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Value Line recently initiated coverage of Workday, Inc. (WDAY), in its flagship product, The Value Line Investment Survey. The company provides cloud-based applications used by businesses for human capital management, payroll, financial management, time tracking, employee expense management, and analytics, among others. The company believes it is the only firm that is able to offer all of the aforementioned services under one fully-integrated system. Workday’s services provide customers with easily adaptable, accessible, and reliable solutions to manage business functions and optimize both financial and human capital resources. The company employs about 1,750 people. It was incorporated in March of 2005 as North Tahoe Power Tools, and changed its name in July of that year. It introduced its first application in 2006. It completed its initial public offering in October of 2012. The principal offices are located in Pleasanton, California.

The company’s software gives customers a more complete picture of their organization, since the applications used capture the content and context of everyday business events, which facilitates good decision making from wherever employees are located. Workday’s products are designed for current business trends, using a wide range of devices from anywhere in the world. They also reduce the need for customers to buy and support a broad range of IT infrastructure, which reduces costs and complexity.

Some of Workday’s primary applications include: Workday Human Capital Management, which is designed to help organize, staff, compensate, and develop a global workforce. Workday Payroll allows customers to group employees, manage calculation rules, and pay employees. Workday Financial Management is a unified application to manage financial processes for corporations. The company also offers Grants Management, Time Tracking, Procurement, and Employee Expense Management.

The company operates in one operating segment, cloud applications. Revenues are derived from subscription and professional service fees, with the former accounting for 70% of 2012 sales. Workday sells nearly all of its software through its direct sales team.

Workday currently has more than 400 customers of varying sizes, but it focuses on larger, global firms. The largest of its clients employs more than 200,000 people. It serves some educational and government institutions, but the majority are businesses. No individual customer accounts for more than 10% of total revenues.

Workday invests heavily in research and development. R&D made up 38% of total revenues in 2012. Application development efforts are essential to the company’s growth prospects. As customers’ needs evolve, the company wants to ensure that it can fulfill these requirements.

The enterprise application software market is highly competitive and rapidly evolving. Some of Workday’s competitors include large enterprise application vendors, Oracle Corporation (ORCL) and SAP AG (SAP). Competition also comes from other enterprise software vendors, including The Ultimate Software Group, Automated Data Processing (ADP), and Lawson Software. Given the likely continued consolidation in the industry, Workday will probably see increased competition in the coming years.

The company faces several risks. Workday has posted losses in every year since its inception. These are largely due to the substantial investments made to acquire new customers and develop its applications. Unfortunately, given expected increases in research and development, marketing, and operating costs, losses are expected for the foreseeable future.

Nevertheless, overall business prospects at Workday look bright. While, as we mentioned, the company has yet to turn a profit, and will likely see at least a couple of more years of losses, demand for the company’s applications continues to expand robustly. Revenues for the last three years were $68.1 million in 2010, $134.4 million in 2011, and $273.7 million in 2012. There are likely over several thousand companies globally with an employee base of over 1,000, and we look for Workday to continue to increase its penetration with these firms in the years to come. Once the company improves its operational efficiencies, it should be able to post strong profitability in the years to come.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.