Workday, Inc. — FY2016 Form 10-K
Business context and reporting period. Workday provides cloud-based financial management, human capital management (HCM), analytics, and related applications. This annual report covers the fiscal year ended January 31, 2016; fiscal Q4 ended on that date. The company reported more than 1,200 customers and approximately 5,200 employees. HCM generated a substantial majority of subscription-services revenue.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $1.162 billion | $787.9 million |
| Subscription-services revenue | $929.2 million | $613.3 million |
| Professional-services revenue | $233.1 million | $174.5 million |
| Operating loss | $264.7 million | $215.7 million |
| Net loss | $289.9 million | $248.0 million |
| Net loss per share, diluted | $1.53 | $1.35 |
| Operating cash flow | $258.6 million | $102.0 million |
| Free cash flow (non-GAAP) | $125.0 million | $(1.6) million |
- Growth and margins: Total revenue increased 48%; subscription revenue rose 52%. GAAP operating margin was -22.8%, versus -27.4%. Management’s non-GAAP core operating margin improved to -0.2% from -6.7%; this measure excludes share-based compensation and other expenses.
- Liquidity: Cash, cash equivalents, and marketable securities totaled approximately $2.0 billion at year-end. Working capital was $1.44 billion; total unearned revenue was $899.7 million.
- Debt: $600 million principal amount of convertible notes: $350 million due 2018 at 0.75% and $250 million due 2020 at 1.50%. Balance-sheet carrying value, net, was $507.5 million. Contractual maturities require repayment if notes are not converted.
- Quarterly snapshot: Fiscal Q4 revenue was $323.4 million, versus $226.3 million in the prior-year quarter; operating loss was $73.4 million and net loss was $81.1 million.
Material changes versus the prior comparable period
- Revenue growth remained strong, driven primarily by more customer contracts; subscription revenue growth moderated from 73% in FY2015 to 52% in FY2016.
- Operating loss widened in dollars as expenses rose, but GAAP operating margin improved. Product development expense increased to $469.9 million from $316.9 million, while sales and marketing expense rose to $434.1 million from $315.8 million.
- Share-based compensation increased to $250.0 million from $156.0 million, a significant component of reported expenses.
- Operating cash flow rose to $258.6 million, and non-GAAP free cash flow turned positive, reflecting higher customer collections, partly offset by increased costs and capital spending.
- Non-cancelable subscription backlog increased to $1.6 billion from $965 million; management cautions that backlog fluctuations are not always a reliable indicator of future revenue.
Outlook, commentary, risks, and unusual items
- Management said it expects continued investment in product development, sales and marketing, global expansion, data-center capacity, and customer support; these investments are expected to increase costs in absolute dollars in the near term. It expects product-development, sales-and-marketing, and general-and-administrative expenses as a percentage of revenue to decline over time. No specific revenue or earnings guidance is provided in the filing.
- FY2017 capital expenditures were estimated at approximately $175 million, excluding about $125 million for a planned Pleasanton development center. The company expected to begin construction in the first half of FY2017.
- Key risks include competition and pricing pressure; customer adoption, renewals, and long enterprise sales cycles; data security, privacy regulation, service outages and reliance on third-party data centers and AWS; execution of rapid growth and international expansion; and continuing losses. The company stated it did not expect to be profitable for the foreseeable future.
- Related-party arrangements include office leases from an affiliate of Chairman David Duffield. FY2016 rent expense under those arrangements was $6 million; disclosed total rent due under the agreements was $88 million.
- Workday acquired two businesses in FY2016 for $31 million, net of cash acquired. The annual goodwill impairment test identified no impairment. The company reported no legal proceedings expected to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether subscription growth, customer renewals, and expansion into applications beyond HCM can sustain revenue growth.
- How quickly losses and GAAP operating margins improve, considering rising operating expenses and $250 million of FY2016 share-based compensation.
- Whether operating cash flow and free cash flow remain positive after planned data-center and development-center investment.
- Cash-flow and potential dilution implications of the $600 million convertible notes, related note hedges, and warrants.
- Terms and market comparability of related-party leases, and the total expected cost of the new development center.
- Exposure to security, privacy, service availability, international data-transfer, and foreign-currency risks as operations expand.