Workday Commands IPO Premium With Web Challenge to Oracle

Workday Inc., a maker of Web-based payroll and human resources programs, is betting it deserves a higher valuation than all other business software providers to hit the public markets in the past year.

The company plans to raise as much as $591.5 million in its initial public offering today. The middle of the $24 to $26 price range values Workday at $4 billion, about 20 times sales in the past four quarters. That’s a richer valuation than any of the 13 U.S. business software companies to go public since late 2011 had at their IPO, according to data compiled by Bloomberg.

The higher valuation reflects confidence in Workday’s ability to grow by targeting large corporations -- recent wins include Google Inc. and Hewlett-Packard Co. -- putting it in direct competition with Oracle Corp. Before founding Workday in 2005, co-Chief Executive Officers Dave Duffield and Aneel Bhusri were top executives at PeopleSoft, the HR software company Oracle bought that same year in a hostile takeover.

“The revenue momentum, the bookings momentum -- there’s no doubt in a lot of peoples’ minds that this is a market-leading company,” said Kevin Spain, a general partner at Emergence Capital Partners in San Mateo, California, which invests in Web-software businesses. “That obviously drives a premium.”

Workday’s revenue in the second quarter doubled to $62.7 million. The company spent 85 percent of that on research, development, sales and marketing, leading to wider net loss of $26.9 million from a $20.5 million loss a year earlier.

The shares are scheduled to price today and trade tomorrow under the ticker WDAY.

Gaining Traction

Workday’s software, accessed via Web browsers, tablets and smartphones, is used by more than 340 customers, which are choosing the cloud-based model over older systems tied to single machines. Unlike many software-as-a-service (SaaS) companies, which tend to target small- to medium-sized customers, Workday is aiming for installations at the largest businesses.

Workday’s valuation is three times as rich as the average of the past 13 business software IPOs. The most expensive previously was ServiceNow Inc., whose online tools automate services such as HR and financial management, followed by network security provider Palo Alto Networks Inc. They had price-to-sales ratios of 15 and 13, respectively, and both have soared since their stock market debuts. ServiceNow has almost doubled, while Palo Alto Networks is up 46 percent.

Big Wins

Mark Murphy, an analyst at Piper Jaffray & Co., estimated in a report that Workday’s share of the $15 billion human resource software market could increase more than fivefold to 17.6 percent in the next three to five years from 3.2 percent. Murphy’s analysis was based on a survey of 125 managers of human resources systems. He predicts Workday will take sales from companies including Automatic Data Processing Inc., Lawson Software Inc. and Ceridian Corp.

“Workday is emerging as a force to be reckoned with,” Murphy wrote.

The company has replaced Oracle and SAP AG at businesses including Flextronics International Ltd., Kimberly-Clark Corp., Sun Life Financial Inc. and Lenovo Group Ltd.

Workday recently signed a deal with Google to supply HR tools for tens of thousands of employees, supplanting parts of Google’s home-grown human resources software. Hewlett-Packard CEO Meg Whitman told Wall Street analysts Oct. 3 the company is standardizing its HR systems on Workday.

One Vendor Inc., the family-history research website, implemented Workday in July, as the company was looking for a single system to handle payroll, accounting and talent review instead of the hodgepodge it had been using. The company chose Workday for its 1,000 employees because it was the best equipped to work in multiple countries and was easy for everyone to access, said Jeff Weber, a senior vice president at Provo, Utah-based Ancestry.

“It’s one vendor with one common application, one interface and one log-in,” Weber said. “It’s so much easier for employees to remember and get into.”

Some of the largest IT consulting companies are taking notice, building up practices dedicated to Workday installations. Mark Willford, a managing director at Accenture Plc, said customers running older Oracle business applications now face a choice whether to upgrade to Oracle’s new Fusion programs, or switch to Inc. and Workday.

“That’s where the battle will be,” he said in an interview. “It’s one vendor versus best of breed.”

Turf Battle

SAP and Oracle are moving to defend their turf. Earlier this year, SAP acquired online talent management software maker SuccessFactors Inc. for $3.4 billion, gaining tools that help companies find, keep and promote the right people.

Oracle countered, purchasing rival Taleo Corp. for about $1.9 billion. At Oracle’s OpenWorld conference this month, Oracle CEO Larry Ellison said businesses would be better served buying his cloud-computing software, which he said could deliver processing power, applications and databases online.

“We’re the only cloud company that delivers technology at all three levels of the cloud,” he said. “If you’re just an application company, you’re going to have a problem.”

Competition between Oracle and Workday is also personal. Duffield and Bhusri were at PeopleSoft when Ellison orchestrated the hostile takeover. The process lasted 18 months with Oracle purchasing PeopleSoft for $10.3 billion. Emergence Capital’s Spain, who isn’t an investor in Workday, doesn’t expect to see a repeat ending.

“Duffield wants to build a big independent business,” Spain said. “He’s not going to settle for building a public company and turning around and selling it. He wants to go for the long ball.”

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