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Workday Q2 FY2015 blows past revenue forecast, ups full year estimate

Den Howlett Profile picture for user gonzodaddy August 28, 2014
Summary:
Can anything stop Workday as it closes in on $1 billion in bookings? It seems not and the addition of BoA as a cornerstone financial services customer bodes well. But...it isn't all plain sailing.

[sws_grey_box box_size="690"]SUMMARY: Can anything stop Workday as it closes in on $1 billion in bookings? It seems not and the addition of BoA as a cornerstone financial services customer bodes well. But...it isn't all plain sailing. [/sws_grey_box]

It's almost boring. Workday blows out another quarter in its seemingly relentless march towards $1 billion in bookings. Add in a massive HR win at Bank of America and it is no surprise the company maintains an eye watering valuation. By the numbers (see also statement - PDF):

Workday Q2 FY2015

Careful management

I'm starting to think that Workday's management team are carefully orchestrating a situation where they become the de facto no brainer choice for systems of record in the 2017 timeframe.

Think about it this way: pretty much every quarter since the company's IPO, Workday has outrun consensus revenue forecasts. Pretty much every quarter it adds another cornerstone customer to further cement its foundational market position. What is truly amazing though is that none of its obvious competitors - SAP and Oracle - have a coherent response that will routinely win deals and it is becoming increasingly difficult to see how they will get on par with Workday's momentum any time soon.  Why would I say that when the competition has so much more market leverage and a seemingly inherent advantage?

CEOs have to satisfy financial analyst expectations. Those are always upward looking yet competitors are saddled with business models that are bound to be dragged downwards in the short to medium term by cloud plays. This has to be managed carefully if those same companies are to retain their dominant position. That drives decisions around cost and we already know that there has been a cull at SAP. That always has a performance impact and not always for the better. Workday has no such legacy so has a clear path to driving expectations in the direction it chooses. It also has a much more easily predictable business model that arises out of the subscription base.

When you factor those issues into the mix, it doesn't matter that both SAP and Oracle can today claim $1 billion in cloud revenue run rate. They still have distractions that Workday doesn't.

To add a bit more spice to the mix, on this quarter's analyst call, Aneel Bhusri, CEO Workday said the company will no longer provide quarterly customer count numbers but will only talk to reaching significant milestones. This has the effect of eliminating one expectational hurdle but I suspect analysts will not be happy. Why?

Annualised Customer Value (ACV) is a key measure for everyone reviewing the enterprise cloud space. So far, Workday has been assessed as earning around $500,000 per customer on average. That measure can no longer be calculated under Workday's current disclosure regime. I can understand why Workday would do this. Keep the analysts interested. Keep the competition guessing. More prosaically, the explanation given of having a diverse mix of customers and product going into those customers, logically renders ACV as a useless measure. I'm not wholly convinced. However flawed ACV may be, it still provides an important footnote to any understanding of Workday's performance in the medium term

Big customers drive momentum

As a side note, Bhusri said Workday now has 700 customers for HR and 'is closing in on' 100 customers for financials. It also announced its biggest HR deal with 242,000 Bank of America employees. The significance of this and other as yet unannounced financial services customers should not be underestimated. While financial services as an industry segment often invests heavily in innovation, it is prudent and conservative when investing in back office.

The fact BoA has made a decision to go with Workday is a monster. It can only be a matter of time before the entire segment at least evaluates Workday if not buys. Why? This is a segment where when one falls into the hands of a named vendor, others follow suit. We already see evidence of that in other geographies. That alone will provide huge momentum for Workday going forward at a time when SAP for example has been struggling to articulate a well differentiated message for that same segment.

Just one final note on the financial services segment. These customers tend to be very large. That means fat deals. That in turn means Workday has a much easier time finding the best and the brightest sales people eager to earn substantial commission income.

More broadly, the stellar growth of momentum vendors like Workday, Salesforce and NetSuite heavily implies we're in the middle of a buying cycle refresh for back office. That spells opportunity and all these vendors are reaping the reward while competitors backfill with existing customers.

Based on these assumptions combined with both an annual revenue forecast now pegged at $760-770 million and deferred revenue standing at $409 million from $333 million in January 2014 make me more confident than ever that Workday will easily reach my bookings target of $1 billion by this time next year.

Non-GAAP measures

So with all this good news, is there anything to dim Workday's day in the sun? (sic) Yes. On a GAAP basis, losses for the quarter widened substantially to $69 million with stock based compensation contributing $40.8 million or 59% to that total. Fortunately, Workday was able to keep cashflow in check largely because of its invoicing methods and use of stock options plus some investing activity. Even so, we should recall that its $1.8 billion cash pile is offset by $479 million in convertible loan stock. That chicken will come home to roost one day.

What next?

Workday financials is due for as refresh. (Disclosure: Workday has been a consulting client on its financials product and I am due to offer some sense testing for the next release under non-disclosure.) I have no current insight into what that might bring but my best guess is that the company will be looking towards better analytics, fill ins for current functional weakness and scaling up as it seeks to attract the more lucrative financials customers. I will report more once I am out of non-disclosure.

On the HR side, the recently released recruiting module appears to be doing well but there is always more to be done in this space. In recent times, Workday has been doubling down on the technology play with a series of webcasts featuring Naomi Bloom, a long time Workday fan and ardent believer in what she calls the 'true SaaS' model to which Workday largely adheres. Start here for the first of four webcasts. While this may seem counterintuitive for a solution that Workday wants everyone to use, the fact is that big customers want solid technology assurance.

For further insights, I highly recommend reading Larry Dignan's absorbing report of a recent conversation with Mike Stankey, COO Workday.

Disclosure: SAP, Oracle, Workday and NetSuite are all premier partners at time of writing.

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