IBM (NYSE:IBM) recently announced that Workday (NASDAQ:WDAY), a provider of enterprise cloud applications for finance and human resources, has adopted the IBM Cloud as its primary development and testing platform. The increased capacity gained from IBM Cloud, which has data centers in 17 countries across six continents, should help Workday accelerate its worldwide expansion.
Over the course of the multi-year partnership, Workday plans to expand its use of IBM Cloud beyond development and testing purposes. Let's see how this new partnership could benefit both companies.
Why is Workday important?
Workday's services enable organizations to staff, pay, and organize their workforces. Its cloud-based services also leverage analytics and machine learning to help organizations make financial and employee-related decisions. This isn't the first time IBM has partnered with Workday. Last year, IBM acquired Meteorix, one of Workday's top service partners. IBM also uses Workday's Human Capital Management service to manage its own global workforce.
Partnering with Workday attaches IBM to a high-growth player in the cloud. Workday revenue rose 38% annually last quarter and is expected to climb 34% this year and another 31% next year. That's a stark contrast to its own 17 straight quarters of year-over-year revenue declines.
Workday is growing so rapidly, because it has carved out a niche that enterprise cloud giants like Salesforce -- which specializes in customer relationship management -- hasn't adequately addressed. That's why Salesforce integrates Workday's software into its own CRM suite.
How does this deal help IBM?
IBM's partnership with Workday will boost the growth of its strategic imperatives (cloud, AI, analytics, mobile, social, and security) businesses -- the high-growth segments which it hopes can offset ongoing declines in IT services, software, and hardware.
Revenue from strategic imperatives rose 12% annually to $8.3 billion last quarter and accounted for 38% of IBM's top line over the past 12 months. Within that total, cloud revenue grew 30% to $3.4 billion last quarter. The annual run rate for its higher-growth "cloud as a service" revenue -- which includes deals with companies like Workday -- rose nearly 50% to $6.7 billion.
Over the past few years, IBM has been aggressively divesting its slower-growth businesses while investing heavily in cloud acquisitions and partnerships to bolster its top line growth. Since the beginning of the year, IBM has acquired ten companies (or parts of companies) to boost its cloud and analytics capabilities. It also secured major cloud deals with Facebook, Apple, Twitter, SAP, and Tencent. Workday has a smaller market cap than all of those companies except for Twitter, but its top line is also growing the fastest.
And what about Workday?
Workday stock has stagnated over the past 12 months on concerns of slowing sales growth. Its 38% jump last quarter was impressive, but it also represents a slowdown from 43% growth in the previous quarter and 57% growth a year earlier. Its operating losses have also been widening, and the company's bottom line remains deep in the red.
To re-accelerate its revenue growth, Workday must expand to new markets -- something that IBM Cloud can help it do. The scalable nature of IBM Cloud can help keep operating expenses under control as Workday expands.
Is this a win-win deal for both companies?
With this announcement, IBM gains a multi-year deal with a fast-growing niche player in the cloud, and Workday gains the ability to expand faster with potentially lower operating costs. So it's safe to call this deal a win-win situation for both companies. However, IBM will likely benefit less, since revenue from the deal will only account for a small slice of its cloud business, while Workday will gain a stronger cloud-based testing and development platform.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Facebook, Salesforce.com, Twitter, and Workday. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.
More from The Motley Fool
2 Stocks to Help You Make Money in Retirement
Whether you're an income investor or a growth seeker, IBM and Cisco deserve consideration for your portfolio.
3 High-Yield Stocks to Hold Forever
Know when to hold 'em.
3 Things to Watch in the Stock Market This Week
Look for CSX, Alcoa, and IBM to make big moves in the trading days ahead.