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Is This Cloud Company the Next Oracle?

Monday - 8/19/2013, 6:07am  ET

At first sight, Workday , up 46% in the past six months, looks like yet another IT company in the cloud business. But this isn't your typical cloud company.

To begin with, it does not sell cloud space and apps to web developers, like Amazon Web Services. Workday sells cloud-based apps for human capital management (HCM) to Fortune 500 companies. This is a segment that historically belonged to giants like IBM, SAP  and Oracle .

Although its $12 billion market capitalization is less than a tenth of what most IT elephants are worth, Workday isn't being elbowed out by them. With less resources, competition does look fierce, but Workday may have some unique competitive advantages. 

What makes Workday so special?
To get clients like Chiquita, Kimberly-Clark, and Aviva, Workday offers a much easier-to-use, flexible product than Oracle's Fusion or SAP Solutions, according to The Forrest Wave Human Resource Management Systems report. In terms of current offerings (which include features like payrolls, technology, hosting and SaaS, compliance and customer experience), Workday has the highest average score. 

A great product at a great price!
This is an excellent product in terms of quality. On the price side, by offering the "cloud equivalent" to what Oracle offers, Workday has been able to reduce its cost base significantly, and more importantly, it has been able to make its clients spend less money.

According to its website, Workday promises to save its customers 30%-50% over a five-year period versus competitors like Oracle software because, among other factors, using Workday implies less personnel maintaining the solution.

10% of Oracle customers are planning to migrate to Workday
Tech analyst Josh Burwick quotes a recent Morgan Stanley survey, where 10% of Oracle customers mentioned they are planning to migrate to Workday HCM and 29%, while not using Workday, are planning to evaluate Workday HCM, emphasizing the strong interest the industry is professing over Workday's star product.

Strong inverse correlation between Workday and Oracle
Not surprisingly, the inverse correlation between Workday and Oracle's stock has increased in magnitude considerably in the past six months. The more sales for Workday, the more pain for Oracle. 

Financial apps coming soon
Workday is not only interested in HCM, it may be planning a major campaign to ramp Oracle's financial offerings by scaling to the Global 2000 in the next 12 months.

Now, as customers move to Workday for both HCM and financial apps, they could stop buying not only Oracle software products, but also database solutions, simply because Workday takes care of that as well. And Workday doesn't buy database solutions from Oracle. Workday's object oriented database technology is quite different from Oracle's relational database technology based on open-source MySQL. 

With all these competitive advantages in motion, it seems Workday will also succeed in the financial applications segment, just like in the HRM field. At least, that's what most CIOs think. According to a Piper Jaffray survey, 40% of CIOs view Workday financials as a serious competitor to Oracle in the next two years.

Source: Piper Jaffray, Seeking Alpha Alpha Rich Ideas

With its enterprise resource planning application legacy business still occupying a major proportion of its revenue base, SAP is also in trouble. The good news is that the company is making quick progress in executing on its cloud strategy. Better late than never: the company has changed its cloud strategy over the past four years so many times!

However, SAP's recent focus is to consider the move to the cloud as the core to SAP's future growth, which is probably the right emphasis. The current SAP public cloud platform, the HANA Cloud Platform, looks promising as a product and the cloud enterprise social network is already an early star, growing over 800% year-over-year.

SAP's latest quarterly revenue growth figures from software and software-related services, which includes cloud revenue, came in at 6.2% versus 2012, below management's prior revised guidance. Still, management expects a stronger second half of 2013. 

Final thoughts
The latest earnings confirm that Workday is making steady progress in stealing more market share from tech giants.

Reported revenue growth slowed down to 61% in the latest quarter, but that should change after the move to financials. Subscription revenue came in at $68.4 million, up 85% from last year. Net losses increased, but not as much as the Street was expecting; adjusted losses came in at $0.15 per share, while the Street consensus was $0.18 per share.
In the long run, such losses shouldn't matter that much due to economies of scale. In the long run, what really matters is the fact that, although Workday has much fewer resources than SAP or Oracle, it excels at delivering top-quality cloud-based enterprise applications that really drive its clients' costs down. Considering how the demand for such products is increasing and the current move-to-the-cloud paradigm, I believe that's a reason strong enough to be a bull!
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