Preparing for Workday (WDAY)’s IPO: Workday vs. Salesforce.com

My esteemed colleague Ryan Leask (LinkedIn Profile) and I have co-authored this three-part blog offering our insights on Workday's IPO.  

This is part 1 in our blog on Workday’s IPO.  Part 2 looks at how Workday compares to SFSF, TLEO, NOW and CRM.  And the third and final part provides an overall summary.

Workday (Ticker: WDAY), a cloud based provider of HCM and other enterprise software, is going to IPO tomorrow.  As in typical Silicon Valley fashion, not that many people are discussing it because it’s not a consumer software company.  But for us in the enterprise software world, this is absolutely one to watch!

We’ve known Workday has been on a tear for a while, so as we looked through their S-1, their growth didn’t come as a big surprise to us.  That’s not to belittle their accomplishments. It was an amazing feat by all accounts, and they achieved it all right through the heart of the Great Recession. Spectacular performance!  However, the thing that caught us a little off-guard was their expenses. We wanted to take a deeper look at their numbers, and compare it to other cloud enterprise companies to see how their figures stacked up.

Of course, our analysis began with comparing Workday to Salesforce.com (Ticker: CRM).  If you invested in CRM on opening day and held it all the way till date, you would be sitting pretty on a 900% ROI over ~9 years.  Not too shabby.  So how does Workday compare?

The figure below highlights a few key metrics. The WDAY figures are for their year ending Jan 31, 2012 from their S-1.  The CRM column represents the data in Salesforce.com’s S-1 document, however, since CRM was only ~5 years old when it IPO’d in 2004, and WDAY is already 7 years old, we added an extra set of figures for CRM at their 7 year mark too (CRM@7), and use this as the comparison point for this blog.

You can see by all accounts, WDAY is significantly trailing CRM@7 years.  WDAY’s revenues are 43% of CRM@7’s revenues (134m vs. 310m), yet Workday’s costs are 73% of CRM@7’s (213m vs. 290m).  That’s a big discrepancy.  Where are these costs coming from?

Well, Workday had 1096 employees to CRM@7’s 1304 (i.e. Workday had 84% of CRM@7’s number of employees to produce 43% of their revenue, yet still incur 73% of their costs).  That means WDAY saw $122k rev per employee vs. CRM@7’s $238k rev per employee, so nearly a 2x favor to CRM@7.

So it’s clear, WDAY is operating with a different model to CRM.  This led us to take two follow-up steps:

1. Compare WDAY to some other companies, to see if we could find any other similarities. This will be the second part of our blog.
2. Analyze “why” WDAY’s figures are so different to CRM’s. Yes, there is the HCM vs. CRM difference, but prior to going through the S-1, we would not have expected to see big differences between the companies. 

The rest of this blog post will address our theory on the second question of “why” the two company’s figures are so different.  So here we offer our some of our thoughts on this:

1.  WDAY is Selling to Large Enterprises
• Workday has only 326 customers after 7 years.  CRM@7 by contrast had over 20,000 customers around the same time.  So yes CRM@7 had 2.3x WDAY’s revenue, but they also had 63x the customers.
• WDAY’s Rev/Customers amounted to $412k.  CRM@7’s Rev/Customers was $15k.  Clearly, WDAY is selling much more to larger companies than CRM did.
• WDAY does a lot more services business as well, but even if you exclude it (34% of rev), it would still give you a figure of $272k/customer… so way higher license rev per customer than CRM.
• WDAY over the years had made news of big account wins (Flextronics & Chiquita come to mind), so we knew they were successful in LE’s. However, we assumed they were also getting a lot more traction in the SME space too, which appears not to be the case.
• As per WDAY’s S-1, the figure of 326 customers does exclude SME’s which were bought in from a reseller. But given we didn’t see any explanation of the figures in any more detail, we would assume that the number of SME’s & the revenue they bring in is not material.
• Selling basically exclusively to large companies also explains why WDAY’s services figures are so high, at 34% of revs.  This is higher than we would have expected/liked to have seen from a SaaS company.
• WDAY mentions customization as a risk: Workday’s customers often want customization (but they don’t support adding custom fields or functions), and big companies always want customization (in our experience).  However, one point that doesn’t add up about this: what are all the services for if Workday doesn’t allow customization?  It would be very interesting to know what the average implementation project time is for Workday customers – we’re guessing it might be a lot higher than other SaaS products.
• Another consequence of selling to the big guys is that you will definitely end up with longer sales cycles.  Yes, Sales & Marketing costs are still 52% of Rev’s, but this is in line with other SaaS companies.  Given that they kept this in-line despite the longer sales cycles, this makes the S&M figure seem more impressive.
2. Investing For the Future
• Workday did state in their S-1 that they are trying to expand out from HCM now into Finance. This is definitely going to require a serious commitment in R&D.  Clearly its early stages for them, with only 10% of their customer base (roughly 30 customers) having adopted their finance component so far.
• The R&D costs for WDAY were $62m vs. $23m for CRM at their 7 year mark. That means CRM produced 2.3x WDAY’s Rev, while spending only about 0.37x of the R&D cost.
• However, we aren’t convinced that just one module (Finance) would be sufficient to account for this R&D.  Our best guess is that there is something else in the works too, and Workday is trying to get to a full ERM/ERP suite sooner rather than later.  We could be wrong of course, and maybe it’s the extra effort of trying to support analytics, mobility, etc that CRM didn’t have to deal with when it was  seven years old… but still, R&D is an extremely high number.  We are going to anticipate a positive surprise in the near future because of the higher R&D expenses.
• A secondary aspect that we suspect might account for the extra costs is Workday’s focus on international expansion.  Both HCM & Finance are going to require a lot more regional changes than say the CRM (i.e. different country laws, etc) module.  Workday already supports 21 languages vs. we counted that the CRM only supports 16 languages today, so they are clearly taking international markets seriously.

We won’t draw any more conclusions in this blog.  Instead we will put WDAY against other similar SaaS companies, and then summarize our overall perspective in the third and final blog post.

Disclaimer: All numbers are approximate.  We are not offering any investment advice and all the analysis we have performed to support our blogs is preliminary.