A Few Reasons Why Workday Can Continue Its Terrific Growth

Workday is making good use of the cloud opportunity, and it should continue doing the same.

Jul 7, 2014 at 3:00PM

Cloud computing has opened up big opportunities for several players, and Workday's (NYSE:WDAY) first-quarter results indicate that it is making the most of it. Driven by strong demand for applications such as Workday Recruiting and Workday Financial Management, the company's revenue has increased at a fast pace. Workday's Human Capital Management (HCM) solutions have been selected by companies such as Hewlett-Packard (NYSE:HPQ), and this can act as a catalyst going forward.

Workday is aggressively investing in its products to land more clients in the face of competition from established players like Oracle (NYSE:ORCL). Even though the company posted a 74% year-over-year jump in revenue in the first quarter, its net loss widened due to investments in product development, marketing, and sales. However, the company's outlook for the second quarter was better than expected, indicating the strong adoption of its solutions.

A robust outlook driven by appealing products
Workday expects second-quarter revenue in the range of $173 million-$178 million, exceeding the consensus estimate of $171.3 million. For the full year, the company sees revenue of $730 million-$750 million, the midpoint of which exceeds the consensus estimate of $735 million. Moreover, Workday expects its subscription revenue to grow 69%-73% year over year. 

This rapid growth can be attributed to Workday's product development. It has remodeled its traditional application tracking system with Workday Recruiting, its newest application. Workday Recruiting is seeing strong demand and has been adopted by more than 70 companies since its launch in April. The company credits this success to a strong development team, with more than six design partners focusing on bringing innovative business solutions to the table.

In addition, Workday unveiled Workday 22, which includes more than 350 new HR and finance features. Of these 350 new features, 68 have come directly from customer ideas and input. 

Looking ahead, the company is working on the development of Workday 23, based on requests from customers and partners to host applications in Workday's data center. This move will broaden its scope in big data analytics. 

Strong customer growth
Workday added more than 60 new customers during the first quarter, bringing its tally to 675 customers.

HP was a big name that opted for its HR solutions. It is now using Workday's cloud-based HR software to manage its 300,000-strong workforce across 100 countries. What's more, HP has decided to monetize Workday's service by allowing other companies to integrate the cloud-based HR platform into their current information technology infrastructures.

After spending 15 months integrating Workday's solutions into its own platform, HP has gained strong insights regarding the offering. During the implementation phase, HP integrated data from 400 different applications across varied functions including payroll and finance. 

HP will now use the expertise that it has gained by taking Workday's solutions to other companies. Since Workday's platform is cloud-based, HP claims that it will provide flexibility to the customer by enabling extensive prototyping that is not possible in non-cloud platforms. Since HP will now promote Workday's solutions, the company can expect to see an increase in attach rates of its HR solutions.

Workday is seeing growth in other areas also. It landed a record number of financial customers during the first quarter, winning over 80 new clients for its financial solutions. Apart from this, the company is focused on driving customer satisfaction by providing them with cutting-edge support when they deploy new software applications. This will help Workday maintain healthy renewal and retention rates of customers. 

Oracle's threat
Workday's growth is impressive despite competition from Oracle, which is making significant moves in HCM. Oracle has several partners (including Accenture, KPMG, and Cognizant) that use its HCM software. It recently upgraded Oracle HCM Cloud, equipping it with new mobile functionality, improvements in the user experience, and better analytics. All in all, Oracle included more than 200 new features in its latest HCM update.

In addition, Oracle has a strong sales force. The company has sales representatives in more than 60 countries for its cloud products. There are also around 19,000 consultants certified to sell its HCM, ERP, and e-commerce products. In such a scenario, it is important for Workday to continue improving its solutions.

The bottom line
Workday is expected to grow at a better rate than the industry average. Over the next five years, the company's annual earnings growth projection stands at 49%, while the industry average is less than 20%. The company also has a strong balance sheet, with $1.87 billion in cash and just $484 million in debt. 

As a result, it can continue making aggressive investments in its product lineup to tap the cloud opportunity. The company's stock is up just 10% in 2014, but it may get better in the long run due to its impressive customer growth and innovative solutions.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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