My esteemed colleague Ryan Leask (LinkedIn Profile) and I have co-authored this three-part blog offering our insights on Workday's IPO.
To quickly recap the first blog in our three-part series, we
discovered WDAY’s cost structure was significantly higher than we anticipated
when we looked at their S-1. In a quest
to understand this, we looked at Workday (Ticker: WDAY) against SalesForce.com
(Ticker: CRM), and discovered some major differences in their business
models. As a result, in this blog, we
wanted to take some other sample companies to compare to WDAY, in the hopes of
finding a company that might show some more similarities.
As a point of note, we will continue to leave the CRM
figures in the information presented here for comparison purposes. Our sample of new companies are SuccessFactors
(Ticker: SFSF) and Taleo (Ticker: TLEO), both HCM SaaS companies (perhaps our
best candidates for comparison), as well as ServiceNow (Ticker: NOW) (although
they are in a different space, they are an cloud based enterprise software
company which also IPO’d in 2012, so we thought it could just be an interesting
comparison point). And as a disclaimer,
note that these comparisons are not precise. For example, WDAY is going to IPO about 9
months after the last full year of data is available, so their IPO price as an
example, may be more based on this year’s results rather than last year's. With
that said, we are just looking for generalities and trends, so an imprecise
comparison is still ok. So let’s jump
right in.
We assembled the following table by pulling the data from
each company’s S-1 to provide a perspective on WDAY’s valuation:
WDAY is attempting to raise more capital than anyone else
did, and they are asking a 31x multiple on TTM revenues. This is by far the highest in this set, but
when compared on FTM, it’s 14x multiple is a bit closer to what we would expect
to see (albeit still rather high). So it
does not appear WDAY is a bargain buy like CRM was (at 6x FTM multiple).
Here also is the same figure from the first blog, extended for
our new comparison companies, showing some key metrics of the last fiscal year
of information before the IPO:
Some quick eyeballing of the numbers tells us that WDAY:
- has lot more employees than any other company
before going IPO;
- does way more consulting services business than
the comparisons;
- has a lot less customers than the comparisons,
except for Taleo who very similar numbers;
- generates MUCH more revenue per customer than
their peer group. Even if we exclude the
services revenue from WDAY, they are around $272k per customer, which is
remarkably higher than any of the comparison group; and
- spends massively more on R&D cost (as a
percent of its revenue) than the others.
So let’s look at a few of these metrics in more detail
(note: “Year 3” in this charts represents the last full year of earnings before
their IPO, “Year 2” represents the year before that, etc).
First up is revenue
growth. After all, investors love
growth companies and the “multiples” game hinges on future growth. The charts below show growth rates of our
companies, with revenues in $m on the primary Y-axis, and YoY growth rates on
the secondary Y-axis.
Nothing significant jumps out here, as all the companies in
our universe had strong growth before going IPO except TLEO (who also had the
second lowest revenue of the group too, so this is not an issue with growth
rates on large numbers). WDAY enjoys some
of the strongest growth rates, which is all the more impressive given they also
have the largest revenue numbers of the comparison group too. Net net, WDAY is looking very strong in terms
of revenue growth.
Second up is the cost
of revenues (the cost to earn a dollar of revenue): Investors over the years have come to accept
that the cloud business is a different beast where it takes years to become
profitable, but it’s still important to keep the cost of sales in-check.
Most companies generally show signs of getting economies of
scale as the company grows. The notable
points in this chart are how much more efficient CRM is compared to the rest,
as well the fact that WDAY has yet to reach an efficient model. So while there is some issues with how high WDAY’s
cost of revenues are, we can try and give them the benefit of the doubt that
this will come down over the next few years as it is at least trending in the
right direction.
Next up is the
operating expense and margins:
Investors would like to see a stable cost-structure expanding in sync
with growth in revenues. Anything out of
whack will raise concerns.
As expected, the SaaS companies here, and perhaps more
generally any startup focusing on growth, have operating expenses greater than
revenues. Interestingly, both SFSF and
WDAY seem to have extremely high cost structures. We were glad to find some company for WDAY on
this, as we were really beginning to wonder where these guys are spending so
much money. In fact, at least WDAY has
consistently been getting the ratio headed in the right direction, unlike SFSF
whose Year 3 figures actually started increasing again relative to Year 2. Again, WDAY is not at the point of having
reached economies of scale, so we have to give them the benefit of the doubt
that they will get there as things are heading in the right direction.
All right, last up are
net profit margins: We are expecting
to see losses from startups in their growth phase as they put every dollar earned
back into the company, focusing on building a great company for a long haul. But we want to look for the size of the losses
and overall directionality too.
Another very similar pattern to operating expenses. WDAY is suffering the heaviest losses of the
group, but they are shrinking relative to the size of revenues (but increasing
in absolute terms). We would have liked
to have seen losses also shrinking in absolute terms too though. WDAY should eventually have profits heading
in the right direction once their recurring subscription revenues are a little
larger, along with the economies of scale benefits as they start getting more
customers. Again, WDAY has found a
friend in SFSF, showing that the scale of their losses is not unprecedented.
These comparisons don’t really paint the best picture for WDAY. Not only are they asking the highest
multiples off of revenue, but their cost structure is one of the highest of the
comparison companies, and a very large chunk of their revenue is coming from
services not license revenue (which has much lower margins). However, in terms of directionality,
everything does look promising for WDAY in the future. We will try and
summarize our overall conclusions in our third and final blog post of the
series.
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.
