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​Workday improves ground game vs. SAP, Oracle, but long war ahead

Workday is landing large accounts, but needs more for Financial Management. The company has gone back to basics with its technology pitch vs. SAP and Oracle.

Workday has landed large financial management accounts from the like of AON and now counts FedEx as its largest human capital management customer. Those accounts have meant changes to Workday's billing structure, but the largest takeaway is that the company is making headway against discounting from Oracle and SAP.

The company's third quarter results raised questions about billings and projecting revenue from larger deals. Workday doesn't discount, but it has been altering some large contracts in terms of what money is up front vs. paid over time.

By introducing this flexibility to its deals Workday can tailor accounts, but also has to educate analysts. In fact, most of Workday's conference call revolved around billing. Perhaps the biggest takeaway is that Workday has improved its ground game vs. incumbents.

Workday CEO Aneel Bhusri said:

Q3 was very strong against all of the main competitors we have. It was just a strong quarter across the board. In terms of competitive dynamics, we've gotten back to focusing on the technology differentiation. We've really pushed customers to do their homework and prospects to do their homework on referenceability.
Neither of our main legacy customers really have much in the way of large referenceable customers. As the customers do their homework, we tend to win the deal. So I'm not sure if we lost sight of it a few quarters ago, but we've gotten down to some of the basics.

On the billing front, total contract values aren't changing, but the time frame that revenue is recognized does. Those moving parts are one reason Workday's outlook seemed a bit light.

In the end, Workday may see growth rates slow a bit as it lands larger customers. Those large deals require Workday to adopt better tactics on the ground vs. legacy players. For fiscal 2017, CFO Mark Peek said revenue growth will be above 30 percent, which implies that revenue will be below estimates of $1.586 billion.

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Jefferies analysts John DiFucci and Brad Zelnick said in a research note:

Two quarters ago there was a noted increase in competition in the market place. Workday discussed competitive pressures and described the competitive dynamics as not having substantially changed from the prior quarter. The company continues to believe that it is well position vis-à-vis its competitors. On the other hand, Workday has had to make changes to its billings terms, which it described as impacting its 4Q billings growth guidance by 4 points and its FY17 subscription revenue growth by 5 points. These impacts should reverse over time given that Workday is not pursuing a discounting strategy. We believe that SAP and especially Oracle continue to practice hyper aggressive strategies against Workday in the market. This speaks to the concern of these incumbents regarding Workday, and we believe is the primary reason for the significant moderation of growth this year.

In the end, the Workday battle vs. SAP and Oracle is going to ebb and flow. Workday will need to land large deals in Financial Management and uproot SAP and Oracle. JMP Securities analyst Patrick Walravens noted how the trench warfare will continue.

We have been tracking a 180,000 seat HCM deal with a healthcare company that Workday apparently lost to Oracle since the beginning of 2015. Initially, the company was reportedly running a pilot of Oracle Fusion HCM, but now our due diligence suggests Oracle closed a very large deal with this company. This company currently runs on PeopleSoft. Given the nature of this company's business, it may have had a bias toward a solution with on-premise deployment options. Workday has indicated that it beats SAP and Oracle in two out of three competitive evaluations.