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Enterprise cloud applications provider for human resource and finance, Workday Inc. (WDAY - Snapshot Report) recently announced third quarter fiscal 2013 results. Workday reported a loss of 49 cents per share in its first earnings release post October 2012 Initial Public Offering (“IPO”).

Loss per share (including stock-based compensation of 10 cents) was much narrower than the Zacks Consensus Estimate of a loss of 56 cents per share and the year-ago quarter loss of 66 cents.

Quarter Details

Revenue surged 99.2% year over year to $72.6 million, well ahead of the Zacks Consensus Estimate of $64.0 million. Subscription revenue soared 116.0% year over year to $52.0 million in the quarter. Services revenue increased 67% year over year to $21.0 million.

The company added 31 new customers, ending the third quarter with 356 customers in total. Most of the contracts signed during the quarter were of three-and-a half to four years in duration. Total unearned revenue at the quarter-end increased 64% from the year-ago quarter to $252.0 million.

Gross profit jumped 126.0% year over year to $42.4 million. Gross margin expanded 690 basis points (“bps”) to 58.4% in the reported quarter.

Operating expenses rose sharply to $72.0 million from $38.0 million reported in the year-ago quarter, due to a massive 216.7% increase in general & administrative expense, 79% jump in sales & marketing and 71.1% rise in research & development expense.

As a result of higher operating expenses, Workday reported operating loss of $29.6 million, wider than a loss of $19.4 million in the year-ago quarter. Net loss (excluding stock-based compensation) was $41.5 million compared with $19.8 million in the year-ago quarter.

Cash & cash equivalents were $797.4 million, up $675.0 million from the previous quarter, driven by net IPO proceeds of $685.0 million. Workday issued 26.2 million shares in the IPO. Cash outflow was $9.4 million in the third quarter.

Guidance

For fourth quarter 2013, total revenue is expected to remain within a range of $75.0 million to $79.0 million, reflecting year-over-year growth of 74% to 83%. Subscription revenue is expected to remain within a range of $56 million to $58 million, reflecting year-over-year growth of 93% to 100%.

Management expects operating loss to increase in the fourth quarter due to increasing headcount and professional fees and increased sales compensation.

Recommendation

We believe that Workday’s innovative product pipeline will help it to gain significant footprint in the human resource and financials market. Workday’s upcoming Big Data Analytics applications (expected in the second half of 2013) and Workday Recruiting (first half of 2014) will further boost its customer base going forward.

However, we believe that Workday will face serious competition from large established players such as Oracle Corp. (ORCL - Analyst Report), SAP AG (SAP - Analyst Report) in both of its operational markets. This cut-throat competition and increasing investments in product development and personnel cost will hurt profitability going forward.

Thus, we remain Neutral on the shares over the long term (6-12 months). Currently, Workday has a Zacks #3 Rank, which implies a Hold rating over the short term (3-6 months).

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