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Shares of Workday (WDAY), a leader in enterprise cloud applications for human resource and finance functions, published its third quarter results for its fiscal 2013 after the close on Wednesday. Shares gained over 1% in after hours trading, after trading with gains of up to 7%.

Third Quarter Results

Workday reported its third quarter results, the first earnings release as a public company after being listed in October. Workday reported third quarter revenues of $72.6 million, up 99% compared to last year. Growth was driven by a 116% increase in subscription revenues which came in at $51.6 million. Revenues came in ahead of analysts estimates of $64 million.

The company reported an operating loss of $40.9 million, compared to a loss of $19.4 million in the year before. Net losses came in at $41.3 million, while non-GAAP net losses increased to $23.9 million. Analysts expected the company to lose $46.6 million on a GAAP basis.

Non-GAAP losses narrowed from $0.63 per share last year to a loss of $0.39 per share. Analysts expected Workday to report non-GAAP losses of $0.49 per share.

CEO and co-founder Aneel Bhusri commented on the results, "Workday had a strong third quarter, and we continue to make great strides as we build for the long term. Our pace of innovation, high levels of customers satisfaction, and employee-centric culture are key contributors to our growth: With these differentiators, we see more companies choosing Workday to bring HR, finance, and analytics to the cloud."

Outlook

For the fourth quarter of its fiscal 2013, Workday guides for quarterly revenues of $75 to $79 million. The outlook represents a 74-83% increase in revenues year-on-year. Subscription revenues for the quarter are expected to come in between $56 and $58 million.

Analysts expected Workday to guide for fourth quarter revenues of $70.5 million.

Valuation

Workday ended its third quarter with $797.4 million in cash, equivalents and marketable securities. The company operates with roughly $27 million in capital leases, for a comfortable net cash position of roughly $770 million.

For the first nine months of its fiscal 2013, Workday generated revenues of $192.1 million. The company reported a net loss of $88.1 million for the period. At this rate, Workday is on track to generate annual revenues of $269 million, on which the company is expected to lose approximately $125 million.

Factoring in a 1 percent jump in after hours trading, the market values Workday at $8.6 billion. This values operating assets at roughly $7.8 billion. The valuation implies that the firm's operating assets are valued at roughly 29 times its fiscal 2013 annual revenues.

Some Historical Perspective

Workday made its public debut in October of this year at a price of $28 per share. Shares rose 74% on their first trading day, closing around $49 per share, as demand for cloud public offerings continues.

Shares rose to highs of $57 in the days after the offering before falling back towards $47 in the beginning of the month. Shares traded at lows of $49 during the regular trading session on Wednesday, but closed at $53 fueled by a late afternoon rally. In after hours trading, shares are exchanging hands at $54 per share.

Investment Thesis

The public offering of Workday has been an immense success. Shares are trading at roughly double the public offer price of $28, which was already upwards revised from its initial guided price of $24-$26 per share. The company raised $637 million in its public offering.

The company notes that clients are looking for other software solutions, including Workday's, when they need to upgrade existing software programs. Newly acquired customers are Johnson Controls (JCI) and J.B. Hunt (JBHT) Transportation, among others. The company continues to invest, hire and introduce new features and upgrades in the coming periods.

Investors initially reacted positively, sending shares 7% higher after the company beat on revenues and earnings, and guided for a strong fourth quarter. However the pace of revenue growth is slowing down already. Third quarter revenues rose 15.8% compared to the second quarter, and revenues are expected to grow by 10.6% on a quarterly basis in the final quarter. Year-on-year revenue growth is expected to slow down from 99% in the third quarter, to 78% in the fourth quarter, based on the midpoint of the outlook.

Assuming year-on-year revenue growth slows down to 75% for its fiscal 2014, and towards 50% in 2015, Workday will report revenues of approximately $700 million for the calendar year of 2014. This still values the firm at over 11 times fiscal 2015s annual revenues. The company is expected to report losses for the short to medium term. During the third quarter, Workday lost 57 cents for every dollar in revenue.

I remain short, as the valuation has simply gone too far. Shares are trading with gain of just 1% in after hours trading now, and I would not be surprised to see shares in the red tomorrow as the valuation is entirely driven upon future revenue growth.

Source: Workday - Solid Quarter, But Growth Is Already Slowing Down