Earnings Preview: Workday (WDAY) Fiscal Q4 by TechStockProspector

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									                            Robert DeFrancesco’s
                      Tech-Stock Prospector
February 25, 2014

Earnings Preview: Workday (WDAY) Fiscal Q4
After the close tomorrow, Workday (WDAY, $99), a provider of cloud-based
solutions covering HR and financials, reports its fiscal Q4 (Jan.) results.

Workday’s revenue guidance for the quarter of $133 million to $138 million calls for
growth of 63% to 69% year over year. The latest consensus estimate stands at
$137.9 million, with the high estimate at $141.4 million.

Workday is shaking up the competitive dynamic for legacy vendors (mainly SAP and
Oracle)—exactly the reason why it’s included on our list of TSP Tech Disruptors for
the second year in a row. The shares today traded to a new all-time high of $102.26.
After rising 52.5% in 2013, the stock so far this year is up 19%.

For customers, Workday can reduce TCO by 25% to 60% compared to the
incumbents. This degree of savings can make a substantial difference for
organizations of all sizes because costs associated with HR and accounting systems
generally represent 1.5% to 3% of total revenue. A big bonus: Deployment times are
significantly reduced from an average of 18 months for traditional ERP installations
to five to seven months for midsize customers and eight to 12 months for large
enterprises.

Workday started out in HR and focused only on the largest enterprises (those with
3,000+ employees). But the company is now pushing into financials (a TAM of $25
billion, 2.5x greater than its core HR TAM) and concentrating more on mid-market
customers (1,000 to 3,000 employees), a segment that represents 45% of all
organizations in its North American target market and more than 50%
internationally.

In addition, the company is expanding its portfolio of offerings. In FQ3, Workday
made its Big Data Analytics solution generally available (it’s expected to be sold in
tandem with either the HR or financials suites), while management said the
recruiting product (a natural progression within the HR suite) is on track for release
this spring. Workday Student, the company’s first major vertical solution, is aimed at
changing the way colleges manage students from prospecting to graduation.

In fiscal Q3 (Oct.), revenue rose 76% (acceleration from 72% growth in FQ2) to
$127.9 million, easily beating the consensus estimate of $117.6 million. Subscription
revenue of $93.9 million jumped 61% and services revenue of $33.9 million
advanced 61%. Total unearned revenue (90% from subscription fees) rose 40% to
$352 million, with the short-term portion up 70% to $279 million. Billings growth of
99% topped the consensus estimate of 72%.

Workday has roughly 550 customers (about two thirds are live on the platform);
more than 50 were added in the latest quarter, including eight of the Global 2000.
The company in FQ3 brought on 10 new financials customers, the most ever in a
quarter for this suite. Of the 50 customers signed up for financials, about half are
live. In financials, the company is seeing early success with customers that have a
heavy human-capital component (services and hospitality industries).

At the Workday analyst day last fall, CFO Mark Peek said the company is capable of
serving 5,000 customers “in a relatively short period of time,” or 21% of the 23,000
organizations worldwide with 1,000+ employees. About 80% of these organizations
are addressable within eight countries; there are roughly 10,000 alone in North
America, where Workday’s penetration rate is now just 4%.

According to Workday, over the past three years it has won 27% of its direct bake-
offs (70% of the wins were against legacy ERP vendors) and lost 16% to the
competition (58% were won by legacy vendors). The rest of the pipeline
opportunities resulted in potential customers doing nothing—this group now
represents a big revisit pool as more enterprises become comfortable with the cloud
and more familiar with Workday. The company’s win rate over the past 12 months
has improved to 30%+, while the direct-loss rate dropped to 13%.

Some analysts believe Workday over time can become the dominant vendor of
enterprise SaaS HR and financial-focused applications. The pivot point for the
overall business could come when the company scores several reference customer
wins in financials, something that might occur as early as this summer.

For fiscal 2015 (Jan.), management’s initial guidance of 50% revenue growth could
end up being conservative (the consensus estimate for fiscal 2014 indicates growth
of nearly 70%). The FY’15 consensus revenue estimate of $705.5 million represents
growth of 51.7%.

Valuation remains a key sticking point: With the market cap at $17.3 billion, even
using the FY’15 Street-high revenue estimate of $735.9 million (growth of 58%)
results in a pricey forward revenue multiple of 23.5.
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Here are some of the topics covered in the February 2014 issue:
*Q4 earnings season: Investors attempt to spot inefficiencies
*Twitter looks to jump-start user growth & engagement
*LinkedIn boosts its enterprise presence
*Meet the new group of enterprise software titans
*The next cloud-software company to hit $1 billion in revenue
*Disruptor Update: ServiceNow keeps raising revenue guidance
*NetSuite continues to deliver record results & grab market share
*A positive surprise from Akamai Technologies
*Gigamon drives growth by exploiting a niche in networking
*The product cycle finally turns positive for F5 Networks
*New leadership at Fusion-IO tries to drive a turnaround
*Has the momentum crowd unfairly sold off CommVault Systems?
*Why Juniper Networks attracted activist investors
*Behind the recent stumble at Citrix Systems
*Conversant is the new name for ValueClick
*Yahoo’s non-core assets still driving the story
*A big investor bulks up on shares of Aruba Networks
*Palo Alto Networks positioned for growth in IT security
*Deal Report: VMware expands in MDM with AirWatch purchase


Order the February 2014 issue of TSP here:
http://www.amzn.com/B004T6Z0ME


Tech-Stock Prospector Managing Editor Rob DeFrancesco has more than 20
years of experience covering the tech sector. He is a former senior writer with
Louis Rukeyser’s Wall Street.

TechStockProspector.com, launched in 2003, is an investment-research service
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