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Micah Fairchild Workday IPO Filing Questions & Answers

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 By Micah Fairchild

Cloud HCM Vendor Workday Files for IPO and Increases Scrutiny of Its Offerings

With all the recent activity in the HCM software world, few were surprised when Workday expressed formal interest in pursuing an initial public offering for their highly-sought after technology. But after Facebook’s recent foray into that arena, to say that it would all be smooth sailing ahead for the company once the dust settled and trading officially started is quite simply wishful thinking. For one thing, with Oracle and SAP (along with countless other solid solutions) breathing down their neck, Workday hasn’t exactly put the distance between these other software lines as much as they’d hoped. Add to that the inescapable confusion over cloud deployment’s profitability model, as well as the implications of a still-recovering economy, and unfortunately you wind up with a perfect storm of Workday IPO questions. So let’s take them one by one and see if we can’t uncover the story behind the story here.

Workday IPO Question #1: Will a Public Offering Increase Business?

This is a tricky one, and in some respects begs both a yes and no answer. On the one hand, Workday is predicting that this IPO will be a catalyst for continuing customer acquisitions and has even increased their employee headcount as a way of signaling this—adding roughly 500 new employees in preparation for a significant global sales push and customer increase. While that doesn’t necessarily mean that customers will flock to the solution now that it’s backed by a publicly traded company, it does indicate a doubling down on the part of Workday. And consider this, it was just recently announced that Google will be integrating Workday into its fold over the next several months—a win that comes just on the heels of the IPO filing. Regardless though, Workday’s annual revenue run rate is close to 100%, which means even outside of an IPO, this company would still be on a tear.

There is one thing to keep in mind though and that is the fact that this move by Workday is simply an effort to raise money. Workday has moved beyond simply targeting the HCM software market and instead is looking to corner the global, cloud-based ERP industry. And this funding model of the IPO is largely meant to quickly expand both the company’s financial software and international offerings—two elements that could well spell a huge draw for potential customers that saw Workday as simply another HR software suite.

Workday IPO Question #2: Will Workday Suffer the Same Fate as PeopleSoft?

In a word…no. For one thing, Workday’s co-CEOs Dave Duffield and Aneel Bhusri (formerly in charge of PeopleSoft before Oracle’s hostile takeover) have learned how to insulate their new venture from that type of acquisition. Namely, these two men have structured the company so that they hold the controlling interest in the new stock. Not only that, but should one of them die, the other has been designated as a proxy holder. Further, since the stock will be divided as Class A and Class B, voting matters about any M&A activity on the horizon will be tightly reigned in and relegated to only a select group of shareholders. As such, fears that prospective customers could have about any of the big vendors taking over Workday should well be allayed with that news.

Workday IPO Question #3: Are Cloud Offerings like Workday Actually Profitable?

This is a question that really gets to the heart of the Workday IPO. After all, detractors from all things cloud have often lampooned the SaaS establishment by highlighting the fact that subscription-based revenues don’t look the same as recurring licenses, and must therefore not be making any money. And as for Workday, they’ve had to admit in their recent S-1 filing that they’ve lost money every period since their 2005 inception (most recently $47M compared with the previous year’s $36M). Still, this doesn’t paint the whole picture; especially not one that can become incredibly complex once you get down into the bowels of financial statements. Heck, this is even an issue that the major firms like Gartner, Forrester, and IDC disagree on. So let’s explore it further in the context of Workday.

On the one hand, the truth of the matter is that the company has lost money which would signal to most people that their business model needs work. But consider this, 47% of revenues go towards sales and marketing costs and fully 38% go towards research and development (R&D). Both of these figures differ markedly from the competition; in large part thanks to the relative newness of the solution and Workdays penchant and pace for innovation. And that doesn’t even begin to address the issue of cloud companies and IPOs. For instance, in looking over providers such as NetSuite and, BMO's Karl Keirstead cites that, "A lot of these companies came public with negative cash flow”. Workday on the other hand (once all is said, done, and accounted for in terms of capital expenses) nets $8M—a fact that as Keirstead notes is beneficial; stating, “the fact that they have positive operating cash flow [going into the IPO] is a good thing”.

Workday IPO Question #4: What Will This News Mean for Oracle and SAP?

Rightfully so, SAP has continued their slow, steady march towards integration and cloud dreams with their latest acquisition of SuccessFactors. While they certainly have to be feeling the heat from all of the Workday press (as well as that offering in general), the fact of the matter is that substantively you wouldn’t know it. Oracle on the other hand seems to be sweating profusely about all of this industry chatter concerning Workday. For example, just prior to Workday’s S-1 filing Oracle had released their pricing strategy moving forward (which in and of itself was a drastic departure of openness for the software giant)—a move that the company quickly pulled back on and retracted. Not only that, but the marketing machine at Oracle has been putting out information that indicates they’re “drinking their own champagne” when it comes to the Fusion Financials package—a move that smacks more than a little of desperation if you ask us.

Oracle has dedicated a great deal of time and energy trying to dismiss Workday as a non-competitor or a solution that fails in some way compared with Fusion, but these moves by the giant have only fueled speculation that Oracle is worried. With the upcoming Dreamforce conference of (in which the stage will be shared by both Benioff and Bhusri and integration announcements are expected), further display of “kill Workday” put on by Oracle are highly likely (especially given the damage this partnership can inflict on Oracle’s midmarket strategy), but we’ll just have to see.

Workday’s IPO—The Bottom Line

Clearly, this is big news for the rapidly growing SaaS vendor, but it doesn’t mean that the company doesn’t have major hurdles ahead. Indeed, with the quickening pace of M&A activity; the increased call for cloud ubiquity that more and more vendors are answering; and the fact that functionalities still need some work before all questions can be addressed about their offering, Workday certainly has their work cut out for them. For example, while they have forged solid partnerships with a host of other companies to address capability gaps, the fact of the matter is that the integrations needed for those partnerships cost time and money both for Workday and its customers. This is a critical piece for their future success and one that hopefully this latest funding gained from the IPO can address. Workday may have solid ground right now to make a play for that coveted HCM and ERP cloud domination, but the sands are still shifting. End

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Workday is predicting that this IPO will be a catalyst for continuing customer acquisitions and has even increased their employee headcount as a way of signaling this—adding roughly 500 new employees in preparation for a significant global sales push.


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