Workday Q1 Loss Widens, Revs Beat - Analyst Blog

Enterprise cloud applications provider for human resource and finance, Workday Inc. WDAY reported fiscal first-quarter 2015 loss of 29 cents per share, wider than the Zacks Consensus Estimate of a loss of 15 cents per share.

Despite widening loss, share price increased 4.89% ($3.83) to close at $82.13 on May 27, 2014 due to better-than-expected growth in revenues.

Quarter Details

Revenues surged 74.3% from the year-ago quarter to $159.7 million, which surpassed the Zacks Consensus Estimate of $153.0 million. Subscription revenues (77.3% of revenues) soared 80.4% year over year to $123.4 million in the quarter. Professional revenues (22.7% of revenues) increased 56.4% year over year to $36.3 million.

Billings were $208.0 million in the quarter. During the quarter, Hewlett-Packard HPQ and Philips went live on Workday's Human Capital management solution. The company's financial management solution was selected by the likes of Cushman, Wakefield and Nationstar Mortgage.

In April, Workday released Workday Recruiting, a new application closely integrated with Workday Human Capital Management (HCM). Already more than 70 customers have selected the new app. Overall, the company added 60 new customers bringing the total clientele to 675 (financial customers over 80).

Gross margin expanded 410 basis points (bps) to 64.1%, driven by 440 bps surge in subscription gross margin that fully offset a sluggish professional service gross margin.

Total cost and expenses rose sharply to $211.8 million from $124.3 million reported in the year-ago quarter due to a 79.6% jump in research & development expense, 77.7% rise in sales & marketing expense and 63.0% surge in general & administrative expense.

As a result of higher operating expenses, Workday reported an operating loss (including share-based compensation) of $52.1 million, wider than a loss of $32.6 million in the year-ago quarter.

Net loss (including stock-based compensation) was $53.5 million or 29 cents per share, wider than a loss of $32.3 million or 19 cents per share in the year-ago period.

Cash & cash equivalents and marketable securities were $1.87 billion compared with $1.89 billion in the previous quarter. Cash provided by operating activity during the quarter was $21.7 million. Free cash flow was $11.8 million. Total unearned revenue was $462.0 million, up 54.0% on a year-over-year basis.

Guidance

For fiscal second-quarter 2015, revenues are expected in the range of $173.0 to $178.0 million or growth of 61.0% to 65.0% compared with the year-ago quarter. The company expects total billings to decline sequentially in the second quarter.

Subscription revenues are expected to be in the range of $137.0 to $140.0 million, resulting in a year-over-year growth of 69.0% to 73.0%.

Professional service gross margin is expected to decline sequentially in the second quarter.

For fiscal 2015, Workday forecasts revenues to be in the range of $730.0 to $750.0 million or growth of 56.0% to 60.0% compared with the prior year. Total billings are expected to be approximately $890.0 to $910.0 million for the fiscal year.

Subscription revenues are expected to be within a range of $575.0 to $590.0 million reflecting year-over-year growth of 62.0% to 67.0%.

Gross margin is expected to be in the 64.0% to 65.0% range for the full year.

Our Take

We believe that Workday's innovative product portfolio will help it to gain significant footprint in the human resource and finance markets. The company continues to win new commercial customers, which is significantly positive.

Workday has strong growth opportunity from international expansion. Management expects to sell Workday financial applications in countries such as the United Kingdom and Australia in 2016.

This will help Workday to face intensifying competition from large established players such as Oracle Corp ORCL and SAP AG SAP in both of its operational markets.

Currently, Workday has a Zacks Rank #3 (Hold).