Loss Narrows at Workday in 4Q

Enterprise cloud applications provider for human resource and finance, Workday Inc. ( WDAY - Snapshot Report ) reported fourth-quarter 2013 non-GAAP loss per share of 16 cents, considerably narrower than the loss per share of 73 cents reported in the prior-year quarter.

Including share-based compensation of 3 cents, loss per share came in at 19 cents per share and fared better than the Zacks Consensus Estimate of a loss of 25 cents per share.

Quarter Details

Revenues surged 88.7% from the year-ago quarter to $81.6 million and were ahead of the Zacks Consensus Estimate of $78 million. Subscription revenue soared 105% year over year to $59.6 million in the quarter. Services revenue increased 55% year over year to $21.9 million.

Workday ended the fourth quarter with 400 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 52% from the year-ago quarter to $285.0 million.

Gross profit surged 112.0% year over year to $48.5 million. Gross margin expanded 660 basis points (“bps”) to 59.5% in the reported quarter, primarily due to higher revenue base.

Operating expenses rose sharply to $79.2 million from $45.9 million reported in the year-ago quarter, due to a 148.9% increase in general & administrative expense, 61.1% jump in sales & marketing and 65.4% rise in research & development expense.

As a result of higher operating expenses, Workday reported operating loss (Including share based compensation) of $30.7 million, wider than a loss of $23.1 million in the year-ago quarter. Net loss (including stock-based compensation) was $30.9 million compared with $23.6 million loss in the year-ago quarter.

Cash & cash equivalents and marketable securities were $790.3 million compared with $797.4 million in the previous quarter. Cash from operations during the quarter was $5.9 million.

Guidance

For first quarter 2014, total revenue is expected in the range of $83 million to $87 million. Subscription revenue is expected between $64 million and $66 million.

Workday expects macroeconomic challenges to remain and IT spending to be muted in 2014. Workday expects the revenue mix to shift toward subscriptions.

Recommendation

We believe that Workday’s innovative product pipeline will help it to gain significant footprint in the human resource and financials market. However, we believe that the company will face serious competition from large established players such as Oracle ( ORCL - Analyst Report ) , AVG Technologies ( AVG - Snapshot Report ) and 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.

Currently, Workday has a Zacks Rank #3 (Hold).