The Market Likes Workday

Last week, SaaS-based enterprise services provider Workday (NYSE:WDAY) finally went public. According to Fortune/CNN Money, its IPO was among “the largest venture-backed IPO since Facebook.” It sold 22.8 million shares at $28 each, raising $637 million through the IPO.

Workday’s Growing Losses
Pleasanton, California–based Workday has seen strong revenue growth in the recent years, but turning a profit has yet to become a reality. Revenues grew from $68.1 million in 2010 to $134.4 million last year. However, losses have also widened. Losses grew from $56.2 million in 2010 to $79.6 million in 2011. For the first half of the current year, revenues grew 118% over the year to $119.5 million. Net losses continued to widen and grew from $36.3 million for the first half last year to $46.9 million during the first half of the current year. Even in its S-1 filing Workday mentions that it “does not expect to be profitable for the foreseeable future.”

But that hasn’t stopped the company from expanding its customer base. It boasts of names such as Kimberly-Clark, Flextronics, and Hewlett-Packard on its customer list. Workday’s management believe that by going public, they will be able to attract more customers as the CIOs of large companies will feel more secure in signing long-term contracts because of increased transparency.

Workday Upgrades Offerings
Recently, Workday announced plans to bring Salesforce Chatter, the enterprise social network option, into its suite of human capital management (HCM) and financial management applications. Through the move, Salesforce’s Chatter will be available to all Workday users, and Workday users will be able to share profiles, feeds, and files within their system. The integration of the applications will help organizations manage global workforce through the mobile and social media more effectively.

Workday also released a new time-tracking tool for the white collar employees. Workday 17 includes Workday Time Tracking, which is a global time and attendance application that uses a single application to collect, process, and manage time and attendance for global workforce. The application comes with a simpler and a more user-friendly interface that is well integrated with other Workday applications, thus providing a global platform for workforce management and real time data for effective management of resources. The application is available not only on the Web, but also through iPhone and iPad applications.

Analysts estimate that the human resources software market is worth $15 billion this year. They project that Workday’s market share will continue to grow in the future and expect it to become three to five times bigger in the next three to five years. Piper Jaffray’s analyst Mark Murphy calls Workday as “a force to be reckoned with.”

The current stock performance surely supports that point. The stock is trading at $51.94 after touching a high of $51.37 soon after listing last week. Based on the offer price of $28 a share, the company was valued at $4.5 billion and at the current trading price, Workday is valued at $7.8 billion.

So what explains this stock performance and its contrast with the social media IPOs (minus LinkedIn)? I believe it is the business model. The SaaS subscription model is a clean, reliable, tried-and-true business model. It scales nicely. The product offerings are mission critical, and business customers are willing to pay. In social media, the ROI on the advertising dollars seems suspect, and the actual users of the product are free riders. That makes things iffy and unpredictable.