 Welcome to News Desk on SiliconANGLE TV. For Friday, October 12, 2012, I'm Kristen Filetti. Cloud's software company Workday made its red carpet debut on the New York Stock Exchange today. So just how big of an after-hours party will they be able to afford? Join us now as Chief Wikibon Analyst, Dave Vellante, to give us his breaking analysis on Workday's IPO. Welcome, Dave. Hi, Kristen. First up, Dave, can you provide us with a little background on Workday? Yeah, sure, Workday is an enterprise software company that sells exclusively through the cloud. Everybody, I'm sure, is familiar with Salesforce, salesforce.com. And Workday is a similar company from a deployment standpoint, but they really focus on the human resource management aspect of software, which has not really taken off as much. The whole human resource and ERP space has not been as rapid an uptake as has the Salesforce. Workday is a relatively new company, although they were founded in 2005 by Dave Duffield and Anil Bhushri. After their company, Peoplesoft, was acquired by Oracle for a little over $11 billion in 05. They started Workday and really set out to build, from the ground up, an internet-based, browser-based, cloud-based now software company. So I want to get your analysis on the IPO action today. The stock sort of rocketed, then settled back. What do you make of the offering? A big day for Workday. DAO was down in midday and the NAS was down midday, but Workday was way up, up over 70, 75%. Well, this exceeded my expectations. I've been saying for many months now that this is a highly anticipated IPO. I've been very excited about it. The stock was priced in the mid-20s and then repriced. And I was telling people earlier today that I thought that it would get some resistance in the mid-30s. Well, we're seeing resistance at 50. And we're seeing support at 45. So this is just a phenomenal day for Workday at IPO. It was worth about $4.5 billion. Now it's pushing $8 billion. Can you tell us how Workday compares to Oracle and SAP? Sure. Well, first of all, Oracle and SAP are giant whales with, in the case of SAP, a $70 plus billion market cap in Oracle, roughly around 150 billion plus. And so Workday is a relatively new company. We're talking about hundreds of millions, 130 million or so. And so much, much smaller, obviously. The second thing is it's completely focused on the cloud, whereas SAP and Oracle, most of their business comes from on-premise. Much of their business comes from maintenance and service and essentially extracting ongoing rents from the maintenance contracts of their clients. The other thing is the capabilities of the software are quite different. The customers I've talked to, they love the Workday software. It's very simple to use. It's very people-centric. They focus on the HR side of the business, which was PeopleSoft's expertise. And of course, they're expanding into financials. I'll talk about that in a minute. The big difference with SAP is SAP really didn't have a cloud software play until it bought success factors. Now, success factors really focuses on talent management, focusing on those highest performance employees and accelerating employee performance. They bought, SAP bought that company to really have a cloud play. And they're sort of mashing up success factors with its core HR, SAP's core HR, which is a legacy system. And so that's kind of a bolt-on, if you will. Now, success factors has its own core HR that it's trying to build up. So it's a bit of a collage there compared to Workday, which is really a pure play. In the case of Oracle, Oracle really had PeopleSoft, which was the leader in HR software, in the client server day. PeopleSoft essentially invented that whole client server model for that software space and really did well with it. Oracle really had to go out and make some acquisitions to get into the cloud with companies like Tileo and right now and basically rebuild its fusion apps for the cloud. So quite a bit of difference, really those legacy companies bolting on and sort of mashing up existing software. It's the old crossing the chasm, innovators dilemma versus the pure play Workday. You mentioned fusion apps. Oracle claims that two thirds of its fusion apps are being deployed on demand in the Oracle public cloud. If that's the case, then why does the world need another software as a service player? Well, that's a good question. And as I say, most of those fusion apps that are in the cloud are really coming from acquisitions that Oracle made. And of course there's nothing wrong with that. Those are good companies that they acquired. The challenge is really the cleanness and the elegance of the software. Workday is really building up from the scratch of the 2005 white sheet of paper and really had this vision to deliver cloud based software to enterprises. Now at the time, the only people that were doing internet based software were really small businesses, but to Workday's credit, they stuck to their knitting. They didn't really have the first mover advantage, say for example, that a Salesforce had, but at the same time, the market wasn't adopting the HR software. They were really glomming on to the oracles of the world or the people softs of the world. So what Workday brings is a whole new capability. I talked about the core HR versus talent management before. Workday brings those together. It's also been investing a lot in financial software, so expense management and the like. Now the difference with Workday is it's really people centric. It's probably not good from a financial management standpoint for process manufacturing and other types of businesses. It's really good for people oriented business, services businesses, perhaps government, healthcare and the like. And so they're really bringing a fresh new look to that human face of software. And so I'm actually very excited about what they bring to the cloud market space. Workday priced its IPO shares above expectations. Talk about how that went down and how we got to this point. Yeah, well this is, as I said before, a highly anticipated IPO. We started talking about the IPO early this year and clearly it was over subscribed. The original pricing was in the mid 20s, around 24. They repriced it the other day at 28, which as I said, put it at about 4.5 billion. And that really, I thought was at the high end of the range. I was hoping that small investors would get a bigger lick off the cone. Well, I think I underestimated that. I know for instance, Jim Kramer the other day said he wouldn't buy past 28 and a half. I had told people, as I said earlier this morning that I thought they'd get into the mid 30s. Well, they really didn't see resistance until the high 40s. And so this has been a phenomenal rocket ship right now. And it puts the company's valuation above $7 billion, which is of course ironic. I mean, looking at the leaderboard, Duffield sold his last company. People saw it for 11 billion. So we seem to be headed toward that direction. So is this market demand or do we risk another Facebook-like situation here? I think the big difference with Facebook is Facebook is a consumer play. That's a social media play. Workday is really B2B. It's business software for a large and mid-size enterprises, serious business software. And that took a while for the cloud world to really get some traction in that space. So the other big difference is Facebook way overpriced its IPO. And of course investors soured on it and it's still struggling. And I think Facebook's business model being advertising and really relying on its huge volume of user base is quite a bit different than what's happening with Workday. I think what's happening with Workday is really they're investing in two areas. Building out its sales force and enterprise sales is a belly-to-belly exercise. And the second is R&D. They're spending a lot on R&D. Duffield and Bursary raised about $250 million to get this company off the ground. That's big bucks and they've been investing in the core platform. And now they're investing more into other areas like I was talking about before financial management. Now that expands their market significantly. The market for this type of software is north of 25, 30 billion whereas the PeopleSoft HR only market was significantly smaller than that. So it's a big market that they're going after. They're a leader, they've got a great management team. And I think the real thing here, Kristen, is that once this company gets established and starts doing three, four, five year contracts with customers, it's going to print money in my opinion, like an ATM. The amount that Workday raised made the companies offering the largest IPO by a cloud computing firm and the largest market debut by a tech company of any kind since Facebook's IPO. So coming back to Workday's financial outlook, the company recently reported it did 119 million in revenue for the last six months, but it never turned a profit. Yet its IPO value was around 4.5 billion. Is that justifiable and is Workday's market momentum sustainable in your opinion? Well, you know, I guess justifiable is all in the eye of the investor. So, you know, right now people are willing to buy the stock at the mid to high 40s. I think whether or not it's justifiable, it really depends on a couple of factors. One is, you know, can Workday continue to grow at the pace it's growing? So, and I think it will for quite some time. And that's why the valuation is so high. It's growing at triple digits, whereas some of its peers are, you know, growing at maybe 20 or 30%. So Workday, you know, if you forecast through, you know, 250 to $300 million in an annual run rate basis, you know, it's probably trading, you know, at IPO 15 times revenue at where it is now, it's significantly higher than that 20 plus revenue. And that's a testament to its growth rate. Can it sustain that growth rate? I think it can for quite some time, especially as it expands into new markets. I think the other factor is over time, its cost of sales and G&A and its cost of R&D as a percentage of revenue will come down. And that's really where the company will get significant operating leverage. And as I was saying, turn sort of the cost equation where it's losing money into profits and start printing money. So question for you, Dave, are we seeing another dot com bubble here? I think there are some, you know, frothy similarities to the dot com bubble, but there's some stark differences. And I think the big difference is that companies like Workday are doing real business. You look at a company, another cloud company service now, they're really doing, you know, substantive business. It's not funky advertising. It's not just dot com companies advertising with other dot com companies. This is, you know, real productivity that they're driving. It's transformative. They're really going after legacy install bases like those of SAP and Oracle. So there's real money to be made here. I think the second difference is that, you know, we've seen the market be a lot more skeptical toward IPOs. You look at the Facebook IPO, which could have been enormous had they priced it right. But the market said, you know what? It's too much and pull back from that. And so I think we're seeing healthy skepticism. Some of the air has been let out of the bubble recently and I think that's a good sign. It's been said that of all the current IPOs, Workday may have the strongest business model. Do you believe that to be true? Yeah, I think it's, I mean, absolutely love the software as a service business model, the subscription model. It's very repeatable. It's predictable. It's all about, can you, you know, continue to get growth? Can you continue to renew existing customers? And can you, can you continue to add more products and more service capabilities to those existing customers and service them? You know, a good chunk of Workday's probably about a third of its business comes from the service part of the organization, the maintenance business. And so I absolutely love the business model. I think it's a, I love software and I love subscription based software even better. Dave, real quick before we go, we were speaking of Oracle earlier. Did you have a chance to see the news that Larry Ellison has put in a bid to buy AEG so he can move the NFL team to LA? Yes, I did. I think it's, you know, it's funny. Larry Ellison's title of CEO, when it comes to buying other companies, I often joke it's that CEO title stands for cheap executive officer because Oracle doesn't tend to overpay for companies. It doesn't tend to get involved in auctions. But when it comes to Larry's toys, it seems like the sky's the limit, whether it's yachts or homes or now, you know, franchises, sports franchises and sports marketing firms. So this is a big price tag. The floor's been set at 10 billion. So we'll see if AEG can get that. But I want to think that, well, first of all, Larry will probably go into this in some kind of consortium. He's probably not going to fund it himself. I'd love to see an NFL team come back to LA. I mean, it's absurd. LA's a good sports town, even though I'm from Boston, it's a great sports town that needs an NFL team. So that would be fantastic to see. And I think that, I guess this is Larry's way of diversifying investments. A very high-priced way to do it, but sports is a great business and we've seen it continue to increase in value over time. So I think it's a pretty humorous and fun to watch. Well, Dave, thanks so much for taking the time. We really appreciate you joining us. My pleasure. Thanks for having me on, Kristen. And remember for information on News of the Day and the latest breaking analysis, stay tuned to News Desk right here on SiliconANGLE.tv.