Workday, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2013. The filing is an annual report, not a standalone quarterly filing; the fiscal fourth quarter ended January 31, 2013. Unless stated otherwise, financial amounts are U.S. dollars.
Business context
Workday sells cloud-based enterprise applications, led by human capital management (HCM), alongside payroll, financial management, and other applications. Subscription agreements are typically non-cancelable three-year contracts, with subscription revenue recognized over the contract term. The company reported more than 400 customers and more than 1,750 employees at year-end. No customer accounted for more than 10% of annual revenue.
Key financial metrics
| Metric | FY ended Jan. 31, 2013 | FY ended Jan. 31, 2012 |
|---|---|---|
| Revenue | $273.7 million | $134.4 million |
| Subscription revenue | $190.3 million | $88.6 million |
| Professional services revenue | $83.3 million | $45.8 million |
| Operating loss | $117.9 million | $78.4 million |
| Net loss | $119.2 million | $79.6 million |
| Net loss per share, basic and diluted | $1.62 | $2.71 |
| Operating cash flow | $11.2 million provided | $13.8 million used |
- Revenue increased 104% year over year; subscription revenue rose 115%. Subscriptions were 69.5% of revenue, up from 65.9%.
- Gross margin was approximately 57.4%, compared with 51.4% in FY2012. Operating margin was approximately negative 43.1%, compared with negative 58.4%.
- Year-end cash and cash equivalents were $84.2 million and marketable securities were $706.2 million, totaling $790.3 million. Working capital was $629.5 million.
- Total liabilities were $366.8 million, including $25.0 million in capital lease obligations and $285.3 million in unearned revenue. The filing does not report conventional borrowings as a separate debt balance.
- Unearned revenue was $285.3 million; non-cancelable subscription backlog not yet invoiced was $434 million. Management cautioned that backlog is not a reliable indicator of future revenue.
- Fourth-quarter revenue was $81.5 million; operating loss was $30.7 million and net loss was $30.9 million.
Changes, outlook, and notable items
- Revenue growth reflected new and larger customers: customer count rose from more than 250 to more than 400. Operating losses widened in dollars as the company expanded staffing and investment, although operating margin improved.
- Workday received $684.6 million in net proceeds from its October 2012 IPO. Financing cash flow was $685.5 million; the large investing cash outflow mainly reflected purchases of marketable securities after the IPO, as well as capital expenditures.
- Management expected continued losses in the near term and planned further investment in product development, sales and marketing, data-center capacity, and international growth. It expected operating expenses to rise in absolute dollars, while some expenses as a percentage of revenue could decline with scale.
- Management estimated FY2014 capital expenditures of approximately $80 million, primarily for data-center infrastructure and office expansion.
- A one-time, non-cash $11.3 million expense was recorded for donating 500,000 shares to the Workday Foundation. General and administrative expense also increased with public-company costs and share-based compensation.
- The company cited material risks including continued unprofitability, competition, dependence on HCM revenue, customer adoption and renewal uncertainty, security and service interruptions, rapid growth and execution, and international, privacy, and regulatory exposure. Management said it did not expect profitability in the near future.
- Ernst & Young issued an unqualified opinion on the financial statements. The auditor did not audit internal control over financial reporting; management’s internal-control assessment was omitted under the transition relief for newly public companies.
Important facts for investors to verify
- Whether subscription growth, customer additions, renewals, and adoption of non-HCM applications sustain revenue growth.
- Whether professional-services costs and overall spending grow more slowly than subscription revenue, improving margins and profitability.
- Cash generation and the use of IPO proceeds, including delivery against the approximately $80 million FY2014 capital-expenditure estimate.
- How unearned revenue, contract terms, and the $434 million backlog translate into recognized revenue; backlog is not management’s key internal performance metric.
- Potential dilution from equity compensation and the dual-class share structure, which gives Class B shares ten votes per share and concentrates voting control.
- Execution of internal-control reporting requirements as a newly public company, and any material developments in security, service availability, litigation, or related-party arrangements.