I think investors should be more than pleased with where it stands.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Workday. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.