Carnival in the Cloud: Workday and Oracle Continue to Battle it Out

According to a recent research report, cloud-based Human Capital Management (HCM) solutions market is estimated to have grown 21% in 2014 to $6.1 billion. It is further expected to grow to $10 billion by 2019 at a CAGR of 10%. SAP is the leader in the market with 11% share and Workday (NYSE: WDAY) is the second largest player accounting for 9% of the market, followed by Ultimate Software with 7% share and Oracle with 6% share.

Workday’s Financials

For the recently reported third quarter, Workday’s revenues grew 42% to $305.3 million, and exceeded the Street’s forecast of $303 million. This was a break-even quarter for them, exceeding the market expectations of a loss of $0.04 per share.

Subscription revenues grew 48% over the year to $242.7 million and professional services revenues grew 23% to $62.57 million.

Their recent performance may have surpassed market expectations, but their outlook does not appear as promising. For the current quarter, Workday is projecting revenues of $317 million-$320 million while the market was looking for revenues of $320 million.

Workday and Oracle’s Bitter Rivalry

Everyone knows there is no love lost between Workday’s founders and Oracle after the hostile takeover of PeopleSoft by Oracle. But their relationship continues to sour even now. During the year, Oracle has been offering heavy discounts to customers who want to sign up for their HCM products. What is particularly worrisome for Oracle is that Workday’s applications do not rely on any of Oracle’s offerings – neither Oracle’s database nor its high-end servers. To counter this competition, Workday is offering billing model changes that are hurting its revenue outlook. According to Wedbush analysts,

“WDAY has been offering more flexible payment terms to new customers to counteract ORCL’s aggressive pricing tactics with its HCM Cloud. We believe the impact from more flexible payment terms on WDAY’s subscription revenue was minimal in 3Q, although WDAY’s new sales tactics are expected to result in a three point headwind to 4Q subscription revenue and five points next year, then normalizing by FY18.”

Workday is also countering Oracle with several product upgrades. It has already entered the financial management market and last quarter announced continued investments in global capabilities for Financial Management, including the addition of new language translations for French and Spanish.

During the last quarter, Workday released Workday Learning, a new application that will deliver a more personalized learning experience for organizations to help and encourage employee career development. The application will feature collaboration and social learning technologies including the ability to share content on any device, personalized training modules, support for diverse learning experiences that will be able to support various developmental experiences, and a built-in measurement and insights tool to help organizations get an insight into the learning effectiveness. Workday Learning will be integrated into Workday’s unified suite of applications and will be generally available to the customers during the second half of next year.

Workday has also released its latest feature release Workday 25, which includes additional financial management solutions including Workday Inventory and additional reporting and analytics capabilities, and expanded product translations and localizations.

Besides its own efforts, Workday is also benefiting from other acquisitions in the industry. Last quarter, IBM announced the acquisition of Workday’s leading service partner Meteorix. Meteorix has over 200 certified Workday consultants delivering Workday’s solutions to multi-national companies across a wide range of industries. With the acquisition, IBM could become one of the leading, most qualified, and experienced Workday service providers in the world. The move will help Workday expand their reach to new clients and also rely on IBM’s might to rapidly implement their solutions.

Its stock is trading at $80.48 with a market capitalization of $15.45 billion. It touched a 52-week high of $95.17 in February this year.

You can read about many other entrepreneurs who have built successful cloud businesses in my book Carnival In The Cloud and here on my blog.

This segment is a part in the series : Carnival in the Cloud