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Workday Inc (WDAY): Is This SaaS Company a Good Bet?

Workday IncThe demand for cloud-based applications has been on the rise, as it has become preferred over on-premises installations due to its cost effectiveness. Currently, about 10% of the total Enterprise Resource Planning (ERP) solutions are SaaS based, and the demand for SaaS-based ERP solutions is increasing at a rapid pace. This gives a huge market potential for the companies in this industry to expand their SaaS based solutions.

About WorkDay

Workday Inc (NYSE:WDAY) is a leading SaaS-based Human Capital Management, or HCM, solutions provider. Currently, the company caters to 450 companies for their Human Resource solutions. The company fulfills the needs of businesses that have 1,000 to 100,000 employees.

Workday Inc (NYSE:WDAY) is expected to grow sales in the high-twenties for at least the next 3-4 years. I believe that the company will report negative profit for at least 2-3 years, as the current sales and marketing and R&D costs are very high. But, with the economies of scale, the sales and marketing costs will come down to 30% of revenue in the next few years. Also, the R&D cost will stabilize at the industry standard of around 5% of revenue in the next few years.

Workday will increase revenue

I expect that more and more companies will move to SaaS-based HCM rather than having on-premise applications, Workday Inc (NYSE:WDAY) is going to gain at the expense of its competitors Oracle Corporation (NYSE:ORCL) and SAP, who have been slow in moving from on-premises to cloud computing platform.

Currently, Workday Inc (NYSE:WDAY) has customers whose workforce strength is between 1,000 to 10,000 employees. But the larger firms who have been using Oracle or SAP may possibly shift to SaaS-based HRM products. This gives Workday Inc (NYSE:WDAY) a chance to erode the traditional customer base of its large competitors and gain ground. The company has added a recruitment app in its HR system, which will help the incumbent vendor buy incremental HR products.

Expansion in financial products will enhance the product offerings

The company has launched its financial products. According to the company, current financial offerings have 85% of functionality needed to service fortune 500 companies. The remaining gap will be covered in the next 12 months. The main feature of its financial offerings is that it provides built in analytics and reporting facilities, which the traditional data warehousing models lack. Also its in-memory technology will be faster. The company is also developing a big data analytics product, which will be rolled out in mid 2013.

International growth will drive the future revenue and profit

Currently Workday caters to companies in the US and Canada. The company’s financial offering is sold in UK and France too. The Company is planning to expand its presence in the other geographical regions either through direct sales or by entering into strategic collaborations with other firms. Workday Inc (NYSE:WDAY) has its sales offices in the UK and Hong Kong. The company has plans to increase its international presence in Northern Europe and South East Asia. This will help the company increase its customer base and increase its revenue in the coming year.

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