Workday - Beats Again And Hikes Guidance, Valuation Remains Too Steep For Me

| About: Workday (WDAY)
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Workday continues to beat, hikes its guidance again.

Yet growing topline growth goes hand in hand with increased GAAP losses.

Despite a sell-off during the ¨momentum¨ correction, I remain short.

Workday (WDAY) reported a strong set of first quarter results on Tuesday after the market close after strong customer demand for its Workday Recruiting application boosted its results.

Despite the great applications and growth, I continue to disagree with the valuation despite a correction of the shares during the recent ¨momentum¨ sell-off, leaving me left on the short side.

First Quarter Results

Workday reported first quarter revenues for its fiscal year of 2015 which came in at $159.7 million, up 74% compared to last year. Revenues came in ahead of consensus estimates at $152.4 million.

Despite the aggressive top-line growth, net losses were on the rise as well. Net losses increased by 80% to $59.4 million, resulting in GAAP losses of $0.32 per share which compares to losses of $0.20 per share.

Based on often looked at non-GAAP earnings metrics, losses came in at $0.13 per share. This was two cents better than the loss reported last year as well as analysts estimates.

Looking Into The Performance

Growth in the quarter was driven by subscription revenues which were up by 80% to $123.4 million. Professional service revenues rose by 56% to $36.3 million.

Direct costs of subscription services fell by 440 basis points to 17.4% of sales. To take notice of, direct costs of its professional service business rose to 99.0% of revenues, up from 93.7% reported last year.

The company continues to show an increase in costs on the operational side, although the company saw modest operating leverage in percentage terms. Operating losses came in at 32.6% of sales on a GAAP basis, a 330 basis points improvement compared to last year.

Despite the losses, the company actually took a very modest tax provision for its income taxes which implies that net earnings are not ¨inflated¨ throughout tax provision allowances.

Looking Into The Year

Based on solid first quarter performance, Workday now anticipates second quarter revenues of $173 to $178 million, which represents 61 to 65% annual growth. The guidance is above consensus estimates at $171.3 million.

Full year revenues are now seen between $730 and $750 million which implies 56 to 60% growth on an annual basis. Total billings are anticipated at $890 to $910 million which adds to the future backlog.

Rock Solid Balance Sheet

Following its public offering and the subsequent secondary offering, Workday holds $1.88 billion in cash, equivalents and marketable securities. The company holds no conventional debt although it does have $474 million in convertible notes outstanding plus a modest amount of capital lease obligations, resulting in a net cash position of $1.4 billion.

At $87 per share, the company is valued at $15.9 billion based on 183 million shares outstanding. This values operating assets at around $14.5 billion which on its turn values the company at 20 times projected revenues for this year.

Investment Takeaway

Investors should note that Workday appears to be traditionally cautious in its guidance, to report a beat when announcing the definitive results.

As the company offers its services on a SaaS-based business model, this means that revenues are only recognized on a monthly basis and not upfront in an accounting method which understates current revenues when you are growing. To indicate the growing pipeline of future revenues, Workday reported billings of $208 million for the quarter which implies billings run 30% above reported revenues. For the full year this gap is anticipated to come in at 22%.

After strong momentum last year and at the start of the year, shares of Workday have given up some 45% from their highs of $115 in the wake of its fourth quarter release. Shares fell to lows of $65 amidst the momentum sell-off over the past quarter. Shares have bounced back up by a third to $87 at the moment of writing, but remain 25% below their highs.

While I continue to appreciate the company's great applications and products, the valuation remains out of control in my opinion at 20 times forward revenues and 16 times forward billings. I won't even start discussing the growing GAAP losses.

I continue to trade Workday from the short side.

Disclosure: I am short WDAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.