Recent earnings calls have been a mixed bag. Many of the so-called 'momentum' stocks that are priced solely for revenue growth, have taken massive haircuts, Tableau being the trend setter. So when Workday rounded out its year with better than expected Q4 FY2016 results (statement) but a relatively light forecast for FY2017, I wondered what would happen to the stock price.
The unsurprising answer, at least to me, was mixed. Initially the stock fell back from a close of $60.45 to $59.11, then swung back up and then down to $58.50 before settling out at $60.30, a hair off its close. All within two hours after the market close. Anything could happen tomorrow but one thing's for sure, I'm not worried. By the numbers:
Workday revenue for Q4 FY2016 totaled $323.4 million, up 43% over Q4 FY2015. That brought the year total to $1.162 billion, up 48% compared to 2015. This number makes Workday the first stand alone SaaS ERP company to break the psychological $1 billion revenue barrier. At the operating level, the loss widened to $264.7 million, or negative 22.8% of revenues, compared to a loss of $215.7 million, or negative 27.4% of revenues, in fiscal 2015. At the non-GAAP level, Workday got close to break even for the year at $2.7 million compared to $53.1 million in 2015.
Looking forward, Workday said that it anticipates Q1 FY2017 revenue in the range $337M-$339 million, below consensus of $343.1 million. For the full year, Workday expects FY17 revenue in the $1.54-$1.55 billion range versus consensus of $1.55 billion. Of note. the company expects FY2017 billings to be in the range $1.855-$1.875 billion. Assuming the company delivers, then deferred revenue will model at around $1.27 billion at the higher end of estimates. We don't know how that will translate into cash because there are numerous factors impacting the cashflow statement.
Analysts have been eyeing the company's growth with the financials product. This is what the company said:
Workday accelerated momentum for Workday Financial Management with 45 customers joining in the fourth quarter of fiscal 2016, bringing the total customer count for this application to more than 200. Workday has over 100 financial management customers in production and live customers in 35 countries.
That double up from over a year ago will be a relief. Cracking the finance nut is the hardest for any vendor, let alone one whose pitch is to tell the CFO that they will take full control over the running of all the technology of finance operations. Brian Sommer has repeatedly noted with some dismay that finance chiefs are behind the curve in this regard. I argue that may appear to be the case, but finance remains central to operational decision making and SaaS systems are very well suited to ensuring that the distance between LOB and the CFOs office is no more than a mouse click. We know this because we operate SaaS financials and everyone can get a snapshot of where we're at 24x7. That's impossible in non-SaaS operations.
We also know from meeting with Oracle that mid-tier companies who are on legacy applications are proving to be an increasingly easy target for a cloud system. That confirms my theory that SaaS/cloud financials is a trickle up movement. Now it becomes a matter of time before Workday sees benefit of that in its upper mid-market/large enterprise deals. As an aside, I recently spoke with a Workday financials customer who added color to my relatively simple argument. More on that in another story.
Referring to recent results, Bushri said:
I do think that referenceability is much important today than it was 12 months ago, because now they’ve had the time to take customers into production they haven’t been able to and we continue to move forward, still 75% of our customers are in production and with J.B. Hunt and Bank of America, two proof points of very large companies in production with Workday and being happy.
What of the future?
That still leaves the question of general momentum and especially in the much larger HR/HCM suite. In the last year, SAP has become a much more aggressive competitor but I would still argue that Workday is ahead of the technical curve and has plenty of runway in front of it. That is largely because of two differentiating factors:
- Attention to the user experience.
- Relentless focus upon customer success.
That's not to say SAP is not competing, far from it. But I do believe that SAP has a much more difficult story to tell, given that the vast majority of its customers remain using on-premises applications. The SAP SuccessFactors group in particular is talking cloud while at the same time telling those same customers that what they have is legacy that no longer serves modern needs. For proof, check out this recorded session from Yvette Cameron, global head of strategy at SAP SuccessFactors. Oracle also fancies its chances against Workday but we have yet to see how that shakes out at the level of enterprise Workday chooses to play.
Taken in the round, the competitive landscape in 2016-17 will only become more interesting. On balance, Workday will do just fine. The only thing that concerns me is that the growth plans, while an impressive 33%, really need to be a few points higher for me to continue believing it will remain the cloud player to beat.
There is one more factor that could play in Workday's favor. The recent results coming out of Salesforce and upbeat forecast for 2016 surprised me. It is well known that a Salesforce-Workday deal combination is a good ticket into which companies can safely buy. The fact that most of the recent growth at Salesforce has been attributed to the influence of Keith Block, former Oracle enterprise sales head doesn't go un-noticed.
If I have one concern it is that while operating losses look in nose bleed territory, around $250 million relates to non-cash, stock based compensation. Workday's stock price has declined 34% in the last year. At current levels, Workday trades at 10x trailing revenue and you can be sure that the bears lurking around will be poking hard to see if they can get that price down some more.
Volatility will impact Workday because unlike its most immediate competitors, it doesn't have the 'fat' of past years' earnings upon which to draw when it comes to considering the compensation pool. Workday for its part will argue that it's in good shape, with close to $1.5 billion in cash net of loan obligations, a healthy bookings forecast and no obvious macro economic headwinds. Oh yes - and a management team that has seen it all before.