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Shares of Workday (WDAY) are trading largely unchanged after the provider of enterprise cloud-based applications released a decent set of second-quarter results on Tuesday after the market close.

Even after the company issued an upbeat outlook, and is willing to sacrifice earnings for growth, I remain very cautious. The absolute valuation of the business is very high, even accounting for years of high growth going forwards. I hold on to my short position on valuation concerns.

Second-Quarter Results

Workday generated second-quarter revenues of $107.6 million, up 72% on the year before. Revenues came in ahead of consensus estimates, which stood at $100.5 million, and ahead of Workday's own guidance of quarterly revenues of $97 to $101 million.

Net losses came in at $36.0 million compared to $27.1 million last year. Losses per share totaled $0.21, compared to $0.78 last year. The only reason for narrowing losses per share is the dilution that took place.

Adjusted losses came in at $0.13 per share, beating consensus estimates for losses of $0.18 per share.

CEO and Chairman Aneel Bhusri commented on the performance, "Workday continues to be well positioned for strong growth as a leader in cloud applications for human capital management and financial management. We continue to execute well as we expand our global operations and new product initiatives. Workday's pace of innovation and very high levels of customer and employee satisfaction are important contributors to our growth."

Looking Into The Results

Total revenue growth of 72% was boosted by subscription revenue growth, which increased by 92% to $81.1 million, thereby making up three quarters of total revenues. Service revenues grew at a much more modest pace as it is not intended as a revenue-generating business.

Solid operating leverage reduced cost of sales by some 720 basis points to 37.9% of total revenues. Yet operating leveraged didn't occur in all cost categories. Research and development expenses rose by 70 basis points to 38.3% of total revenues. Sales and marketing expenses fell by 620 basis points to 41.1% of total revenues. Despite the relative drop in these expenses, Workday invested quite heavily in international markets.

All in all operating loses narrowed by some 12 percent to 30.0% of total revenues over the past quarter.

..And The Rest Of The Year

For the current third quarter, Workday expects to generate revenues of $115 to $118 million. This implies that revenues are expected to grow between 58 and 62% on the year before. Revenues are expected to rise between 7% and 10% from the past quarter and the guidance is in line with analysts expectations of $115.3 million in quarterly revenues.

Annual revenues are seen between $436 and $446 million, up 59% to 63% on the year before. This implies that fourth-quarter revenues are seen between $122 and $129 million, up 50%-58% on the year before. Consensus estimates for full-year revenues stood at $439.4 million.

Valuation

Workday ended its second quarter with $1.30 billion in cash, equivalents and marketable securities. The company operates with $458 million in convertible senior notes, for a net cash position of roughly $850 million.

Revenues for the first six months of the year came in at $199.2 million, up 67% on the year before. Net losses widened to $69.0 million.

Trading around $76 per share, the market values Workday at $13.1 billion, or its operating assets at $12.3 billion. This values the operating assets of the firm at 28 times annual revenues.

Workday does not pay a dividend at the moment.

Some Historical Perspective

Shares of Workday were sold to the general public at $28 per share in October of last year. The offering was placed above an initial guided range of $24-$26 per share. From that point in time shares have steadily risen to recent highs around $78 per share.

Between the calendar year of 2010 and 2012, Workday has increased its annual revenues from merely $68.1 million to $273.7 million. Net losses more than doubled to $119.2 million in the meantime.

Investment Thesis

Workday has made quite a bit of progress over the past quarter. The issuance of two convertible notes due in 2018 and 2020 raised $533 million in proceeds, boosting the strength of its balance sheet.

The company stresses that its focus is on growth and not profitability for the short term. Workday aims to grow by putting customer satisfaction first, followed by employee happiness.

Crucial are Workday's subscription revenues, which rose by 92% on the year before. The duration of contracts signed over the past quarter totaled 3.5 years on average, thanks to a couple of five-year deals. Workday believes it can attain high renewal rates on these kinds of contracts. High renewal rates should be driven by the importance of Workday's applications for its clients, ease-to-use applications and frequent meaningful upgrades.

Non-GAAP operating margins are seen between minus 23% and 27% for the third quarter, which is a bit disappointing as Workday is preferring growth over earnings at this stage in the game.

Back in May of this year, I took a look at Workday's prospects after the company released its first-quarter results. Workday has made some progress by accelerating revenue growth in the meantime. This has come at the expense of GAAP earnings.

I reiterate my standing from the time. While the performance over the past quarter was quite solid, the shares have run-up a bit further as well. Even when applying a 50% growth rate to annual revenues in the period 2013-2015, I see Workday achieving annual revenues of $1 billion by 2015.

Trading around 12 times 2015's annual revenues seems a bit stretched to my opinion. Despite the fact that the recent run up hurt, I remain short.

Source: Workday - Management Places Growth Above Earnings, For Now