It's becoming monotonous. Workday records blow out numbers for Q1 FY2016 but only confirms past guidance and guess what happens? The knee-jerk reaction on Wall Street is to hammer the stock price in after hours trading largely because they want ever higher growth that Workday is not prepared to guide up.
Regardless, I'm not so sure CEO Aneel Bhusri is overly concerned but it is worth reviewing the numbers to understand what's happening and what to expect going forward.
- Total revenues were $251.0 million, an increase of 57% from the first quarter of fiscal 2015. Subscription revenues were $201.0 million, an increase of 63% from same period last year.
- Operating loss was $53.4 million, or negative 21.3% of revenues, compared to an operating loss of $52.1 million, or negative 32.6% of revenues, in the same period last year. Non-GAAP operating loss for the first quarter was $2.1 million, or negative 0.8% of revenues, compared to a non-GAAP operating loss of $22.5 million last year, or negative 14.1% of revenues.1
- Net loss per basic and diluted share was $0.33, compared to a net loss per basic and diluted share of $0.32 in the first quarter of fiscal 2015. The non-GAAP net loss per basic and diluted share for the first quarter was $0.02, compared to a non-GAAP net loss per basic and diluted share of $0.13 during the same period last year.1
- Operating cash flows for the first quarter were $94.1 million and free cash flows were $63.9 million. For the trailing twelve months, operating cash flows were $174.4 million and free cash flows were $50.4 million.2
- Cash, cash equivalents and marketable securities were approximately $1.9 billion as of April 30, 2015. Unearned revenues were $653.4 million, a 41% increase from last year.
During the analysts call, CFO Mark Peek added color on some of the more recent developments. Highlights:
The attach rate for Payroll is very strong, at about 50% of our total customer base and about half of them are live. Over the past year, the attach rate for Payroll is even higher with customers with annual contract values greater than $1 million.
...We have also seen a high attach rate with our recruiting application and about half of our new customers in recent quarters buying recruiting and over 50 recruiting customers now live.
...The weighted average duration of new contracts signed in our first quarter was four years, up slightly from the prior quarter.
...Renewal rates continued to be very strong, a 100% to be exact, with billings from renewals signed during the quarter at just over 10% of total billings.
...For the year, we anticipate total revenues of approximately $1.125 billion to $1.145 billion, a growth of approximately 43% to 45%.
...We were about 100 people short in our hiring objective to support these areas and we intend to work hard to make up the short fall over the next quarter.
Analysis and comment
Taken in the round, it is relatively easy to see how Workday's Q1 FY2016 beat estimates on the bottom line - they were down on headcount which represents about two-thirds of the company's expenditures while at the same time maintaining or exceeding guidance on the top line. Contract periods are getting longer which in turn provides greater certainty over future income and cashflows. The real surprise to me is renewal rate suggesting the company is close to negative churn - almost unknown in the software business.
Responding to questions about sales volumes for financials, Bhusri said the company now has 135 financials customers (925 total customer count) but that there is a ways to go before they get 100 of those same customers live.
Among colleagues, we've been asking ourselves how Workday positions itself as an ERP business when there is so much concentrated discussion about how it performs as an HR play. In past conversations, Bhusri has said the key to long term sustainability comes in cementing HR admin and finance applications together in the minds of CFOs. On this call, he said:
Today we have done minimal marketing to our customer base [on financials] something that we will greatly increase over the next few quarters. We wanted to market to them in the right way and at the time we thought that the products were ready for them, and so going through the Payroll and HR lens into our customer base is a great way to solve financials.
In other conversations, colleagues have asked about vertical markets. That question also came up on the analyst call to which Bhusri said:
From a go-to market perspective, we are still aligned by products, but we do now have specialist in the services and sales organization that understand the needs around education and government, financial services, healthcare, and a couple other industries that are tying the product back to specific value propositions for the customers.
So the verticalization is happening but in areas where the company has the best understanding based upon market experience and past history. These are conservative and safe approaches at a time when it is relatively easy for Workday to win deals against the usual suspects of Oracle/PeopleSoft and SAP. The risk - if you can call it that - is that Workday is too conservative, a factor that no doubt influenced market makers in price setting during after hours trading.
Workday is at an interesting point in its development. Having nailed the $1 billion run rate then where to next?
Colleagues report a continuing stream of inquiries about SaaS alternatives to on-premises systems to the point where on-premises is no longer a talking point in any deal of consequence, apart from financials where resistance remains at the top end of the market. Interestingly, Bhusri hinted less resistance in the mid-market, a trend I have seen in play at Oracle.
HR (and CRM) are clear and obvious targets that have become mainstream in part because both SAP and Oracle have validated the market with their own offerings. That means Workday now has real competition and while it can grow at high rate, the comparisons with its direct competitors will surely follow. That's one to watch in the ERP market.
I am much more interested in knowing how Workday will get on with its predictive solutions. There is hardly a day goes by that I don't get an approach by one company or another looking at predictive analytics as the cornerstone for decision making. Earlier in the month, I participated in a useful discussion with Cornerstone on this topic as it relates to attrition and talent retention. Workday has been talking similar concepts but little was said on the call about Insights although Bhusri did give us a teaser with:
...I would hope within 2 to 3 years, we have got 30 to 40 of these applications beginning with the cross industry cover of -- coverage of HR and Finance applications, but then moving into industry specific analytic solutions as well. And what we see from our customers is great interest in learning more and beginning to subscribe for these new offerings.
Cross industry? Hmmm...that would open up questions back into development of verticals, or does it?
Cementing the $1 billion run rate is a huge achievement but like many other milestones, it represents a kind of inflection point.
As always, Workday talks a confident if somewhat conservative game but I am left wondering whether now is the time to be bold so that the push to the next billion can take shape in the minds of buyers as further validation of the company's future and act as a distraction for competitors.
You can be sure that competitors will be charging hard in the next few earnings calls and likely naming competitive wins against Workday, which doesn't tend to do that. I'm not sure that kind of bloviation is in Workday's interests. Far better to simply mention Coca Cola, Dell and Hitachi on the call and leave others to draw their own conclusions.
Image via Workday
Disclosure: Workday, SAP and Oracle are all premier partners at time of writing.