Workday's Q2 shows continued controlled growth

Workday's Q2 FY 2014 results show how well the company continues on its controlled growth strategy. In the quarter, Workday recorded $107.55 million in revenue, well ahead of analysts' consensus which was pegged at $100.5 million.

During the investor call, Aneel Bhusri, co_CEO Workday presented what is becoming a trademark understated explanation of achievements:

In the second quarter we executed well. Notably, we crossed the 500 customer mark as we continued to grow our business across North America, Europe and Asia. We remain extremely focused on maintaining the industry's highest levels of customer success and fostering our unique employee culture of fun and innovation as we expand our workforce around the world.

I like the way Workday's analyst relations team manage expectations. It speaks to a culture of delivering first and crowing about it afterwards rather than spouting hyperbole in the hope that fashionistas will grab hold of the glittering rhetoric as indicative of the future. Even so, there is no denying the considerable momentum the company has created with a business and technical model that are difficult to replicate without investing considerable resource and even more difficult to beat down in lawsuits.

More important, Workday continues to gain momentum despite M&A activity elsewhere and the creation of faux partnerships designed to build turbulence in the enterprise cloud ERP space. It is, in other words, a great example of a vendor who chooses to ignore everybody and so set out a differentiating vision into which buyers are readily attracted. Back to the numbers:

• Year over year revenue growth was 72 percent. Given Workday is not a two bit startup but a company with close to $500 million in annual contracted revenue, that is a startling result.
• The GAAP stated operating loss of $32 million for the quarter looks ugly but when when you look at the accumulated six months' loss then you can see that it is shrinking as the company scales.
• Workday is now projecting annual revenue at around $436-446 million. It is starting to look like my 2011 prediction that Workday will reach a revenue run rate of $1 billion by end 2015 is firmly on target.

During the analyst conference call, the company talked about expanding its international reach with additional R&D investments that will be required to support such growth. A few weeks ago I casually inquired about the company's European presence and was surprised to learn it counts 25o people in that arena.

Mark Peek, CFO talked about the ingredients for success which all feed into the results:

Fundamental to our business model is the belief that once we win a customer, we keep a customer for years beyond the initial subscription period. This is driven by a combination of the importance of the application to our customers' business, our frequent updates with meaningful features, functionality and improved ease of use and of course very high customer satisfaction.

In turn, the average weighted contract value for Workday customers is now 3.5 years. I expect to see that expand to something aorund 4.5-5 years in the next 18 months as more customers become comfortable with the value proposition Workday is delivering.

So far, Workday has won laergely on HR. But in remarks during the call, the company alluded to the fact it is winning more on the financials functionality. Surprisingly though, the emphasis was in wins against Microsoft Dynamics. I would have expected to hear more about SAP and Oracle replacements. I guess that what we are seeing is an evolving picture where large companies - Workday's focus - need to get more comfortable with the full offering before jumping ship on financials as well as HR. On the other hand, Bhusri pointed up the fact the company is emphasising the mid-market in its sales efforts.

To those points, I expect to get more color at the upcoming Workday Rising analyst conference which both Phil Wainewright and myself will be attending as Workday's guests. That was reinforced by Bhusri's comments that:

...we had a good quarter and everything is trending well on the financial products themselves and the sales organization, I'm going to give a more detailed overview about what's happening with the financial products, the ecosystem, the sales organization at the Analyst Day.

Talk about being a tease!

I make no secret of the fact that there is little about Workday I dislike. The business model, customer focus, willingness to listen and the take up of new and modern approaches to application building make Workday a company with which we are proud to be assoicated. Why? Because it is clear that customers benefit and that - at least for me - is the ultimate test.

PS = one interesting aside. There was no talk nor evidence in the Q&A that Workday is seeing any turbulence as a result of the NSA/PRISM revelations. Many factors could play into this but it is a topic we will explore at the upcoming analyst event.