Workday, Inc. — FY2014 Form 10-K
Business context and reporting period. Workday provides subscription-based cloud applications for human resources, payroll, finance and analytics. This annual report covers the fiscal year ended January 31, 2014; the fourth quarter ended on that date. Workday reported more than 600 customers and more than 2,600 employees at year-end. Subscription contracts are typically non-cancelable, three-year agreements, with subscription revenue recognized over the contract term.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $468.9 million | $273.7 million |
| Subscription revenue | $354.2 million | $190.3 million |
| Professional services revenue | $114.8 million | $83.3 million |
| Gross profit and margin | $292.1 million; 62.3% | $157.1 million; 57.4% |
| Operating loss and margin | $(153.3) million; (32.7)% | $(117.9) million; (43.1)% |
| Net loss | $(172.5) million | $(119.2) million |
| Operating cash flow | $46.3 million | $11.2 million |
| Free cash flow (non-GAAP) | $(29.6) million | $(23.4) million |
Revenue grew 71% year over year; subscription revenue grew 86% and represented 76% of total revenue. Operating cash flow improved with higher customer collections, while free cash flow worsened as capital spending and payments for a land lease and patents increased. Share-based compensation rose to $61.9 million from $15.3 million.
At January 31, 2014, cash, cash equivalents and marketable securities totaled approximately $1.887 billion, and working capital was $1.602 billion. Convertible notes had $600 million in aggregate principal ($468.4 million net carrying value after discount): $350 million due 2018 at 0.75% and $250 million due 2020 at 1.50%. Unearned revenue was $413.6 million; reported subscription backlog was $636.1 million.
Fourth-quarter revenue was $141.9 million, versus $81.5 million in the prior-year quarter. Fourth-quarter operating loss was $48.0 million and net loss was $56.0 million, compared with $30.7 million and $30.9 million, respectively, in the prior-year quarter.
Changes, outlook and notable items
- Customer count increased from more than 400 to more than 600. Management attributed subscription growth primarily to new customer additions.
- Management expects continued investment in product development, sales and marketing, data center capacity and customer support, and does not expect profitability in the near future. It expects fiscal 2015 capital expenditures of approximately $100 million.
- Management anticipated lower professional services margins in fiscal 2015 as it invested in new deployments, including financial management, medium-sized enterprise, and education and government customers. It expects professional services to become a smaller share of revenue over time as partners take on more deployments.
- Fiscal 2014 financing included $592.2 million net proceeds from a follow-on share offering and $584.3 million net proceeds from convertible notes. The company also paid $143.7 million for note hedges and received $92.7 million from associated warrants.
- Workday paid $10.0 million for a 95-year land lease and $1.5 million in prepaid rent, and acquired patents for $5.0 million. If construction on the leased parcel does not begin by June 30, 2015, additional payments of $0.2 million to $1.0 million may be due.
- Key risks include persistent losses, slowing growth or weaker customer renewals, intense competition, data security and privacy, service availability and dependence on third-party data centers and AWS, and execution risks from rapid hiring and expansion. The co-founders’ Class B shares carry ten votes per share and provide substantial majority voting control.
- The company reported no litigation it believed would have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth, renewal rates and customer additions can sustain revenue expansion as the customer base grows; the filing notes that HCM generated a substantial majority of subscription revenue.
- Whether operating losses and negative free cash flow improve despite management’s planned spending and stated expectation of continued near-term losses.
- The cash-flow and dilution implications of the convertible notes, their conversion terms, note hedges and warrants, including the $600 million principal due in 2018 and 2020.
- Whether planned data center and office investment, including fiscal 2015 capital expenditures, supports growth without weakening service reliability or margins.
- The related-party lease arrangements involving co-CEO David Duffield and the terms of the long-term Pleasanton land lease.