Cash, debt, and cash flow
With a market cap of ~$16 billion, Workday (WDAY) is a leading player in the HR (human resources), financial management, and payroll software market. Due to its successful subscription-based business model, along with Salesforce (CRM), the company gained such a stature in the enterprise software space that leading technology players like Oracle (ORCL) don’t forget to mention the company in the earnings release.
In late September 2015, IBM acquired Meteorix—a consulting and implementation services provider for companies looking to deploy Workday’s cloud-based HR and financial management software. According to HfS Research, with the acquisition of Meteorix, IBM became the third-largest Workday services player in the market.
Let’s look at the company’s financials. As of October 31, 2015, Workday had cash, cash equivalents, and marketable securities of ~$1.9 billion. The company has a long-term convertible debt of $508 million. In fiscal 3Q16, the company generated $55.1 million in net cash from operations compared to $41 million during fiscal 3Q15. It generated $14.9 million in free cash flow for fiscal 3Q16 compared to $13.3 million during fiscal 3Q15.
Workday has a subscription services and professional services revenue ratio of ~80% to 20%. As a result, it has to invest significantly upfront to acquire customers. This is apparent from its high sales and expenditure and product development costs. However, the company recognizes the revenue generated over an extended period of time. This leads to a misalignment of cash flows.
In fiscal 3Q16, its sales and marketing expenditure and product development as a percentage of revenue stood at 36.5% and 40.6%, respectively. Increased operating expenses—sales and management and product development costs—put pressure on the margins and profits.
The company tried to control its sales and marketing expenditure, as the above chart shows. However, its product development costs are rising. This is good for its future product pipeline.
Outlook for fiscal 4Q16
For fiscal 4Q16, Workday expects its revenue to be $317–$320 million—a rise of 40%–41% on a YoY (year-over-year) basis. The company’s revenue guidance failed to meet analysts’ expectation. They were expecting the company to report $320.3 million.
You can consider investing in the iShares Morningstar Mid Growth ETF (JKH) and the iShares US Technology ETF (IYW) to gain exposure to Workday. JKH and IYW invest about 0.57% and 0.24% of their holdings in Workday, respectively.