Workday, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2014 (Q1 fiscal 2015); unaudited. Workday provides cloud-based HCM, payroll, financial management and analytics applications. Comparisons below are with the three months ended April 30, 2013 unless stated otherwise. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Prior period | Change / context |
|---|---|---|---|
| Subscription revenue | $123.4 | $68.4 | Up 80% |
| Professional services revenue | $36.3 | $23.2 | Up 56% |
| Total revenue | $159.7 | $91.6 | Up 74% |
| Operating loss | $(52.1) | $(32.6) | GAAP operating margin was (33%), versus (36%) |
| Net loss / diluted loss per share | $(59.4) / $(0.32) | $(33.0) / $(0.20) | Loss increased |
| Operating cash flow | $21.7 | $17.3 | Positive in both periods |
| Free cash flow (non-GAAP) | $11.8 | $15.3 | Down $3.5; higher capital spending was the main driver |
- Subscription revenue exceeded 77% of quarterly revenue; management attributed its growth primarily to revenue recognized from a larger number of customer contracts. Workday reported more than 650 customers at quarter-end.
- Costs and expenses totaled $211.8 million, up from $124.3 million. Share-based compensation rose to $28.9 million from $7.4 million. Management’s non-GAAP core operating margin improved to (14%) from (27%); this measure excludes share-based compensation and specified other expenses.
- Cash, cash equivalents and marketable securities totaled approximately $1.866 billion at April 30, 2014. Current assets were $2.014 billion and current liabilities $487.3 million. Cash and equivalents alone declined to $246.0 million from $581.3 million at January 31, while marketable securities increased to $1.620 billion from $1.305 billion.
- Convertible notes had $600 million aggregate principal: $350 million due in 2018 and $250 million due in 2020. Their combined net carrying amount was $473.8 million. Capital leases were $10.2 million current and noncurrent.
- Unearned revenue was $461.9 million ($388.1 million current and $73.9 million noncurrent), up from $413.6 million at January 31.
Changes, outlook and notable items
- Workday acquired Identified, Inc. in February for approximately $26.4 million, to enhance search, predictive analytics and machine learning. The preliminary allocation included $23.8 million of goodwill and $3.6 million of developed technology.
- Investing cash outflow was $352.4 million, largely reflecting marketable-security purchases net of maturities, capital expenditures and the Identified acquisition. Capital expenditures were expected to be approximately $100 million for fiscal 2015, mainly for data centers and office space; potential construction on recently acquired adjacent land was not included.
- Management expects continued investment in product development, sales and marketing, staffing and data-center capacity, with near-term costs rising and no profitability expected in the near future. It expects professional-services margins in the current fiscal year to be lower than fiscal 2014, partly due to deployment investments in newer markets.
- A change to the U.S. exempt-employee paid-time-off policy was expected to use approximately $18 million of operating cash in the quarter ending July 31, 2014. This is a disclosed one-time cash-flow item, not an expense forecast.
- Interest expense was $7.7 million, including $5.9 million of noncash debt-discount and issuance-cost amortization. The notes’ contractual cash interest was approximately $1.6 million for the quarter.
- Management reported disclosure controls and procedures were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
- The filing identifies risks including rapid growth and execution, competition, reliance on third-party data centers and AWS, security and privacy, customer adoption and renewals, international expansion and foreign-exchange exposure. Workday said it expected to begin a foreign-currency hedging program in fiscal 2015.
- Workday reported ordinary-course legal proceedings and claims; management did not expect their resolution to have a material adverse effect, while noting an unfavorable outcome could affect a particular quarter. The IRS was examining the 2011 tax year.
Important facts for investors to verify
- Whether subscription growth, customer additions and unearned-revenue trends continue, and how much growth remains concentrated in HCM.
- Whether operating losses and share-based compensation continue to grow alongside revenue, and how GAAP results compare with the company’s non-GAAP measures.
- Actual fiscal 2015 capital expenditures, the expected $18 million PTO-related cash outflow, and the effect of infrastructure investment on free cash flow.
- Convertible-note repayment, conversion and potential dilution terms, as well as the company’s ability to manage its debt obligations.
- Developments in the Identified acquisition’s preliminary purchase-price allocation, integration and expected benefits; material changes in legal matters or the IRS examination.