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WDAY > SEC Filings for WDAY > Form 10-K on 22-Mar-2013All Recent SEC Filings

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Form 10-K for WORKDAY, INC.


22-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors."

Overview

Workday provides enterprise cloud applications for human capital management (HCM), payroll, financial management, grants management, time tracking, procurement, employee expense management and analytics. We offer innovative and adaptable technology focused on the consumer Internet experience and cloud delivery model. Our applications are designed for global enterprises to manage complex and dynamic operating environments. We provide our customers highly adaptable, accessible and reliable applications to manage critical business functions that enable them to optimize their financial and human capital resources.

We were founded in 2005 to deliver cloud applications to global enterprises. Our applications are designed around the way people work today - in an environment that is global, collaborative, fast-paced and mobile. Our cycle of frequent updates, which we currently provide three times per year, has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our Human Capital Management (HCM) application in 2006. Since then we have continued to invest in innovation and have consistently introduced new services to our customers, including our Financial Management application in 2007, our Procurement and Employee Expense Management applications in 2008, our Payroll and mobile applications in 2009, our Talent Management application in 2010, and our native iPad application and Workday integration platform in 2011.

We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with three year terms and with subscription fees based on the size of the customer's workforce. We generally recognize revenues from subscription fees ratably over the term of the contract. We currently derive a substantial majority of our subscription revenues from subscriptions to our HCM application. We market our applications to enterprise customers primarily through our direct sales force.

We have achieved significant growth in a relatively short period of time. Our diverse customer base includes large, global companies and our direct sales force targets organizations with more than 1,000 workers. As of January 31, 2013, we had more than 400 customers. A substantial majority of our growth comes from new customers choosing to use our services and entering into contracts with us. Our current financial focus is on growing our revenues and expanding our customer base. While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to our significant growth in employees. We had more than 1,750 and more than 1,050 employees as of January 31, 2013, and January 31, 2012, respectively.

We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in our application development efforts to deliver additional compelling applications and to address customers' evolving needs. In addition, we plan to continue to expand our sales and marketing organizations to sell our applications globally. We expect to continue to make significant upfront investments in our data center infrastructure and personnel to service our growth in customers. The level of these upfront infrastructure investments will vary based on the rate at which new customers are added and the scale of such deployments. These investments will increase our costs on an absolute basis in the near-term. Many of these investments will occur in advance of experiencing any direct benefit from them and will make it difficult to determine if we are


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allocating our resources efficiently. As a result of these investments, we do not expect to be profitable in the near future. We expect our research and development, sales and marketing, and general and administrative expenses as a percentage of revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs and by utilizing more of the capacity of our data centers.

Since inception, we have invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications. More recently, we have expanded our professional services partner ecosystem to further support our customers. We believe our investment in professional services, including partners building their practices around Workday, will drive additional customer subscriptions and continued growth in revenues. In addition, over time we expect professional services revenues and the cost of professional services as a percentage of total revenues to decline as we increasingly rely on third parties to deploy our applications and as the number of our existing customers continues to grow.

Fiscal Year End

We changed our fiscal year end from December 31 to January 31 effective for our fiscal year ended January 31, 2012. For the year-over-year discussions below, the year ended January 31, 2013 is compared to the year ended January 31, 2012, and the year ended January 31, 2012 is compared to the year ended December 31, 2010.

Components of Results of Operations

Revenues

We primarily derive our revenues from subscription fees and professional services fees. Subscription revenues primarily consist of fees that give our customers access to our cloud applications, which include routine customer support at no additional cost. Professional service fees include deployment services, optimization services, and training.

Subscription revenues accounted for 70% of our revenues during the year ended January 31, 2013 and represented 92% of our total unearned revenue as of January 31, 2013. Subscription revenues are driven primarily by the number of customers, the number of workers at each customer, the number of applications subscribed to by each customer, the price of our applications, and to a lesser extent, renewal rates. To date, revenues from renewals have not been a substantial component of revenues.

The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications. Compared to our other offerings, our HCM application has been available for a longer period of time, is more established in the marketplace and has benefited from continued enhancements of the functionality over a longer period of time, all of which help us to improve our pricing for that application. However, new products or services offerings by competitors in the future could impact the mix and pricing of our offerings.

Subscription fees are recognized ratably as revenues over the contract term beginning on the date the application is made available to the customer, which is generally within one week of contract signing. Our subscription contracts typically have a term of three years and are non-cancelable. We generally invoice our customers in advance, in annual installments. Amounts that have been invoiced are initially recorded as unearned revenue and are recognized as revenue ratably over the subscription period. Amounts that have not been invoiced represent backlog and are not reflected in our consolidated financial statements.

Our consulting engagements are typically billed on a time and materials basis, and revenues are typically recognized as the services are performed. We offer a number of training options intended to support our customers in configuring, using and administering our services. Our typical professional services and training


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payment terms provide that our customers pay us within 30 days of invoice. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As Workday's professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect the partners to increasingly contract directly with our subscription customers. As a result of this trend, and the increase of our subscription revenues, we expect professional services revenues as a percentage of total revenues to decline over time.

Approximately 9% of our revenues for the year ended January 31, 2013 were derived from multiple-deliverable arrangements that were accounted for as a single unit of accounting, because some of our professional services offerings did not have standalone value when the related contracts were executed. In these situations, all revenue is recognized ratably over the term of the contracts. Additionally, in these situations, we defer the direct costs of the related professional services contract and those direct costs are amortized over the same period as the professional services revenues are recognized. As of January 31, 2013, 8% of our total unearned revenue balance represented multiple-deliverable arrangements accounted for as a single unit of accounting. For contracts executed during the current fiscal year, there was standalone value for all deliverables.

Costs and Expenses

Costs of Revenues. Costs of subscription revenues consist primarily of employee-related expenses (including salaries, benefits and share-based compensation) related to hosting our applications and providing support, the costs of data center capacity, and depreciation of owned and leased computer equipment and software.

Costs of professional services revenues consist primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The percentage of revenues derived from professional services was 30% in the year ended January 31, 2013. The cost of providing professional services is significantly higher as a percentage of the related revenues than for our subscriptions.

Research and Development. Research and development expenses consist primarily of employee-related expenses. We continue to focus our research and development efforts on adding new features and applications, increasing the functionality and enhancing the ease of use of our cloud applications.

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs and travel related expenses. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities. Commissions earned by our sales force that can be associated specifically with a non-cancelable subscription contract are deferred and amortized over the same period that revenues are recognized for the related non-cancelable contract.

General and Administrative. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees and other corporate expenses.


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Results of Operations

The following tables set forth selected consolidated statement of operations
data and such data as a percentage of total revenues for each of the periods
indicated:



                                                                  Year Ended
                                             January 31,          January 31,         December 31,
                                                2013                 2012                 2010
                                                                (in thousands)
Revenues:
Subscription services                       $     190,320        $      88,634       $       36,594
Professional services                              83,337               45,793               31,461

Total revenues                                    273,657              134,427               68,055
Costs and expenses:
Costs of revenues:
Costs of subscription services                     39,251               22,342               11,419
Costs of professional services                     77,284               43,026               28,445

Total costs of revenues                           116,535               65,368               39,864
Research and development                          102,665               62,014               39,175
Sales and marketing                               123,440               70,356               36,524
General and administrative                         48,880               15,133                8,553

Total costs and expenses                          391,520              212,871              124,116

Operating loss                                   (117,863 )            (78,444 )            (56,061 )
Other expense, net                                 (1,203 )             (1,018 )                (57 )

Loss before provision for income taxes           (119,066 )            (79,462 )            (56,118 )
Provision for income taxes                            124                  167                   97

Net loss                                    $    (119,190 )      $     (79,629 )     $      (56,215 )

                                                                 Year Ended
                                        January 31,              January 31,             December 31,
                                           2013                     2012                     2010
Revenues:
Subscription services                           69.5 %                   65.9 %                   53.8 %
Professional services                           30.5                     34.1                     46.2

Total revenues                                 100.0                    100.0                    100.0
Costs and expenses:
Costs of revenues:
Costs of subscription services                  14.3                     16.6                     16.8
Costs of professional services                  28.3                     32.0                     41.8

Total costs of revenues                         42.6                     48.6                     58.6
Research and development                        37.5                     46.1                     57.6
Sales and marketing                             45.1                     52.3                     53.7
General and administrative                      17.9                     11.3                     12.6

Total costs and expenses                       143.1                    158.4                    182.4
Operating loss                                 (43.1 )                  (58.4 )                  (82.4 )
Other expense, net                              (0.4 )                   (0.8 )                   (0.1 )

Loss before provision for
income taxes                                   (43.6 )                  (59.1 )                  (82.5 )
Provision for income taxes                       0.0                      0.1                      0.1

Net loss                                       (43.6 %)                 (59.2 %)                 (82.6 %)


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Revenues



                                                     Year Ended
                                January 31,         January 31,         December 31,        2012 to 2013         2010 to 2012
                                   2013                2012                 2010              % Change             % Change
                                                   (in thousands)
Subscription services          $     190,320       $      88,634       $       36,594                 115 %                142 %
Professional services                 83,337              45,793               31,461                  82                   46

Total revenues                 $     273,657       $     134,427       $       68,055                 104                   98

Year ended January 31, 2013 compared to Year ended January 31, 2012.Total revenues were $273.7 million for the year ended January 31, 2013, compared to $134.4 million for the year ended January 31, 2012, an increase of $139.2 million, or 104%. Subscription services revenues were $190.3 million, or 70% of total revenues, for the year ended January 31, 2013, compared to $88.6 million, or 66% of total revenues, for the year ended January 31, 2012. The increase in subscription revenues was due primarily to the addition of new and larger customer contracts as compared to the prior year. We had more than 400 customers as of January 31, 2013 compared to more than 250 customers as of January 31, 2012. Professional services revenues were $83.3 million, or 30% of total revenues, for the year ended January 31, 2013, compared to $45.8 million, or 34% of total revenues, for the year ended January 31, 2012. The increase in professional services revenues was due primarily to a larger customer base requesting deployment and integration services.

Year ended January 31, 2012 compared to Year ended December 31, 2010. Total revenues were $134.4 million for the year ended January 31, 2012, compared to $68.1 million for the year ended December 31, 2010, an increase of $66.3 million, or 98%. Subscription services revenues were $88.6 million, or 66% of total revenues, for the year ended January 31, 2012, compared to $36.6 million, or 54% of total revenues, for the year ended December 31, 2010. The increase in subscription revenues was due primarily to the addition of new and larger customers as compared to the prior year. We had more than 250 customers as of January 31, 2012 and more than 150 customers as of December 31, 2010. Professional services revenues were $45.8 million, or 34% of total revenues, for the year ended January 31, 2012, compared to $31.5 million, or 46% of total revenues, for the year ended December 31, 2010. The increase in professional services revenues was due primarily to a larger customer base requesting deployment, integration and training services.

Costs and Expenses

Costs of Revenues



                                                      Year Ended
                                 January 31,         January 31,         December 31,        2012 to 2013         2010 to 2012
                                    2013                2012                 2010              % Change             % Change
                                                    (in thousands)
Subscription services           $      39,251       $      22,342       $       11,419                  76 %                 96 %
Professional services                  77,284              43,026               28,445                  80                   51

Total costs of revenues         $     116,535       $      65,368       $       39,864                  78                   64

Year ended January 31, 2013 compared to Year ended January 31, 2012. Costs of revenues were $116.5 million for the year ended January 31, 2013, compared to $65.4 million for the year ended January 31, 2012, an increase of $51.2 million or 78%. The increase in costs of subscription services was primarily due to an increase of $6.2 million in employee related costs driven by higher headcount and an increase of $4.8 million in depreciation and amortization expenses for additional data center equipment. In addition, we had an increase of $2.9 million in service delivery costs and $1.5 million in facilities costs due to our efforts to increase data center capacity.

The increase in the costs of professional services revenues for the year ended January 31, 2013 as compared to the year ended January 31, 2012 was primarily due to additional costs of $31.6 million to staff our deployment


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and integration engagements. Due to the large increase in demand for our professional services versus the year ended January 31, 2012, we have increased both our internal professional service staff as well as third party supplemental staff. We expect costs of professional services as a percentage of total revenues to decline as we increasingly rely on third parties to deploy our applications and as the number of our customers continues to grow.

Year ended January 31, 2012 compared to Year ended December 31, 2010. Costs of revenues were $65.4 million for the year ended January 31, 2012, compared to $39.9 million for the year ended December 31, 2010, an increase of $25.5 million or 64%. The increase in costs of subscription services was primarily due to an increase of $4.7 million in employee related costs driven by higher headcount, an increase of $2.5 million in depreciation and amortization expenses and an increase of $2.4 million in service delivery costs, primarily due to our efforts to increase data center capacity. The increase in the cost of professional services revenues for the year ended January 31, 2012 as compared to the year ended December 31, 2010 was primarily due to an $11.2 million increase in higher employee related costs driven by higher headcount.

Research and Development



                                                     Year Ended
                                January 31,         January 31,         December 31,        2012 to 2013         2010 to 2012
                                   2013                2012                 2010              % Change             % Change
                                                   (in thousands)
Research and development       $     102,665       $      62,014       $       39,175                  66 %                 58 %

Year ended January 31, 2013 compared to Year ended January 31, 2012. Research and development expenses were $102.7 million, or 38% of total revenues, for the year ended January 31, 2013, compared to $62.0 million, or 46% of total revenues, for the year ended January 31, 2012, an increase of $40.7 million. The increase was primarily due to an increase of $30.4 million in employee related costs due to higher headcount and a $2.6 million increase in contractor costs as we supplemented our internal development professionals. We expect that in the future, research and development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.

Year ended January 31, 2012 compared to Year ended December 31, 2010. Research and development expenses were $62.0 million, or 46% of total revenues, for the year ended January 31, 2012, compared to $39.2 million, or 58% of total revenues, for the year ended December 31, 2010, an increase of $22.8 million. The increase was primarily due to an increase of $18.0 million in employee related costs due to higher headcount and an increase of $1.4 million in contractor costs.

Sales and Marketing



                                                     Year Ended
                                January 31,         January 31,         December 31,        2012 to 2013         2010 to 2012
                                   2013                2012                 2010              % Change             % Change
                                                   (in thousands)
Sales and marketing            $     123,440       $      70,356       $       36,524                  75 %                 93 %

Year ended January 31, 2013 compared to Year ended January 31, 2012. Sales and marketing expenses were $123.4 million, or 45% of total revenues, for the year ended January 31, 2013, compared to $70.4 million, or 52% of total revenues, for the year ended January 31, 2012, an increase of $53.1 million. The increase was primarily due to increases of $37.8 million in employee related costs driven by higher headcount, $5.0 million in advertising, marketing and event costs, and $3.2 million in travel expenses. We expect that sales and marketing expenses will continue to increase in absolute dollars in the future as we continue to invest in sales and marketing by expanding our domestic and international selling and marketing activities, building brand awareness and attracting new customers.


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Year ended January 31, 2012 compared to Year ended December 31, 2010. Sales and marketing expenses were $70.4 million, or 52% of total revenues, for the year ended January 31, 2012, compared to $36.5 million, or 54% of total revenues, for the year ended December 31, 2010, an increase of $33.9 million. The increase was primarily due to increases of $24.7 million in employee related costs driven by increased headcount, $3.6 million in advertising, marketing and event costs, and $2.5 million in travel expenses.

General and Administrative



                                                      Year Ended
                                 January 31,          January 31,         December 31,         2012 to 2013          2010 to 2012
                                    2013                 2012                 2010               % Change              % Change
                                                    (in thousands)
General and administrative      $      48,880        $      15,133        $       8,553                  223 %                  77 %

Year ended January 31, 2013 compared to Year ended January 31, 2012. General and administrative expenses were $48.9 million, or 18% of total revenues, for the year ended January 31, 2013, compared to $15.1 million, or 11% of total revenues, for the year ended January 31, 2012, an increase of $33.7 million. The increase was primarily due to $15.6 million in higher employee related costs driven by higher headcount, of which $5.6 million is related to share-based compensation charges, and a one-time $11.3 million non-cash charge related to the donation of 500,000 shares of common stock to the Workday Foundation in the third quarter. Also contributing to the change was a $4.9 million increase in professional services costs as we transitioned to being a public company. Excluding the charge related to the Workday Foundation stock grant, we expect general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion.

Year ended January 31, 2012 compared to Year ended December 31, 2010. General and administrative expenses were $15.1 million, or 11% of total revenues, for the year ended January 31, 2012, compared to $8.6 million, or 13% of total revenues, for the year ended December 31, 2010, an increase of $6.6 million. The increase was primarily due to increases of $2.5 million in employee related costs driven by higher headcount and $2.2 million in professional and outside . . .

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