Workday, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended April 30, 2013; comparative period is the three months ended April 30, 2012. Balance-sheet comparisons are with January 31, 2013. Workday provides enterprise cloud applications, with subscription revenue primarily from HCM. It reported more than 450 customers and more than 1,950 employees at quarter-end.
Key financial results
| Metric | Q1 FY2014 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $91.6 million | $56.8 million | Up 61% |
| Subscription revenue | $68.4 million | $36.9 million | Up 85%; 74.7% of revenue, versus 65.0% |
| Professional services revenue | $23.2 million | $19.9 million | Up 17%; 25.3% of revenue |
| Gross profit / margin | $54.9 million / 60.0% | $31.7 million / 55.8% | Improved, partly reflecting a higher subscription mix |
| Operating loss / margin | $(32.6) million / (35.6)% | $(20.0) million / (35.1)% | Loss widened in dollars; margin was slightly lower |
| Net loss | $(33.0) million | $(20.1) million | Loss widened |
| Net loss per share | $(0.20) | $(0.61) | Weighted-average shares rose to 168.1 million from 33.0 million, following the IPO |
| Operating cash flow | $17.3 million | $12.7 million | Includes a temporary $16.5 million benefit from payroll taxes withheld on employee stock transactions |
| Capital expenditures | $1.9 million cash purchases | $2.2 million | Also had $13.3 million of property and equipment accrued but unpaid |
Financial position and liquidity
- Cash and cash equivalents were $219.3 million and marketable securities were $586.5 million, totaling $805.8 million, compared with $790.3 million at January 31, 2013.
- Current assets were $893.7 million and current liabilities were $309.1 million. Unearned revenue totaled $300.9 million, including $224.4 million current.
- Total liabilities were $409.5 million. Capital lease obligations were $21.3 million ($11.2 million current and $10.2 million noncurrent); the filing reports no other conventional debt balance.
- Cash increased $135.1 million to $219.3 million. Investing cash flow was positive $117.1 million, mainly reflecting marketable-security maturities exceeding purchases; financing cash flow was positive $0.8 million.
Changes, outlook, and material matters
- Subscription growth was attributed primarily to revenue recognition on a larger base of customer contracts. Professional services growth reflected new customers and increased deployment and integration work.
- Operating expenses rose to $124.3 million from $76.8 million. R&D increased 75% to $36.3 million, sales and marketing increased 55% to $38.4 million, and general and administrative increased 113% to $12.9 million. Management cited higher headcount and continued investment.
- Management expects continued near-term investment in product development, sales and marketing, customer service, and data-center infrastructure, and does not expect profitability in the near future. It expects R&D, sales and marketing, and G&A expenses to decline as a percentage of revenue over time; subscription and professional-services costs are also expected to benefit from scale and greater partner deployment activity.
- Management estimated FY2014 capital expenditures at approximately $80 million. The $16.5 million employee stock-transaction payroll-tax withholding benefit was paid out in May and is expected to produce a corresponding operating cash outflow in the quarter ending July 31, 2013.
- Subscription contracts are generally non-cancelable, typically three years, billed annually in advance, and recognized ratably. Subscription revenue was 93% of unearned revenue. The company cautioned that quarterly results are not necessarily indicative of full-year results.
- Risks highlighted include ongoing losses, competition, customer adoption and renewal uncertainty, security and service disruptions, scaling data-center capacity and operations, long enterprise sales cycles, and international, privacy, foreign-exchange, and intellectual-property risks. A 100-basis-point interest-rate increase was estimated to reduce investment portfolio market value by $3.7 million.
- Workday reported ordinary-course legal proceedings and claims, but management did not expect their resolution to materially adversely affect results, cash flows, or financial position. Certain office and equipment leases involve affiliates of co-CEO David Duffield; the filing reports $0.2 million quarterly rent expense under office leases with an affiliate.
- Disclosure controls were assessed as effective at a reasonable assurance level; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth, customer additions, renewals, and expansion beyond HCM sustain revenue growth, and how unearned revenue develops.
- How quickly operating costs grow relative to revenue, and whether the stated scale benefits and path to lower expense ratios materialize.
- The cash-flow impact of the payroll-tax withholding payment in the following quarter, and progress against the approximately $80 million FY2014 capital-expenditure estimate.
- Customer concentration, service availability, security controls, and data-center capacity as the company scales; the filing does not quantify these exposures here.
- The effect of the dual-class structure: Class B shares carry ten votes per share, and Class B holders held more than 94% of voting power at April 30, 2013.