Workday (NASDAQ:WDAY) reported its second-quarter results after Wednesday's market close. The company delivered strong revenue growth, with sales coming in above projections. These results show solid performance in the developing cloud-based enterprise resource planning sector, but whether the company can continue to deliver growth in line with its heavily forward-looking valuation will likely remain a point of contention among investors and analysts.

The results
Workday's second-quarter revenue came in at $186.6 million, a 74% increase on the $107.6 million generated in the corresponding period last year. Internal projections had forecast between $173 million and $178 million in sales for the period, while actual numbers represented a 5.3% overperformance relative to consensus analyst estimates. The company brought in $143.7 million in subscription revenues, good for 77% growth year over year. Operating income for the quarter was negative $9 million, while free cash flows were negative $37.4 million. EPS arrived significantly better than guidance. Operating cash flows for the trailing 12 months stood at $54.6 million, while free cash flows across the same period were negative $27.8 million.


Average Analyst Estimate Actual Result
Revenue $177.4 million  $186.6 million
EPS (non-GAAP) -$0.14  -$0.11

Business benefited from the addition of new clients like Travelex and Acxiom, as well as the developing client and support relationships with Hewlett-Packard and CSC.

The previous quarter saw the company generate $159.7 million in revenue, which represented a 74% increase in sales year over year. Performance in the first half of the year has prompted the company to revise its revenue target up from previous projections of between $730 million and $750 million for the fiscal year..

Workforce CFO Mark Peek outlined the strong performance for the quarter and new guidance:

We are very pleased with our strong results for the second quarter of fiscal 2015. We generated record quarterly revenues and trailing twelve month operating cash flows. Looking ahead, we anticipate a strong second half of fiscal 2015 with third quarter revenues expected to be within a range of $200 to $205 million, or growth of 56% to 60% as compared to the prior year. Total revenues for the year are anticipated to be in the range of $760 and $770 million, or growth of 62% to 64%.

Prior to the earnings release, analysts forecast revenue of $195.5 million and a loss of $0.13 per share for the current fiscal quarter.

Looking forward
Significant growth in the market for cloud-based Human Capital Management is expected to continue, with IDC projecting that revenue for the human resources segment will have climbed from approximately $10 billion in 2013 to $13.5 billion in 2017. As a leader in this SaaS field, Workday would appear to be well-positioned to absorb a significant portion of this growth, but it's facing strong competition as Oracle and SAP AG (NYSE:SAP) increasingly focus on the cloud. The two larger companies are transitioning their on-premise enterprise programs to cloud-based solutions, and their move to this model has the potential to disrupt Workday's growth plans. SAP AG expects to claim as much as $4.7 billion from cloud subscription and support revenue by 2017, a number that suggests it will aggressively court cloud ERP customers in the developing segment.

Workday has built its market position through a well-designed, integrated software platform that is offered at less-expensive rates than competing alternatives. The company's service is structured in a way that allows for rapid adjustments and upgrades, with all clients operating on the same unified software hub. At present, Workday's human capital and financial management solutions offer clear advantages when stacked against the competition, but Oracle and SAP are likely to begin flexing their resource advantages to greater degrees. Many of the benefits that Workday's platform provides may be absorbed and replicated by the larger companies as they attempt to grab the cloud ERP market.

To its credit, Workday has recently been successful in adding new, large clients; whether it can continue to secure contracts in line with expectations as big competitors adjust their offerings is the point to watch going forward.

Final thoughts
The latest quarterly results represent a strong performance for Workday as the company aims to expand the scope and reach of its business. That said, the performance does not offer strong indication as to whether its trajectory can match or improve on the growth implied by its current valuation. The company's price-to-sales ratio suggests that the company's stock remains more expensive than that of comparably sized competitors, and investors will have to weigh whether there is enough potential upside in Workday stock to offset the possibility that it will fail to deliver on projected growth.

Keith Noonan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.