According to a Gartner report published earlier this year, the global cloud application services, including SaaS offerings, is expected to grow 20% this year to $37.7 billion. The market was estimated to have grown 16% in 2015 to $31.4 billion. Gartner attributes this growth to the shift in the models of software vendors who are transitioning from on-premises licensed software to public cloud-based offerings. SaaS based enterprise application services provider Workday (NYSE: WDAY) is already seeing the benefits of this growth.
Workday’s first quarter revenues grew 38% over the year to $345.4 million driven by a 39% growth in subscription revenues. The market was looking for revenues of $339 million. Excluding costs, Workday’s EPS came in at $0.05 compared with the Street’s forecast of a loss of $0.02 per share.
By segment, subscription revenues grew 39% to $280 million and professional services revenues grew 31% to $65.4 million.
For the current quarter, Workday projected revenues of $371 million-$373 million, marginally ahead of the Street’s forecast of $371 million. For the year 2017, Workday projected derived billings to grow to $1.87 billion-$1.885 billion, compared with the earlier forecast for full-year derived billings of $1.855 billion-$1.875 billion.
Workday continued to expand its geographical footprint by offering regional releases. During the quarter, it announced the general availability of Workday Payroll for France. Workday Payroll has already been released for the US, Canada, and the UK. The Payroll platform for France will include support for France-specific requirements. It will cater to the regional legislative requirements such as regional tax updates. It will include the newly-initiated Déclaration Sociale Nominative (DSN) process that will simplify the process for organizations to replace a wide range of reports with a single statement. The application also supports the Single Euro Payments Area payment-integration initiative that is specific to the European Union. To cater to the growing European market, Workday recently opened a new office in Madrid.
Additionally, Workday is also looking to expand its market share by targeting medium-sized organizations. Going forward, it will focus on selling and servicing these companies through the development of lower-cost technologies that they are building for the particular segment. Some of the products targeted for this segment include Workday Planning, Workday Learning, and Workday Student.
Workday’s Growing Losses
Despite the increasing revenues, Workday hasn’t seen much improvement in its bottomline. For the current quarter, operating expenses increased 38% to $419.1 million. Sales and marketing expenses climbed 34% to $127.5 million and R&D spend grew 43% to $141.8 million. Till now, the company was focused more on growth than on profitability. But that appears to be changing now. During the last quarter, Workday’s senior management team defined their action plan on moving towards profitability. But it expects to turn profitable only “over the next few years both from an operating margin and cash flow generation perspective”.
Its stock is trading at $81.84 with a market capitalization of $16 billion. It touched a 52-week high of $85.67 in November last year. It has recovered from the 52-week low of $47.32 it had fallen to in February this year.
Overall, Workday continues to be poised well for growth in the coming months. SAP and Oracle may be the market leaders in the ERP segment for now, but their biggest problem lies in adapting to the cloud. SAP is relying on HANA, which is really a database, to help it power its way to the cloud. While there is no denying that HANA has helped SAP over the past few years, it is still no substitute for a truly mobile and cloud-based experience like that offered by Workday. Similarly, Oracle is relying on Fusion, which is essentially a hybrid offering for cloud and on-premise ERP. As more and more organizations rethink their cloud strategy, Workday, which has been built on the cloud will have an advantage. The challenge lies in the fact that it is not easy to get an organization to switch from an existing ERP system to an altogether new one.