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What's in the Offing for Workday (WDAY) in Q2 Earnings?

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Workday, Inc. WDAY is set to report second-quarter fiscal 2018 results on Aug 30. The company has beaten the Zack Consensus Estimate thrice and missed it once in the last four quarters, delivering an average positive surprise of 239.06%.

Last quarter, the company reported earnings of 29 cents per share, topping the Zacks Consensus Estimate of 16 cents. Revenues increased 39% year over year to $480 million and beat the Zacks Consensus Estimate of $467 million. The strong revenue growth was driven by robust increase in its subscription revenues.

Following strong fiscal first-quarter results, the company raised its guidance for fiscal 2018. Revenues are anticipated to be in the range of $2.04-2.05 billion, up from the prior guidance of $2.01-$2.03 billion.

Notably, Workday’s shares have gained 56.7% year to date, significantly outperforming the industry’s 15.7% rally. The outperformance can be attributed to improving results as well as increasing adoption of its products in the market.

Let's see how things are shaping up for this announcement.

Factors at Play

Workday’s revenue growth is consistently driven by high demand for human capital management (HCM) and financial management applications. The company continues to win new customers, which demonstrate high demand for its applications.

In Jun 2017, the company’s existing HCM customers, 21st Century Fox and CNA Financial CNA, adopted Workday’s financial management application, which reflects its growing clout in the market. The company added 29 new core financial management customers in the fiscal first quarter.

The company’s strong growth potential in both HCM and financial application space is further reflected in the market research firm Gartner’s latest reports. In June 2017, the firm put Workday in the “Leaders” quadrant in its “Magic Quadrant for Cloud Core Financial Management Suites for Midsize, Large, and Global Enterprises” report. Again, Workday has recently been placed in the “Leader” quadrant in Gartner’s “Magic Quadrant for Cloud HCM Suites for Midmarket and Large Enterprises” report.

Workday Planning and Workday Learning — the two new applications of the company — have also demonstrated well in terms of sale by adding over 140 and 165 new customers, respectively, in the last-reported quarter. Further, the company’s expansion in the global market is also a positive.

However, increasing competition in the HCM and financial software market could lead to pricing pressure and affect Workday’s margins. Also, increasing investment in development programs remain a concern.

Workday, Inc. Price and EPS Surprise

Workday, Inc. Price and EPS Surprise | Workday, Inc. Quote

Earnings Whispers

Our proven model does not conclusively show that Workday is likely to deliver a positive surprise this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Workday’s Earnings ESP is -6.04%. This is because the Most Accurate estimate stands at 14 cents while the Zacks Consensus Estimate is pegged at 15 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Workday’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few companies that you may want to consider as our model shows that these have the right combination of elements to deliver an earnings beat in their upcoming release:

Adobe Systems (ADBE - Free Report) with an Earnings ESP of +0.54% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Red Hat RHT with an Earnings ESP of +0.21% and a Zacks Rank #3.

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