Understanding Workday's IPO filing

While most of the attention to Workday's much anticipated IPO has been around the $400 million said to being raised from ten percent of the company's shares, there are many interesting nuggets in the S-1 that are worthy of discussion. The timing is also interesting. 

In this piece I provide some color on the S-1, but also discuss the competitive landscape in the run up to Dreamforce. 

This S-1 document is remarkably detailed yet conservative in tone. There is for instance, no mention of billing run rates though the company has in the past alluded to numbers in the $300 million range. I suspect that with all the recent talk about shenanigans around billings by cloud players, Workday is erring to the side of caution. 

While Workday is following a now familiar pattern by issuing non-voting shares, co-founders/CEOs Aneel Bhusri and Dave Duffield have wisely entered into a proxy agreement. Should one of them die, the other takes on their voting rights. That, along with other arrangements the company has made in its constitution documents means over and above their current control of the company's voting stock, Workday is virtually impregnable against any attempted hostile takeover for the foreseeable future. While that might crimp the stock's value for some time to come, it provides comfort for customers in knowing that the founders' intentions are to build for the long term. 

The numbers

On to the numbers. While the revenue run rate is close to or exceeding 100% year over year, I am amazed that not only has Workday comfortably hit in excess of $100 million in top line revenue ($134 million for the year to 31st January, 2012 and $119 million in the half year to 31st July, 2012) but also that its current deferred revenue is $151 million with a further $96 million in non-current deferreds. And that with only 325 major customers but more than two million employees using its HCM system. Those numbers place top line guaranteed revenue for this year at around $270 million. If anyone needed convincing that there is an enterprise cloud market for systems of record then that in itself should be proof positive. While Workday will not comment at this time, I am sticking to my forecast that the company will be close to $1 billion in revenue by 2015.

Gratifyingly, I see that the way Workday accounts for revenue is easy to understand. They have clearly set out the terms under which they recognise revenue, account for deferred income and deferred costs. In doing so, they effectively signpost a reasonable element of future revenue and costs. This should make their business relatively easy to understand going forward. This contrasts with some others where the methods they are using are sometimes impenetrable. This will help Workday present a 'clean' image and set the right communications tone to analysts who often struggle to get a firm grasp on financial results. 

When Workday raised its last private round of $85 million, the company said it did not need the money. And so it has proven. The balance sheet shows a healthy $122.7 million in cash or near cash securities. That has been achieved by concentrating upon spending less on GS&A than equivalent organisations. For instance, its expensed sales and marketing costs are currently pegged at 47% of total revenue. While high, it is not as high as, for example Salesforce.com, which still expends 52.5% on sales and marketing. (PDF download) Unsurprisingly for a business that is relatively small, cost of revenue is running at 45% while R&D comes in at 38% of revenue. 

One final snippet from the numbers. Workday says that implementations typically take from three to nine months. That is incredibly fast when weighed against the more typical 12-18 month implementation cycle for on-premise enterprise class solutions. Where do they get all that extra time? Configuration and not customisation is the order of the day. We are routinely told that customers always want something unique. Maybe so but if Workday can be taken as a proxy for the future then that could easily change. Having the benefit of many years' HR/financials development experience doesn't hurt either. 

Timing and competition

On to timing. As at today, we are just under three weeks away from Dreamforce. In an earlier analysis, I remarked that this year, Marc Benioff, CEO Salesforce.com will share the main stage with Aneel Bhusri. Coincidence? It would not surprise me in the slightest if Benioff introduces Bhusri with words along the lines of: "Great to see you Aneel. So how's the IPO shaping up? How much as you hoping to raise?" or some such. 

On to more speculative matters. I believe that Oracle will use Dreamforce to set up a war of words with both Workday and Salesforce.com as it sets out on its 'kill Workday' strategy. It is well known among analysts that both Oracle and SAP are deeply concerned about the rapid progress Workday (and Salesforce.com) have made. While SAP tends to avoid trash talk, Oracle has no such inhibitions. Quite what flavor that takes is open to much speculation but to me, the confluence of events will be too compelling for Oracle to resist. I'm not convinced it will work. 

The reason is simple. Both Workday and Salesforce.com are very long on customer engagement and satisfaction. They make that abundantly clear in every public forum I've seen or attended. In addition, my observations around their employees suggests that while as tough as any other Silicon Valley competitor, employees love what they do. Organisations that are loved both internally and externally are very hard to beat and I suspect this combination along with solutions that are of the moment will make it very difficult for incumbents. 

In the meantime, Oracle released (and then withdrew) its HCM go to market plans this Tuesday. Those plans clearly show how it will be pricing for competition. Shortly afterwards, it set out a 'drinking our own champagne' blog post talking about Fusion Financials. More coincidence? I don't think so. Regardless, it will be interesting to see how each competitor plays out its position in the coming weeks and months.  

PS - I notice Workday just snagged Google as a customer. 

See also: Workday's IPO - 10 things to know (Dignan)

Workday IPO - the company that Oracle won't acquire? (Sommer)

Note: thanks to Brian Sommer for doing a quick fly by on the S-1 and pointing me to certain issues contained in this piece. 

Disclosure: Salesforce.com is paying some of my T&E for attending Dreamforce, Workday is a recent client.