Workday fires on all cylinders in Q1

Profile picture for user gonzodaddy By Den Howlett May 22, 2013
Summary:
Workday has released its Q1 fiscal 2014 results (see pro forma above.) Those results exceeded consensus expectations and the company is now raising its full years guidance. I like what I see in these results.

WDAY-Q1

Workday has released its Q1 fiscal 2014 results (see pro forma above.) Those results exceeded consensus expectations and the company is now raising its full years guidance.

I like what I see in these results. The company is not spending madly on marketing yet is still closing out high profile deals such as Levi Strauss for HR and University of Miami for the full suite. It continues to spend a healthy proportion of revenue on R&D, something I particularly like to see as it demonstrates a firm commitment to innovation. Operating costs as a proportion of revenue is falling, suggesting the company is efficiently leveraging its investments in service provision.

Company preference for three year deals which effectively locks in customers is allowing Workday to generate positive operating and free cashflow. In this quarter, the company generated $15.3 million in free cash flow. Total cash and near cash assets now stand at a very healthy $805.8 million.

Revenue guidance for the full year was raised to $425 and $440 million or growth of 75-80 percent.

More revealing though is the fact the company is reporting that ALL customers migrated to Workday 19. This tells me that the company has successfully figured how to bring users into the latest version of the software without disruption. Other vendors would do well to learn from Workday's customer experience.

Highlights from the financial analyst call

  • 450 customers, 290 live
  • Heavy investment in mobile. Delivered Workday for Android.
  • Headcount is now 1,950 employees. Anticipate building out headcount for global expansion.
  • BigFin - major improvements in financials functionality to meet the needs of global 2000.
  • BigData analytics continue to be on track for general availability in the second half of 2013.
  • Don't anticipate calculated billings for the year to exceed $530 million.
  • Gross margin at 61 percent, unlikely to change for the full year.
  • The company expects financials to be a much larger market over the long term but that timeline looks like 3-5 years.
  • Won Philips in Europe.
  • Pegging financials functionality at around 85 percent of legacy solutions.
  • Investments made in higher education vertical lead to wins at top tier insituations like Yale and Brown Universities but this is already a 'friendly' market given the past involvement in this sector by co-founder Dave Duffield.
  • Historically the company had a set of boutique SIs, now seeing a step up from Deloitte, Accenture and other GSIs.
  • The ability to evaluate both internal and external candidates as part of the recruitment process is becoming a clear differentiator.
  • Workday will mostly partner for payroll. Internal development will never take the company to 100 payrolls. The maximum will likely be no more 15 payrolls.
  • Competitive tactics remain the same: aggressive pricing and wait for us to get a cloud product. Workday is the youngest but most mature cloud vendor. This means the market continues to expand as every year goes by.

Commentary

There were two big standouts.

Financials is getting a lot of technical attention and is being beefed up for massive scale. On the call, I estimate that over 60 percent of the commentary was devoted to this topic. Assuming the company achieves its technical goals and continues to deepen financial analytics then it becomes a genuine competitor in Fortune 500 deals by the end of this year.

Its efforts in big data are largely under the covers but from the hints on the call, it looks like Workday plans to attack the traditional datawarehouse market. Today, that market is highly fragmented with numerous players like Tidemark, Visier and Tableau emerging as competitors to Hyperion, Business Objecta and Cognos.

Workday can leverage its growing HR and financials markets to make a serious splash. I suspect it will take cues from the combination of experience in mobile technologies and some of the new kids on the block to surprise us all. Again, watch for what they deliver later in the year.