Workday and its key growth drivers
21/03/2019
Diego Gutiérrez
Workday and its key growth drivers

Workday is a company with more than 10 years of experience in the development of ERP systems for finance, planning and human resources. In this study on business valuation let's look at the factors that have led to the company's growth and whether the situation is sustainable in the long term.

ERP systems and Workday

The trend towards digitalisation and the automation of functions has led to a boom in the growth of ERP systems. Initially it started to develop within the finance and planning sector, however, this growth has continued to develop into other sectors such as human resources.

One of the great exponents of this sector is Workday. Founded in 2005, it is a company dedicated to the development of ERP of finance, planning and HR.

At the end of 2012 it was floated on the Nasdaq with a share price of 48 dollars. Six and a half years later, the share price is around 181 dollars.

 

Financial analysis

In the following tables we have summarised the most relevant Workday data to provide a broader analysis of its valuation. The first thing that strikes you at first glance is the sales growth over the last few yearswith a 36.2% growth in turnover in 2018 and 36.1% during 2017.

This increase in total turnover is largely driven by the growth in subscription services, which accounts for the largest share of the total. core business of Workday.

This is important because ERP parameterisation is a major barrier to exit for existing customers, which guarantees recurring revenues in the future.

Thanks to this growth rate, boosted by the last four years of the company purchases in 2018, it is getting closer to a structure in which it can generate profits and positive EBITDA.

With respect to the company's equity situation, it is possible to appreciate the growth it has enjoyed thanks to the inorganic acquisitions made during the last year and to the increased indebtedness.

With regard to indebtedness, it can be seen that it has almost tripled. This debt is necessary to maintain the acquisition policy that the company has been following since 2016, when it began to focus on inorganic growth in order to be able to compete with other giants in the sector and to facilitate innovation.

Qualitative analysis

One of Workday's great competitive advantages is its ability to launch major upgrades, incorporating customer feedback and proprietary innovations. Thanks to a much looser organisational structure than other competitors, it is able to roll out a large-scale update every six monthsThe new service has been improved and new features have been included to appeal to different sectors on a regular basis.

Workday Quote

Workday's share price has been more volatile than the benchmark S&P 500 Index and the S&P 500 Application Software Index due to the strong interest in the company. This interest was generated by David Duffield when he created the company, being one of the creators of PeopleSoft, which operated in the same sector until it was hostilely acquired by Oracle.

To see these variations we have used 2013 as a base year.

Thanks to the founder's know-how and the financial backing of venture capital Greylock Partners, the idea was able to scale and in a very short time it went public and continued to grow. It was this speed of growth that made the idea the company's share price has grown well above expectations. This, coupled with a slowdown in 2015, led the company to a rather unstable situation from which it did not manage to emerge until 2017.

Since then, the company has returned to a fairly high growth path and maintains growth forecasts of more than 30% in the coming years.

 

Conclusion

Workday's share price is closely linked to achieving industry growth forecasts, thanks to its focus on innovation and inorganic acquisitions. In the last two years it has managed to meet these goals and the share price has reflected this.

This is the reason why they either continue to grow inorganically, or it is possible thatthe future, no matter how many existing customers they continue to keep, fail to meet growth expectationsThe company will not be able to maintain sustainable growth even if it does not improve its EBITDA generation efficiency.

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