Workday, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2015; comparisons are with the corresponding 2014 periods. Workday provides cloud-based financial management, human capital management (HCM), and analytics applications. Figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Subscription revenue | $242.7M | $164.4M | $667.4M | $431.5M |
| Professional services revenue | $62.6M | $50.7M | $171.5M | $130.1M |
| Total revenue | $305.3M | $215.1M | $838.9M | $561.6M |
| Operating loss | $(70.2)M | $(51.5)M | $(191.2)M | $(165.3)M |
| Net loss | $(77.8)M | $(59.9)M | $(208.8)M | $(188.5)M |
| Diluted net loss per share | $(0.41) | $(0.33) | $(1.10) | $(1.03) |
| Operating cash flow | $55.1M | $41.0M | $164.7M | $53.7M |
| Free cash flow (non-GAAP) | $14.9M | $13.3M | $68.5M | $(12.3)M |
- Q3 revenue grew 42% year over year; subscription revenue grew 48%. Nine-month revenue grew 49%, led by 55% subscription growth. Management attributed subscription growth primarily to revenue recognized from a larger number of customer contracts.
- Subscription services were 80% of Q3 revenue and 97% of unearned revenue at quarter-end. Subscription revenue is generally recognized ratably over non-cancelable contracts, typically three years.
- Approximate Q3 gross margin was 66.7%, versus 66.6% a year earlier, calculated from reported revenue less subscription and professional services costs. GAAP operating margin was (23.0)% in Q3 versus (23.9)% in Q3 2014. For the nine months, it was (22.8)% versus (29.4)%.
- Management’s non-GAAP core operating margin was 0.3% in Q3 versus (1.4)% a year earlier, and (0.2)% for nine months versus (7.9)%. These measures exclude share-based compensation and certain other expenses and are not substitutes for GAAP results.
- Share-based compensation was $68.7M in Q3 and $180.7M for nine months, up from $47.0M and $116.7M, respectively. The company had about 4,900 employees at quarter-end, versus about 3,500 a year earlier.
Financial position and liquidity
- At October 31, 2015, cash and cash equivalents were $219.9M and marketable securities were $1.676B, totaling about $1.896B. Total assets were $2.511B.
- Unearned revenue was $718.0M, including $624.8M current. Accounts receivable was $170.9M.
- Convertible senior notes had a net carrying amount of $507.9M, against $600M principal: $350M due in July 2018 and $250M due in July 2020. The notes are unsecured, with fixed coupons of 0.75% and 1.50%. Principal is repayable at maturity unless converted or otherwise repurchased under the indentures.
- Nine-month investing cash outflow was $265.6M, including $96.3M of property and equipment purchases and $31.5M net cash outflow for acquisitions. Management expected fiscal 2016 capital expenditures of approximately $150M, mainly for data-center infrastructure and office space.
Changes, outlook, and notable items
- Operating cash flow and non-GAAP free cash flow improved materially year over year, primarily due to increased customer cash collections; higher headcount, operating costs, and capital expenditures partly offset the improvement.
- Management said it intends to continue investing in product development, sales and marketing, international expansion, customer support, and data-center capacity. It expects these investments to raise costs in absolute dollars in the near term. It expects professional services margins in fiscal 2016 to be below fiscal 2015 as it builds its partner ecosystem.
- The filing provides no specific revenue or earnings guidance. Management said it expects losses to continue for the foreseeable future; profitability is not assured. It expects product development, sales and marketing, and general and administrative expenses as a percentage of revenue to decline over time, but this is a forward-looking expectation.
- On August 28, 2015, Workday acquired a cloud-based educational video platform company to integrate media management technology into its applications. The stated purchase consideration was $25.6M; the cash-flow statement reports $23.6M net of cash acquired. Purchase accounting remained preliminary.
- Legal matters arise in the ordinary course, including intellectual-property claims. Management did not expect their resolution to have a material adverse effect, while cautioning that an unfavorable outcome in a particular matter could affect a future quarter.
- Risks highlighted include security breaches, data-center or service interruptions, privacy and data-transfer regulation (including uncertainty after the EU Safe Harbor ruling), intense competition, customer renewals and pricing, international expansion and foreign exchange, continued losses, and reliance on partners. The filing also describes concentrated voting control through the dual-class share structure.
- Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth, renewals, and customer additions sustain revenue growth, given ratable revenue recognition and the company’s dependence on HCM subscriptions.
- Whether operating leverage improves on a GAAP basis, considering rising operating losses and substantial share-based compensation.
- Whether cash generation covers planned capital spending and continued infrastructure and headcount expansion.
- The eventual purchase accounting and integration results for the education-platform acquisition, and any further acquisition or investment needs.
- How the company plans to address the $600M note principal maturities, potential conversion or dilution, and the risks associated with its dual-class voting structure.
- Developments in security, service reliability, privacy regulation, competition, and legal or intellectual-property contingencies.