Workday, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2013. Unaudited results; amounts below are in U.S. dollars. Workday provides enterprise cloud applications, principally HCM, as well as financial management and related services.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $127.9m | $72.6m | $327.1m | $192.1m |
| Subscription revenue | $93.9m | $51.6m | $243.5m | $130.7m |
| Operating loss | $(40.4)m | $(40.9)m | $(105.3)m | $(87.2)m |
| Net loss | $(47.5)m | $(41.3)m | $(116.5)m | $(88.2)m |
| Operating cash flow | $7.1m | $(9.4)m | $11.5m | $5.3m |
- Q3 revenue increased 76% year over year; subscription revenue rose 82% and professional services revenue rose 61%. Nine-month revenue increased 70%.
- Q3 gross margin was approximately 62.0% (cost of revenue was 38.0% of revenue); operating margin was (31.6%) and net margin was (37.2%). Subscription services were 73.5% of Q3 revenue. Professional services remained lower-margin, with costs equal to 23.9% of total revenue versus services revenue of 26.5%.
- At October 31, cash and cash equivalents were $183.5m and marketable securities were $1,099.2m, totaling approximately $1.283bn. Current assets were $1.406bn and current liabilities $361.7m. Total assets were $1.528bn.
- Convertible notes had $600m aggregate principal; their balance-sheet carrying amount, net of discount, was $463.1m. Capital lease obligations totaled $15.6m. The notes bear 0.75% and 1.50% cash coupons and mature in 2018 and 2020.
- Nine-month operating cash flow was supported in part by a $66.5m increase in unearned revenue. Cash used in investing was $444.7m, including $48.4m of capital expenditures. Management estimated fiscal-year capital expenditures of approximately $75m.
Changes versus prior period
- Revenue growth was driven mainly by recognition of revenue from a larger customer base. Workday reported more than 550 customers at period-end.
- Operating loss narrowed slightly in Q3, but widened for the first nine months as research and development and sales and marketing expenses grew with headcount and business expansion. The company had more than 2,300 employees versus more than 1,600 a year earlier.
- Q3 net loss increased despite the slightly lower operating loss, primarily reflecting higher interest expense from the new convertible notes. Nine-month other expense was $10.6m versus $1.0m.
- Q3 general and administrative expense fell 28%, partly because the prior-year quarter included an $11.3m stock donation to the Workday Foundation. On a nine-month basis, G&A expense increased 18%.
- Workday issued $600m principal amount of convertible notes in June 2013 and entered into note hedge and warrant transactions. It paid $143.7m for the hedges and received $92.7m from warrant issuance.
Outlook, risks, and unusual items
- Management said it expects continued investment in product development, sales and marketing, data-center capacity, and customer service, and does not expect profitability in the near future. It expects professional-services revenue and costs as a share of total revenue to decline over time as partners take on more deployments.
- No full-year revenue or earnings guidance is provided in the filing. Management cautioned that interim results are not necessarily indicative of the full fiscal year; it expected Q4 professional-services utilization and gross margin to decline due to holiday-period billable hours.
- Key risks include persistent losses, the ability to sustain growth and manage rapid expansion, intense competition, customer adoption and renewal uncertainty, data security and service availability, reliance on third-party data centers and AWS, international expansion and foreign exchange exposure, and potential dilution or repayment obligations related to the notes and warrants.
- Management reported no material adverse impact expected from ordinary-course legal proceedings, while noting outcomes remain uncertain. The company was under IRS examination for tax year 2011. It said uncertain tax benefits for prior years could be reduced significantly within 12 months, but could not estimate the amount.
- Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Most important facts to verify
- The cash-flow statement’s ending cash figure for the nine months ended October 31, 2012 is shown as $42.980m, while the comparative three-month figure is $442.980m and the statement reports a $385.451m nine-month increase from $57.529m. Verify the apparent inconsistency against the filed financial statements.
- Review the notes’ conversion, repurchase, maturity, hedge, and warrant terms, including potential dilution and the $600m principal repayment obligations.
- Track subscription growth, customer renewals, unearned revenue, and whether rising operating costs and infrastructure investment translate into improving operating leverage.
- Assess the stated $75m fiscal-year capital expenditure estimate and the risks around data-center capacity, service reliability, security, and third-party providers.