It’s a Big Deal: Cloud Company Workday Preps for Its IPO

The company expects to raise more than $500 million

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

It’s been a good year for cloud IPOs, with Wall Street getting offices from firms like ServiceNow (NYSE:NOW), Eloqua (NASDAQ:ELOQ) and ExactTarget (NYSE:ET). But next week, we’ll see the largest deal to hit the market: Workday, which plans to sell 22.75 million shares at a range of $21 to $24.

Workday has a great pedigree. Founders David Duffield and Aneel Bhusri are the masterminds of PeopleSoft, which was the pioneer in enterprise resource planning software. This technology helps companies manage their HR, inventory and financials.

In 2004, Oracle (NASDAQ:ORCL) won a hostile bid for PeopleSoft and kicked out Duffield and Bhusri — a move that turned out to be fortuitous. The pair realized there was a huge opportunity to leverage cloud computing to build a next-generation ERP company.

They were right. The cloud-based platform makes it easier for Workday to quickly update its product (right now, it’s already on version 17), and Workday now boasts more than 340 customers, including biggies like Aviva, AIG (NYSE:AIG) and Kimberly-Clark (NYSE:KMB).

And the company’s growth has been torrid. From fiscal 2011 to 2012, revenues have rocketed from $25.2 million to $134.4 million. And interestingly enough, those figures are understated. Workday charges its customers on a subscription basis, which means it can only recognize revenues across the length of the contract (with some terms lasting four to five years). Traditional software companies, on the other hand, can recognize a much larger amount of revenues upfront.

Workday’s losses have been heavy, coming to $79.6 million in 2011, but prospective investors should not be too concerned. The company must make substantial investments to scale its growth, such as with sales/marketing, infrastructure and product development. These expenditures should lead to strong returns down the road, since ERP implementations tend to be sticky.

Besides, Workday has really just scratched the surface. On a global basis, the company believes its target market includes more than 23,000 companies. And with a head start against rivals like Oracle and SAP (NYSE:SAP), Workday should enjoy strong growth for quite a while.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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