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Microsoft Should Acquire Workday

Posted on Wednesday, Dec 14th 2016

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Recently SaaS-based enterprise application services provider Workday (NYSE: WDAY) announced its lackluster quarterly results. Workday appears to be getting bogged down by political conditions coupled with increasing competition from other vendors. To top it all, profits are still not visible. The market is surely not pleased with its forecast.

Workday’s Financials

Workday’s third quarter revenues grew 34% over the year to $409.58 million driven by a 38% growth in subscription revenues which came in at $335.7 million. Professional services revenues grew 18% over the year to $73.9 million. The Street had forecast revenues of $400.5 million for the quarter. The company continued to report losses and ended the quarter with an adjusted EPS loss of $0.03. It was better than the market’s projected loss of $0.04 per share. Workday remains focused on growth for now and is not worrying about profitability issues.

For the current quarter, Workday projected revenues of $427 million-$430 million, falling short of the Street’s forecast of $433.6 million. It expects to end the current year with revenues of $1.56 billion-$1.563 billion with billings of $1.887-$1.892 billion. The market was looking for revenues of $1.56 billion for the year.

Workday also provided an outlook for fiscal 2018 and expected growth in the mid-20s, compared to analyst estimates of more than 30% growth in the year. Workday also forecast first quarter 2018 subscription billings growth in the low teens, which was also below the Street’s expectations.

Workday and Microsoft

Workday continues to invest in product innovation and availability. Recently, it announced the general availability of three of its new products: Workday Planning, Workday Learning, and Workday Student. But the market is still not too pleased with Workday’s announcements.

Its disappointing outlook already sent the stock tumbling 11% after the result announcement. Workday’s outlook issues are attributed to the macro-economic conditions that are causing delays in the expected close dates for large contracts. According to Workday, companies are more cautious of signing up for contracts due to the results of Brexit, the US Presidential Election, and the upcoming elections in other G8 countries. These conditions have caused slippage in the closure of some large contracts which were expected to be completed by the start of the current quarter. Workday is hopeful that the delay is short lived and the markets will recover soon.

But political conditions may not be the only reason to worry. Competition for Workday has also increased significantly. Microsoft is becoming a tougher competitor in the mid-market segment. Microsoft has been pushing itself forward through the launch of Dynamics 365 Suite in the cloud segment. Some believe that Microsoft could also be looking at acquiring Workday to upgrade its Dynamics offering with Workday’s features. Microsoft is already gradually building its ties with Workday. Earlier in the previous quarter, it announced an agreement with Workday that will allow Microsoft to integrate productivity tools in Office 365 with Workday’s finance and HR applications. An acquisition could very well be the next logical step. Especially with LinkedIn under its umbrella, Microsoft could get tremendous leverage out of Workday.

Its stock is trading at $70.02 with a market capitalization of $14 billion. It had reached a 52-week high of $93.35 in October this year and has recovered from the 52-week low of $47.32 it had fallen to in February this year.

Photo Credit: Makia Minich/Flickr.com

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