Workday, Inc. — Form 10-Q summary
Business context and reporting period. The filing covers the quarter and nine months ended October 31, 2012, compared with the corresponding 2011 periods. Workday sells cloud-based enterprise applications, including HCM, payroll and financial management, primarily through multi-year subscriptions. The company had more than 350 customers and 1,620 employees at quarter-end.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $72.6 | $36.5 | $192.1 | $91.3 |
| Subscription revenue | $51.6 | $23.9 | $130.7 | $59.6 |
| Operating loss | $(40.9) | $(19.4) | $(87.2) | $(55.4) |
| Net loss | $(41.3) | $(19.7) | $(88.2) | $(56.0) |
| Net loss per share | $(0.67) | $(0.66) | $(2.06) | $(1.93) |
| Cash from operating activities | $(9.4) | $(5.5) | $5.3 | $(7.1) |
- Q3 revenue rose 99% year over year; subscription revenue rose 116%. Nine-month revenue increased 111%, with subscription revenue up 119%.
- Gross margin, calculated from reported revenue and cost of revenue, improved to approximately 58.4% in Q3 from 51.5%; for nine months it was approximately 56.5%, versus 50.7%. Q3 operating margin was approximately (56.3%), compared with (53.3%).
- At October 31, cash and cash equivalents were $443.0 million and marketable securities were $354.4 million. Management reported total cash, cash equivalents and marketable securities of $797.4 million.
- Total assets were $950.1 million; total liabilities were $334.6 million. Capital lease obligations were approximately $27.0 million. Current liabilities included $164.4 million of unearned revenue; another $87.7 million was noncurrent.
- Nine-month operating cash flow was positive mainly due to a $64.1 million increase in unearned revenue and higher accrued liabilities. Q3 operating cash flow was negative $9.4 million.
Material changes versus prior periods
- Operating expenses grew substantially alongside the business: Q3 total costs and expenses increased to $113.5 million from $55.9 million. The company cited increased staffing and investment in product development, sales, marketing and infrastructure.
- Q3 general and administrative expense rose to $22.6 million from $3.6 million, including an $11.3 million noncash charge for donating 500,000 shares to the Workday Foundation and higher public-company and compensation costs.
- Workday completed its IPO in October, issuing 26.2 million Class A shares at $28 per share and receiving $684.6 million in net proceeds. Preferred stock converted to Class B common stock. The resulting financing substantially increased liquidity and stockholders’ equity.
Outlook, commentary and risks
- Management said it did not expect profitability in the near future and expected continued investment and increased expenses in research and development, sales and marketing, and data-center capacity. It anticipated margins could improve over time through revenue growth, scale and greater infrastructure utilization, but provided no quantified forecast.
- Management expected fiscal-year capital expenditures of approximately $40 million for the year ending January 31, 2013.
- Key risks include sustained losses, competition, reliance on HCM subscriptions, customer adoption and renewals, long enterprise sales and deployment cycles, service availability and security, privacy and regulatory requirements, and the ability to manage rapid growth. Management also highlighted foreign-currency exposure as international operations grow; it had not instituted a hedging program.
- A 100-basis-point immediate rise in interest rates was estimated to reduce portfolio market value by $1.7 million. Management reported no material expected loss from ordinary-course legal matters, while noting litigation outcomes remain uncertain.
- In November 2012, certain office leases with $8.5 million of aggregate commitments through 2018 were assumed in a property acquisition by a co-CEO. The filing also reports a related-party equipment lease with a co-CEO affiliate; $2.9 million remained outstanding at quarter-end.
Important facts for investors to verify
- Whether subscription growth, customer additions and unearned-revenue growth continue, and how renewal rates develop as more contracts come up for renewal.
- Whether cost growth and losses moderate as revenue scales, particularly after excluding the one-time $11.3 million Foundation donation.
- How the $684.6 million IPO proceeds are deployed and whether capital spending tracks management’s approximately $40 million expectation.
- The size and terms of related-party leases and the effect of the co-CEOs’ substantial voting control under the dual-class share structure.
- The filing’s cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months; investors may wish to verify the filing-status context.