Workday, Inc. (WDAY)

WDAY 
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Workday (WDAY)

F3Q 2013 Earnings Call

November 28, 2012 5:00 p.m. EST

Executives

Mike Haase – VP, Finance, Treasurer and IR

Mark Peek – CFO

Aneel Bhusri – Chairman, Co-Founder and Co-CEO

Analysts

Adam Holt – Morgan Stanley

Heather Bellini – Goldman Sachs

John DiFucci – JP Morgan

Jason Maynard – Wells Fargo

Brendan Barnicle – Pacific Crest Securities

Richard Davis – Canaccord Genuity

Pat Walravens – JMP Securities

Peter Goldmacher – Cowen & Co.

Brent Thill – UBS

Laura Letterman – William Blair

Mark Murphy – Piper Jaffray

Presentation

Operator

Welcome to Workday's third quarter earnings call.

At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

With that, I will hand the call over to Mike Haase. Please proceed.

Mike Haase

Welcome to Workday's third quarter fiscal 2013 earnings conference call.

On the call we have Aneel Bhusri, our Chairman and Co-CEO, and Mark Peek, our Chief Financial Officer. Following their prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast.

Statements made on this call include forward-looking statements such as those with the words will, believe, expect, anticipate and similar phrases that denote future expectation or intent regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our registration statement on form S-1 for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of Workday's performance, should be considered in addition to, not as a substitute for or an isolation from, GAAP results. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation and an equity grant to the Workday Foundation. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release which is posted on the Investor Relations page of our website.

Webcast replay of this call will be available for the next 45 days on our company website under the Investor Relations link. Our fourth quarter quiet period begins at the close of business January 17, 2013. Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2012.

With that, let me hand it over to Mark.

Mark Peek

Thanks, Mike, and good afternoon everyone. Welcome to our first investor and analyst earnings call as a public company.

We are very pleased with our results during the fiscal third quarter ended October 31 which included the addition of 31 new customers including Hewlett-Packard for HCM and J.B. Hunt for Financials. At the end of the third quarter we had a total of 356 customers.

Just three weeks after our IPO on the New York Stock Exchange, we kicked off our annual user conference Workday Rising. The event was a big success with more than 2,500 attendees compared to 1,400 last year. We had over 170 prospect companies in attendance and are very enthusiastic about the future and our competitive position. It is clear that we can now serve the largest and most complex companies in the world for HCM, and with a superior user experience and ROI. Our progress and confidence in achieving a similar position for our Financials products remain strong. Aneel will cover Rising and some of our recent product announcements in more detail.

Total third quarter revenues increased 99% to $73 million and our subscription revenue, which is the growth driver of our business, increased 116% compared to the same period last year. Our non-GAAP operating loss was $23.5 million or 32.3% of revenue in the fiscal third quarter compared to a non-GAAP loss of 38% of revenue in our second quarter. Trailing 12-month operating cash flows for the third quarter were again near the breakeven mark at a negative $1.4 million. Our balance sheet is strong with cash and investments of $797 million, including $685 million of net proceeds received from our IPO and unearned revenue of $252 million.

As I know some of you are new to Workday, I want to briefly review how our software-as-a-service business model works. Our customers pay us subscription fees that are typically based on the total number of workers within the organization and the number of Workday applications to which they have subscribed. We start recognizing revenue upon delivery of the first software tenant, usually about a week after contract signing. Most of our customer agreements are for three years and are non-cancellable.

In a typical contract, the first year of a multiyear contract is billed and recorded on our balance sheet as unearned revenue. The unbilled portion of the contract remains off our balance sheet as backlog until billed. We plan to provide total backlog information once a year during our yearend earnings call.

As a reminder, backlog as disclosed in our IPO prospectus was $325 million as of the end of our second quarter. Unearned revenue plus backlog at the end of July totaled $572 million.

Subscription renewals of existing customer contracts are currently not a material component of our business as we have had relatively small number of contracts up for renewal. However, as our human capital management and financial applications are typically implemented as platform decisions and our core systems of record for our customers' operations, we anticipate high customer retention.

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