Sunday, July 12, 2015

Workday’s Growth Turns Taskmaster

Just being in the cloud does not mean that it guarantee's success. Aivars Lode avantce

Workday’s Growth Turns Taskmaster

Workday’s latest results showed it can’t afford to miss a single step on the growth treadmill

By Dan Gallagher

It has taken Workday a decade to get to its first billion dollars in sales. Its second will have to come much, much faster.
Such is the burden of being a high-growth cloud company. Late Tuesday, Workday by most measures reported strong fiscal first-quarter results. Revenue jumped 57% year over year to $251 million, beating Wall Street’s estimates. That put Workday on track for a $1 billion annual revenue run rate for the first time since its founding in 2004.
Like other cloud stocks, investors have been valuing Workday more for its growth potential than near-term performance. So any signs of deceleration are particularly concerning. Workday’s shares sold off 11% Wednesday as investors keyed in on the company’s billings outlook for the year that ends next January.
Billings are a measure of business that is invoiced during the quarter. They are considered a better indicator of performance for companies that sell cloud-based software services to businesses under a subscription plan. For the quarter ended April 30, Workday’s billings grew 31%, year over year, after averaging growth of 65% over the last eight quarters.
The company’s full-year forecast implies billings growth of about 35% for fiscal 2016. That compares with growth above 60% in each of the past three years.
Workday still loses money due to heavy spending on sales, marketing, product development and stock-option expenses. So growth potential figures heavily in its valuation.
But that growth will be harder won in the days ahead. Larger, deep-pocketed rivals such as Oracle and SAP have fully awakened to the potential of the cloud. They have the means and motivation to underprice smaller rivals like Workday.
Workday has shown it can keep up, having signed large new customers like Coca-Cola, Dell and Hitachi during the recent quarter. The company also said it has been able to maintain pricing discipline.
But there is a cost to keeping up. Rivals and other cloud peers like are hiring to keep pace with demand. Workday noted it fell about 100 short of its hiring goal during the quarter, with CEO Aneel Bhusriadding “it’s a tough market to hire fast in.”
That could pressure Workday as it scrambles to meet Wall Street’s aggressive goals. Annual billings are still expected to roughly double in the next two years, so the company can’t afford any more slowdowns. And even with Wednesday’s selloff, Workday trades at about 12.5 times forward sales—about double the multiple of Salesforce.
To justify that premium, Workday has its work cut out for it.

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