Workday Posts Strong Start As Public Firm

Workday exceeded expectations Wednesday in its first financial report as a public company. The provider of cloud-based human capital management (HCM) and financial management apps posted a 99% increase in total revenue and a 116% increase in subscription revenue compared with last year's third quarter ended October 31.

The percentages were impressive, but the revenue figures underscored that Workday is a small, seven-year-old company with 356 customers and a sliver of the markets it serves. Total revenue for the quarter was $72.6 million while subscription revenue was $51.6 million. Workday is also far from profitable, reporting a third-quarter operating loss of $40.9 million, up from an operating loss of $19.4 million in the same period last year. The non-GAAP net loss for the quarter was $23 million.

Operating cash flow was also negative, but Workday's balance sheet is strong, with $797.4 million in cash, cash equivalents and marketable securities on the books at the end of the quarter. The company raised nearly $685 million of that hoard in its highly successful October initial public offering. Workday is now pouring that money into growing the company, and it has already increased its headcount by 75% this year.

Investors bought into the IPO because they are counting on the company's prospects to grow quickly. Workday's HCM apps are its most mature and are now driving large, enterprise-wide deals, like contracts recently signed with DuPont and Hewlett-Packard.

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"There aren't many companies bigger than HP, so on the HCM side we can sell to any size commercial enterprise," said Aneel Bhusri, chairman, co-founder and co-CEO of Workday, during Wednesday's conference call with analysts.

Workday's financial management apps, which include core financials, revenue management, asset management, expense management and procurement, are about two years behind HCM in terms of scalability and maturity, Bhusri said. But with research and development now fueled by Workday's IPO haul, the financial apps will be closing the gap with on-premises rivals, Bhusri promised.

"We're comfortable selling to medium-sized companies today, and by the end of next year we'll be a fit for Fortune 1000 to Fortune 500 sized companies," Bhusri said. Customers going live on the financials apps next year will include Netflix and Lifetime Fitness.

Continued investments in sales and marketing, research and development, and associated head counts will weigh on short-term results, Workday warned. It projected higher operational losses for the fourth quarter while revenue won't grow as quickly, as it's a typically soft quarter.

Workday's best opportunity to gain a new customer is when it's contemplating an upgrade on an on-premises legacy system from the likes of Oracle or SAP. That's when they invariably face investments of "tens of millions of dollars," Bhusri said. Customers are looking to cloud apps providers because they want a better user experience and a lower cost of ownership, he said.

"It's a platform shift, much like we saw from mainframe to client server," Bhusri concluded. "We consider it to be a market share land grab opportunity."

On-premises competitors clearly don't intend to let Workday walk away with the cloud market. Oracle has acquired Taleo for its cloud-based recruiting and learning management apps, and it built out its own Fusion HCM cloud apps. SAP acquired SuccessFactors for HCM and recently spun out a Financials OnDemand service to blunt cloud ERP competition from the likes of Workday.