Workday: High Revenue Growth, But What About Profits?

| About: Workday (WDAY)
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Gartner forecasts the SaaS market to grow 19.5% over the period 2011 through 2016 to $32.8 billion. Even at conservative estimates, researcher Tech Navio estimates the global software-as-a-service based enterprise resource planning software market is projected to grow 13.93% annually from 2012 through 2016. The high growth in the market is estimated to be driven by the increased adoption of these services by SMEs.

Workday's Financials

Workday's (NYSE:WDAY) Q3 revenues grew 76% over the year to $127.9 million, surpassing the market's projections of $117.8 million. Loss of $0.12 per share was also significantly better than the previous year's loss of $0.39 per share and the Street's projections of loss of $0.17 per share for the quarter.

By segment, subscription revenues grew 82% over the year to $93.93 million. Professional services grew 61% over the year to $33.95 million.

For the current quarter, Workday projects revenues of $133 million - $138 million, compared with analyst projections of $129.1 million.

Workday's Tie-Up with

As part of Workday's efforts to make bigger inroads into the SaaS market, it is extending its partnership with (NYSE:CRM). Through the agreement, the two will integrate their product lines to offer to customers an end-to-end SaaS-based offering. Both Salesforce and Workday will thus standardize all their solutions for each other's applications. The integration of these applications should help customers to analyze performance and trends in customer relationships, provide greater security and enable users to receive updates regarding both the applications through Salesforce's Chatter service. The integration of Workday Financial Management into Salesforce will also enable customers to make more informed decisions based on the financial and operational performance data available on these two apps. This partnership is expected to help both Workday and Salesforce expand their market presence while ensuring they give other cloud vendors, particularly Oracle and SAP, tougher competition.

Workday's Profitability

Workday has been seeing strong growth in revenues, as is evident from its financials. But profits remain a matter of concern. While losses have narrowed considerably over the year, the company has yet to turn in any profits. The continued losses can be attributed to heavy investment in R&D and sales and marketing efforts, which have surpassed the benefits realized by the decreasing sales and general administrative expenses. In the recently ended quarter, Workday saw R&D expenses grow 76% to $49.35 million and sales and marketing expenses grow 66% to $54.05 million. The company's strong revenue growth has buoyed confidence into the company's performance, but it would be nicer to see that reflect in the profits as well.

The stock is trading at $82.60 with a market capitalization of $14.33 billion. It touched a 52-week high of $84.42 in September 2013.