Workday, Inc. — Form 10-K Summary
Business context and reporting period
Workday provides cloud-based financial management, human capital management (HCM), and analytics applications to enterprise, education, and government customers. This annual report covers the fiscal year ended January 31, 2015 (FY2015); the fiscal fourth quarter ended that date. Subscription contracts are typically three years, and subscription revenue is recognized ratably. HCM generated a substantial majority of subscription revenue.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $787.9 million | $468.9 million |
| Subscription revenue | $613.3 million | $354.2 million |
| Professional services revenue | $174.5 million | $114.8 million |
| Operating loss | $215.7 million | $153.3 million |
| Net loss | $248.0 million | $172.5 million |
| Net loss per share | $1.35 | $1.01 |
| Cash from operating activities | $102.0 million | $46.3 million |
| Free cash flow (non-GAAP) | $(1.6) million | $(29.6) million |
Revenue increased 68% year over year; subscription revenue grew 73% and professional services revenue 52%. Approximate GAAP gross margin was 66%, while operating margin was negative 27%. Subscription services represented more than 78% of revenue. Professional services carried materially higher costs relative to revenue.
At January 31, 2015, cash and cash equivalents were $298.2 million and marketable securities were $1.560 billion, totaling approximately $1.858 billion. Working capital was $1.468 billion. Convertible notes had $600 million principal outstanding and a $490.5 million net carrying value; total liabilities were $1.233 billion. Unearned revenue was $632.7 million, and disclosed non-cancelable subscription backlog was $965 million.
Material changes versus the prior comparable period
- Revenue growth remained high but slowed from 71% in FY2014 to 68% in FY2015.
- Operating loss widened by $62.4 million and net loss by $75.5 million, despite revenue growth.
- Management’s non-GAAP core operating margin improved from negative 19% to negative 7%, which it attributed principally to subscription growth, better professional-services utilization, and operating leverage. This measure excludes share-based compensation and specified other costs.
- Operating cash flow more than doubled, while free cash flow improved from negative $29.6 million to negative $1.6 million. Capital expenditures rose to $103.6 million from $60.7 million.
- Share-based compensation increased to $156.0 million from $61.9 million, reflecting headcount growth and earlier timing of employee equity grants.
Outlook, commentary, risks, and unusual items
- Management expects continued investment and higher absolute costs, including in product development, sales and marketing, data-center infrastructure, and global expansion; it expects some expense ratios to decline over time as revenue scales. No specific revenue or earnings guidance is provided.
- FY2016 capital expenditures were expected to be approximately $150 million. Management anticipated lower professional-services margins in FY2016 while investing in financial-management deployments and expanding partner capabilities, including internationally and in education and government.
- Workday reported a $215.7 million GAAP operating loss and stated it did not expect to be profitable for the foreseeable future. Subscription revenue growth and renewal performance matter because contract revenue is recognized over time and sales changes may affect reported results with a lag.
- Key risks include competition from larger established vendors, dependence on HCM, customer adoption and renewals, service availability and third-party data centers, cybersecurity and privacy, execution of rapid growth, international expansion, and the ability to attract and retain employees.
- Debt consists of $350 million of 0.75% convertible notes due 2018 and $250 million of 1.50% notes due 2020. FY2015 interest expense included $24.2 million of non-cash discount and issuance-cost amortization, in addition to contractual interest.
- Workday acquired Identified, Inc. for approximately $26 million to enhance search and predictive analytics. It also invested $10 million in a private company and disclosed related-party office leases with an affiliate of its chairman.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Workday reported no pending legal matter expected to have a material adverse effect.
Important facts for investors to verify
- Whether subscription growth, customer additions, renewals, and expansion beyond HCM can sustain growth as reported growth rates moderate.
- How much of the operating loss and future expense burden reflects recurring cash costs versus share-based compensation and other excluded items.
- Whether operating cash flow can consistently exceed substantial data-center and facilities investment, and when free cash flow may turn sustainably positive.
- The terms, conversion and repayment exposure of the $600 million principal amount of convertible notes, and potential dilution from associated warrants.
- The extent of related-party leases and the fairness of their terms, as well as the costs and timing of the Pleasanton development plans.
- Execution and disclosure impacts of adopting the new revenue-recognition standard, effective for Workday beginning February 1, 2017; the company had not yet estimated its financial impact.