Workday Entering Student Services

According to Gartner, the Software-as-a-Service market is projected to grow 20% over the period 2011 through 2016 to $32.8 billion. Within the market, CRM will be the largest market growing from $5 billion in 2012 to $9 billion by the year 2016. But the biggest growth within SaaS will be driven by Office Suites which are projected to grow 49% annually over the period 2011 through 2016 and HR offerings will register the slowest growth at 6.7%. But that is not slowing down Workday (Nasdaq: WDAY), which continues to deliver strong quarterly results.

Workday’s Financials

For the second quarter, Workday’s revenues grew 72% over the year to $107.6 million, surpassing the market’s projections of $101.0 million. Loss of $0.19 per share was also significantly lower than the Street’s projections of loss of $0.24 per share for the quarter.

By segment, subscription revenues grew 92% over the year to $81.1 million. Professional services grew 29% over the year to bring in the remaining $26.4 million. During the quarter, Workday crossed the milestone of recording more than 500 customers.

For the current quarter, Workday projects revenues of $115-$118 million. They expect to end the year with revenues of $436-$444 million.

Workday’s Expanding Product Offerings

Last quarter, Oracle announced a partnership with Salesforce.com that announced the implementation of Oracle’s Fusion HCM and Financial cloud apps throughout the company. The move was a big win for Oracle as it helped them trump Workday. But Workday is not too concerned and is hoping to lure a bigger market with new offerings.

They are continuing to invest in research and development and sales and marketing to develop newer products. R&D expenses grew 63% over the year to $37.4 million and sales expenses were up 44% to $42.1 million. They recently announced the availability of upgraded Workday 20 featuring Workday Big Data Analytics. The service has been designed in partnership with their customers and helps deliver business insights that help managers make better decisions on human resource and financial management. The service includes several features such as unification of multiple sources, sizes, and structures of data with Workday data, ability to compare compensation and payroll data with market averages, better insight into global payroll costs by integrating payroll-related with financial data to determine overhead costs, headcount analysis to provides staffing estimates. Within Finance, the solution now offers the ability to benchmark organization’s performance with competition, various reports on sales revenue attainment, detailed revenue and customer profitability analysis.

Workday is also now working on releasing an end-to-end student application that will integrate a system of record, mobile computing capabilities, big data analytics, and Workday’s administrative solution over the cloud to deliver student applications that will help colleges manage their student related data. The application will help colleges with all processes of recruiting, admitting, awarding, enrolling, advising, retaining, billing, and placement of students. Workday expects that educational institutions will be able to create customized learning path for students based on their individual goals, and performance. The product is expected to be available by the second half of 2014. They have already tied up with four pilot customers for this project including Ivy League university, Yale. Analysts believe that the student services market is a largely untapped market worth $2 billion in software sales and if successful, the product will help Workday establish a strong position within the industry. If they can bridge the process for colleges and universities to seamlessly connect with employers, perhaps they would then become the standard for that market, and the worldwide youth unemployment problem can find a reasonable solution. Today, there is a large gap between what employers are looking for, in terms of skill-sets, and what skills students have. There is a strong opportunity to address this gap with a systematic platform.

The company is executing extremely well thus far, and the stock chart reflects that performance. Of course, the software-as-a-service category has delivered some of the best performing newly public companies in recent times, and I am generally quite bullish on the sector.

Furthermore, these kinds of strategies of entering the student services market and addressing macro level problems with creative approaches, if executed well, are the kinds of moves that create deep tentacles into customers. The SaaS category has an inherent ‘low exit barrier’ characteristic. However, the student services strategy seems like one that is sticky, and with a high exit barrier.

I like it a lot.

The market is pleased with Workday’s offerings. Their stock is trading at $76.99 with a market capitalization of $13.4 billion. It touched a year high of $78.22 earlier last month. Holding on to the stock for a few years is likely to produce strong returns.