Workday Picks Up Where PeopleSoft Left Off

Workday (WDAY) is a provider of software as a service for human capital management, financial management and big data analytics. It was founded by Aneel Bhursi and Dave Duffield.  Bhursi was the chief strategist at PeopleSoft and Duffield was the founder and CEO of PeopleSoft.

Founded in 1987, PeopleSoft initially focused on human resource management and then grew into supply chain management and finance.  PeopleSoft grew rapidly to challenge Oracle ’s (ORCL) enterprise resource planning business.  It was a classic battle of David vs. Goliath and David was winning.

In 2003, PeopleSoft merged with a smaller rival but a major player in the ERP business, JD Edwards.

In the software business, hostile takeovers are rare because the software business is heavily dependent on the talent and it is difficult to hold the talent after a hostile takeover.  Not to be deterred, facing a major challenge to its ERP business from PeopleSoft, in 2003 Oracle launched a hostile bid for PeopleSoft.  After a lot of bad blood and a law suit by the Department of Justice against the Oracle bid, Oracle completed the acquisition in December 2004 for approximately $10.3 billion.  The bad blood was made worse because the initial offer was $13 billion and right after the acquisition Oracle fired 6,000 of PeopleSoft’s 11,000 employees.

Workday was born in 2005.  In October 2012, Workday conducted its IPO, pricing shares at $28. They rocketed to $48.69 on the first day of trading. As of this writing the stock is trading at $111.58.

On Wednesday, Workday reported earnings after the market close.  A study of this earnings report and the conference call shows that Workday has reached an inflection point and is now well on its way to becoming a top tier software supplier.

Take a look at these results. Workday’s  FY 2014 total revenues roses to $468.9 million, an increase of 71% year over year.  Q4 total revenues grew to $141.9 million, an increase of 74% year over year.  The company accomplished this feat while generating positive cash flow for the year.  As a reference, the overall ERP market is growing at an average rate of about 14%.

Most of Workday’s growth has been coming at the expense of Oracle, it has also taken some business from SAP (SAP).

Workday has entered into a partnership with Salesforce.com (CRM).  By integrating their offerings, the two companies can offer end-to-end cloud based software as a service solution to the customers.  This partnership should offer tougher competition for Oracle.

In the software business, in the beginning obtaining new clients is a slow and difficult process.  As a company grows its installed base, it reaches an inflection point and growth accelerates.  In my own personal experience with software companies, the inflection point typically occurs when a company starts gaining on the average three new clients a week. Over the last year, Workday added 200 new customers.

This stock is not for the faint of heart, it trades at a price/sales ratio of about 43 and the company is not yet profitable on a GAAP basis.  As expensive as this stock is, this bull market is hungry for growth.  For this reason Workday stock still has room to run.

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