The Path to IPO Workday Final - OPEXEngine

THE$PATH$TO$IPO$–$WORKDAY,$Inc.$ OPEXENGINE SAAS BENCHMARKING COMMUNITY WHITEPAPER All data in this report has been gathered from public sources

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About this Report:

This report was prepared through independent research using each company’s S-1, 10-K, and 10-Q fillings, and OPEXEngine’s EdgarEngine to analyze and interpret the data. In addition, annual reports and other resources such as news articles and investor relation blogs were used to gather data.

The following tables and charts represent an analysis of Workday which had an IPO on 12th October, 2012. The charts exhibit financial information of both pre- and post- IPO data and provide some insight into the operational growth valued by public market investors.

All data in this report is gathered from public sources.


The Path to IPO

The holy grail for many start-up SaaS companies and their investors is an IPO. Yet, there are many different business models and strategies a SaaS company can pursue to scale the business and reach the maturity to go public. The requirements to go public have evolved with the market’s experience with the SaaS business model and macroeconomic trends.

Since SalesForce.com’s IPO in 2004 at $100million in revenues, the SaaS market has grown with over 45 (at the time of this writing) pure SaaS B-2-B vendors entering the public markets since then. Investors’ expectations have evolved to expect that companies show rapid revenue growth, but also a path to profitability. The association of profitability with valuation is expected to increase during 2016, but in the preceding years covered by this report, revenue growth, customer acquisition and customer expansion have been the key drivers of SaaS valuations.

HR software vendor Workday went public with its $637 million initial public offering, which valued the company at nearly $4.5 billion. Workday’s market cap averaged 19 times revenues in the three years after IPO through January 2016.

Workday is a leading provider of enterprise cloud applications for finance and human resources. Founded in 2005, Workday delivers financial management, human capital management and analytics applications designed for the world’s largest companies, educational institutions, and government agencies. Organizations headquartered around the globe, ranging from medium-sized businesses to the world's largest enterprises, use Workday to manage enterprise HR.


Pre and Post IPO Workday Operational Data Summary:

Workday gambled early on, investing heavily upfront in R&D and Sales and Marketing ($8M in Sales & Marketing alone in 2007). The gamble paid off and from its founding in 2005, Workday’s revenues grew dramatically, from $455,000 in 2007, to $274 million five years later. The company has also managed to shift the balance of revenues from the sale of professional services to the majority of revenue coming from recurring subscriptions at a much higher gross margin. In 2009, subscription revenue accounted for 54.45% of the total and professional service revenues accounted for 45.55%. By Jan 2016, subscription revenues accounted for 80% of total revenue, helping Workday present as a true SaaS company.

2007 gross profit margin was -838% and operating expense was 4,616.70%. of revenue. The majority of the expense was divided between R&D and Sales & Marketing, 2500% and 1700 % of revenues respectively. General & Administrative expenses were 346% of total revenues.

In 2008, Workday grew revenues by 1300% with a gross margin of -76.76% and operating expense investment of 727% of revenue. Operating losses dramatically improved in one year between 2007 and 2008 from 5500% to 800% of revenue. By 2015, losses were only 22% of revenue.

Workday’s on-going strong investment in R&D and Sales & Marketing has driven its revenue size and continuously increasing revenue per customer. Workday continues to invest heavily in R&D, often surpassing or roughly equal to its investment in Sales and Marketing, to support future growth. In addition, steady improvements in gross margin and regular reductions in operating losses have balanced reductions in annual revenue growth as revenue reached over $1billion.Annual revenue growth rate remains strong, though, by most measures at almost 50% at the end of January 2016. A little more than 10 years from founding and only eight years from achieving its first $million in revenues, Workday recorded almost $1.2 billion in recognized revenues and year-over-year improving gross margins, achieving almost 70% gross margin in FY 2016.

In summary, as is seen in the following charts, Workday has managed to deliver steady improvement every year in key metrics like:


•! Gross margin, •! Operating margin, •! Cash from operations, •! Revenue per customer, with only a very slight increase in the per customer cost of revenue, •! Higher % of total revenue coming from subscription revenue, and •! Employee productivity

Even though Workdays’ market cap multiple has steadily decreased from a high of almost 33 times revenue in January 2014 to about 10 times revenue at the end of January 2016, Workday’s market cap remains one of the highest multiples for a public SaaS company as of that date.


Revenue & Expenses as % of Revenues (as a percentage of total revenues)

31 Dec, 2007

31 Dec, 2008

31 Dec, 2009

31 Dec, 2010

31 Jan, 2012

31 Jan, 2013

31 Jan, 2014

31 Jan, 2015

31 Jan, 2016

Pre – IPO Post - IPO

Revenues: IPO-5 IPO-4 IPO-3 IPO-2 IPO -1 IPO IPO+1 IPO+2 IPO+3

Subscription Services 54.45% 53.77% 65.93% 69.55% 75.53% 77.85% 79.94%

Professional Services 45.55% 46.08% 34.07% 30.45% 24.47% 22.15% 20.06%

Total Revenues ($ ‘000) $455 $6,398 $25,245 $68,055 134,427 273,657 468,938 787,860 1,162,346

Annual Revenue Growth 1306.15% 294.58% 169.58% 97.53% 103.57% 71.36% 68.01% 47.53%

Cost of Revenues IPO-5 IPO-4 IPO-3 IPO-2 IPO -1 IPO IPO+1 IPO+2 IPO+3

Costs of Subscription Services 26.23% 16.78% 16.62% 14.34% 14.76% 13.01% 12.89%

Costs of Professional Services 938.90% 176.76% 54.99% 41.80% 32.01% 28.24% 22.95% 20.60% 19.32%

Total Cost of Revenues 938.90% 176.76% 81.22% 58.58% 48.63% 42.58% 37.70% 33.61% 32.21%

Gross Margin -838.90% -76.76% 18.78% 41.42% 51.37% 57.42% 62.30% 66.39% 67.79%

Research and Development 2501.10% 403.61% 119.01% 57.56% 46.13% 37.52% 38.84% 40.22% 40.43%

Sales and Marketing 1769.01% 258.97% 82.69% 53.67% 52.34% 45.11% 42.09% 40.09% 37.34%

General and Administrative 346.59% 64.86% 20.66% 12.57% 11.26% 17.86% 14.06% 13.46% 12.78%

Total Operating Expenses 4,616.70% 727.45% 222.36% 123.80% 109.73% 100.49% 94.98% 93.77% 90.56%

Operating Margin -5554.29% -804.20% -203.58% -82.38% -58.35% -43.07% -32.69% -27.38% -22.77%


Recognized Revenue & Annual Revenue Growth (in thousands, except the % change annually)!

Companies 31 Dec, 2007

31 Dec, 2008

31 Dec, 2009

31 Dec, 2010

31 Jan, 2012

31 Jan, 2013

31 Jan, 2014

31 Jan, 2015

31 Jan, 2016

Workday* IPO-5 IPO-4 IPO-3 IPO-2 IPO -1 IPO IPO+1 IPO+2 IPO+3 Subscription Services $13,746 $36,594 $88,634 $190,320 $354,169 $613,328 $929,234 Professional Services $11,499 $31,361 $45,793 $83,337 $114,769 $174,532 $233,112

Total Revenues Workday $455 $6,398 $25,245 $68,055 $134,427 $273,657 $468,938 $787,860 $1,162,346

%change annually 1306.15% 294.58% 169.58% 97.53% 103.57% 71.36% 68.01% 47.53%


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Annual Revenue Growth & Gross Profit Margin

Annual Revenue Growth Gross Profit Margin

IPO


Workday Inc. Annual % Change in Revenue and Cost 31 Dec,

2008 31 Dec,

2009 31 Dec,

2010 31 Jan,

2012 31 Jan,

2013 31 Jan,

2014 31 Jan,

2015 31 Jan,

2016

Pre - IPO Post – IPO Revenues: IPO-4 IPO-3 IPO-2 IPO -1 IPO IPO+1 IPO+2 IPO+3 Subscription 166.22% 142.21% 114.73% 86.09% 73.17% 51.51% Professional Services 172.73% 46.02% 81.99% 37.72% 52.07% 33.56%

Total Revenues 1306.15% 294.58% 169.58% 97.53% 103.57% 71.36% 68.01% 47.53%

Costs and expenses: Costs of Subscription Services 72.41% 95.66% 75.68% 76.29% 48.10% 46.25% Costs of Professional Services 104.91% 51.26% 79.62% 39.25% 50.84% 38.34%

Total Cost of Revenues 164.72% 81.32% 94.41% 63.98% 78.28% 51.72% 49.77% 41.40% Research and Development 126.92% 16.35% 30.39% 58.30% 65.55% 77.39% 73.99% 48.31% Sales and Marketing 105.85% 25.99% 74.97% 92.63% 75.45% 59.89% 60.02% 37.43% General and Administrative 163.16% 25.66% 64.01% 76.93% 223.00% 34.86% 60.88% 40.10%

Total Operating Expenses 121.57% 20.61% 50.09% 75.07% 86.43% 61.98% 65.86% 42.48% Operating Margin 103.60% -0.11% 9.08% 39.93% 50.25% 30.05% 40.72% 22.70%


30 Dec, 2007 31 Dec, 2008 31 Dec, 2009 31 Dec, 2010 31 Jan, 2012 31 Jan, 2013 31 Jan, 2014 31 Jan, 2015 31 Jan, 2016Product development $11,380 $25,823 $30,045 $39,175 $62,014 $102,665 $182,116 $316,868 $469,944

Sales and marketing $8,049 $16,569 $20,875 $36,524 $70,356 $123,440 $197,373 $315,840 $434,056

General and administrative $1,577 $4,150 $5,215 $8,553 $15,133 $48,880 $65,921 $106,051 $148,578

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IPO


31 Dec, 2009 31 Dec, 2010 31 Jan, 2012 31 Jan, 2013 31 Jan, 2014 31 Jan, 2015 31 Jan, 2016Product development 119.01% 57.56% 46.13% 37.52% 38.84% 40.22% 40.43%Sales and marketing 82.69% 53.67% 52.34% 45.11% 42.09% 40.09% 37.34%General and administrative 20.66% 12.57% 11.26% 17.86% 14.06% 13.46% 12.78%

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Workday Inc. Operating Expenses as a % of Revenue

IPO


31 Dec, 2008 31 Dec, 2009 31 Dec, 2010 31 Jan, 2012 31 Jan, 2013 31 Jan, 2014 31 Jan, 2015 31 Jan, 2016Product development 126.92% 16.35% 30.39% 58.30% 65.55% 77.39% 73.99% 48.31%

Sales and marketing 105.85% 25.99% 74.97% 92.63% 75.45% 59.89% 60.02% 37.43%

General and administrative 163.16% 25.66% 64.01% 76.93% 223.00% 34.86% 60.88% 40.10%

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IPO


31 Dec, 2009 31 Dec, 2010 31 Jan, 2012 31 Jan, 2013 31 Jan, 2014 31 Jan, 2015 31 Jan, 2016Cash from operations ($30,128) ($15,335) ($13,774) $11,214 $46,263 $102,003 $258,637

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IPO


The following estimates were developed from Workday’s S-1 filings using revenue, cost and operating expense totals and dividing by the number of customers in a given year.

Workday Inc. Revenue, Cost and Operating Expense Per Customer (Amount $ ‘000)

31 Jan, 2012

31 Jan, 2013

31 Jan, 2014

31 Jan, 2015

31 Jan, 2016

Estimated average revenue, costs and expenses per customer Pre - IPO Post – IPO

Revenues: IPO -1 IPO IPO+1 IPO+2 IPO+3 Subscription per customer annually $272.72 $475.80 $590.28 $681.48 $774.36 Professional Services $141.00 $208.00 $191.00 $194.00 $194.00

Total Revenues $414.00 $684.00 $782.00 $875.00 $969.00

Costs and expenses: Costs of Subscription Services $69.00 $98.00 $115.00 $114.00 $125.00 Costs of Professional Services $132.00 $193.00 $179.00 $180.00 $187.00

Total Cost of Revenues $201.00 $291.00 $294.00 $294.00 $312.00 Gross Profit $213.00 $393.00 $488.00 $581.00 $657.00

Research and Development $191.00 $257.00 $304.00 $352.00 $392.00 Sales and Marketing $216.00 $309.00 $329.00 $351.00 $362.00 General and Administrative $47.00 $122.00 $110.00 $118.00 $124.00

Total Operating Expenses $453.86 $687.46 $742.35 $820.84 $877.15

No. of Customers 325 400 600 900 1200

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31 Jan, 2012 31 Jan, 2013 31 Jan, 2014 31 Jan, 2015 31 Jan, 2016Total Cost of Revenues $201.00 $291.00 $294.00 $294.00 $312.00Costs of Professional Services $132.00 $193.00 $179.00 $180.00 $187.00Costs of Subscription Services $69.00 $98.00 $115.00 $114.00 $125.00

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Market Cap/Valuation Data Post IPO:

Market Cap (diluted, priced as of the period end date) & Market-Cap Multiple (in thousands)

31 Jan, 2013 31 Jan, 2014 31 Jan, 2015 31 Jan, 2016 Average

Workday* Market-Cap $3,953,668 $15,337,933 $14,596,961 $11,972,908 $11,465,368

M-Cap Multiple 18.53 32.71 14.45 10.30 19

Rule of 40%

The Rule of 40% is defined as Annual Revenue Growth Rate + Operating Margin equal to 40% or more. This metric for SAAS companies attempts to define a reasonable relationship between investing in growth and generating profits. Investors in private companies often use this calculation as a key metric when making investment decisions.

Workday’s results in terms of the Rule of 40 were over 40% combined revenue growth and operating margin every year until this most recent reporting of annual results in January 2016. The market has not reacted as negatively as might have been expected as Workday’s revenue growth rate is still impressive and the reduction of operating margin can be attributed to productive investments in R&D and Sales and Marketing, which in the past have produced results.


31 Dec, 2009 31 Dec, 2010 31 Dec, 2011 31 Dec, 2012 31 Dec, 2013 31 Dec, 2014 31 Dec, 2015Workday 103.92% 95.01% 46.11% 66.98% 46.07% 48.15% 32.15%

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The Path to IPO Workday Final - OPEXEngine

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