Workday is a cloud-based operator that focuses on enterprise resource management (ERP). Essentially, this involves helping companies manage critical functions like HR, payroll, financials and procurement.
After the bell today, the company will report its fourth-quarter numbers … and Wall Street has high expectations. The forecast is for an 81% increase in revenues to $78.2 million. Still, many analysts also think the losses will continue. For Q4, the forecast adjusted loss is for 21 cents a share — up from a loss of 18 cents a share in the same period a year ago.
Over the past couple years, I’ve had a chance to talk to Workday’s co-founder and co-CEO Aneel Bhusri several times. He’s definitely impressive and has a strong background in the ERP space. Before starting Workday in 2005, he was a senior vice president at PeopleSoft — the pioneering company in ERP — while Aneel’s partner, Dave Duffield, was the founder of PeopleSoft.
Both men realized that the cloud would be the way to break the hammerlock that SAP (NYSE:SAP) and Oracle (NASDAQ:ORCL) have had on the ERP market.Just some of the advantages of the technology include: lower costs since there is no need to purchase servers or expensive hardware; seamless upgrades since updates are done online; more intuitive interfaces; and improved analytics because the data is centralized. Workday has also been an innovator with mobile devices, which has been crucial because — let’s face it — smartphones and tablets have become ubiquitous in the workplace.
Another key for Workday’s success has been its focus on large customers, which include operators like Aviva International (PINK:AIVAF), AIG (NYSE:AIG), Four Seasons Hotels, Kimberly-Clark (NYSE:KMB) and Lenovo (PINK:LNVGY). In fact, the largest deployment covers a global workforce of over 200,000. For the most part, these types of customers often keep an ERP solution for multiple years since it is usually too disruptive to rip-out an existing solution. This means that Workday’s customer base is likely to be a durable revenue source for the long-haul.
Of course, that is also part of the reason the company has a nose-bleed valuation; shares are trading at an enterprise-value-to-sales ratio of 37! In other words, Wall Street seems to be expecting the growth to last for quite a while. The trouble, though, is that growth can be a bit lumpy the enterprise software world. If just a handful of potential customers delay orders, the impact can be substantial … and this kind of thing is pretty normal in this environment.
Plus, there are already some signs that IT spending is getting tighter — at least in the short-term. Just look at VMware (NYSE:VMW), which posted a horrible Q4. The company noted that customers — especially the federal government and businesses in Europe — were delaying purchases.
And it looks like it was not a one-off. Other companies like BMC (NYSE:BMC) have also experienced a slowdown. Purchasing expensive software is always discretionary, especially when the macro-economy is sluggish and the prospects are uncertain. This is the case even if the technology is top-notch.
In light of all this — and the aforementioned valuation — it’s a good idea to play things safe with Workday. With expectations so high, there could easily be a miss.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.