Workday, Inc. — Q1 FY2016 Form 10-Q
Business context and period. The quarter ended April 30, 2015, compared with the three months ended April 30, 2014. Workday provides cloud-based financial management, human capital management and analytics applications. Subscription contracts are typically three years, with revenue recognized ratably; subscription services generated 80% of quarterly revenue. Financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Subscription revenue | $201.0 million | $123.4 million | +63% |
| Professional services revenue | $50.0 million | $36.3 million | +38% |
| Total revenue | $251.0 million | $159.7 million | +57% |
| Gross margin, calculated from reported revenue and cost of revenue | 69.0% | 64.0% | +5.0 percentage points |
| Operating loss | $(53.4) million | $(52.1) million | Loss widened $1.3 million |
| Operating margin | (21.3)% | (32.6)% | Improved 11.3 percentage points |
| Net loss | $(61.6) million | $(59.4) million | Loss widened $2.2 million |
| Net loss per share, basic and diluted | $(0.33) | $(0.32) | — |
| Operating cash flow | $94.1 million | $21.7 million | + $72.4 million |
| Company-defined free cash flow | $63.9 million | $11.8 million | + $52.1 million |
Liquidity and debt. At April 30, 2015, cash, cash equivalents and marketable securities totaled approximately $1.92 billion, versus approximately $1.86 billion at January 31, 2015. Current assets were $2.12 billion and current liabilities $666.6 million. Convertible notes had $600 million principal outstanding and a net carrying value of $496.2 million; principal maturities are $350 million in 2018 and $250 million in 2020. Total unearned revenue was $653.4 million.
Material changes and management commentary
- Revenue growth reflected more customer contracts and deployment demand. Subscription revenue increased 63%; professional services revenue increased 38%.
- Operating expenses rose to $304.4 million from $211.8 million, including share-based compensation of $47.3 million versus $28.9 million. Management cited higher headcount and continued investment. Headcount was approximately 4,100, up from 2,900 a year earlier.
- Management’s non-GAAP core operating margin improved to (1)% from (14)%, primarily on revenue growth and operating leverage. This measure excludes share-based compensation and certain other expenses; GAAP operating margin remained negative at (21.3)%.
- Operating cash flow improvement was primarily attributable to collections in Q1 on significant billings in the preceding quarter, partly offset by increased operating costs. Investing cash outflow was $124.3 million, including $30.2 million of property and equipment purchases and net purchases of marketable securities.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Workday expects continued investment and higher absolute operating expenses in the near term, with an aim for product development, sales and marketing, and general and administrative expenses as a percentage of revenue to decline over time.
- Management expected fiscal 2016 capital expenditures of approximately $150 million, mainly for data-center infrastructure and office space. It also anticipated lower professional services margins in fiscal 2016 as it builds its partner ecosystem.
- The filing states that Workday has a history of losses and does not expect profitability for the foreseeable future. Key risks include competition, customer adoption and renewals, growth execution, service availability and third-party data-center dependence, cybersecurity and privacy, and international expansion and currency exposure.
- Legal proceedings and claims arise in the ordinary course, including intellectual-property matters; management said resolution was not expected to materially affect results, cash flows or financial position, while noting an adverse matter could affect a particular quarter.
- Workday initiated cash-flow hedges during the quarter, with $29 million notional value and maturities of up to 15 months. The company also reported a 95-year land lease; delayed construction beyond December 31, 2015 could trigger additional payments of $0.2 million to $1 million.
- Office leases with an affiliate of the chairman are related-party arrangements. Rent expense under those agreements was $1 million for each comparable quarter.
Important facts for investors to verify
- Whether subscription growth, customer additions, renewals and unearned revenue support continued growth, given ratable revenue recognition and the absence of numerical revenue guidance.
- Whether cash-flow gains are repeatable: this quarter’s operating cash flow benefited from prior-quarter billings and collections, while planned fiscal 2016 capital expenditures are approximately $150 million.
- The scale and trajectory of GAAP losses, share-based compensation and potential dilution, including the convertible notes, warrants and dual-class voting structure.
- Execution of data-center expansion and partner development, and exposure to service disruption, cybersecurity, privacy, competition and international risks.
- Potential implications of the related-party leases, long-term land lease and any developments in legal or intellectual-property claims.