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Despite strong earnings beat, Workday’s stock wobbles on disappointing guidance

Workday Inc. delivered better-than-expected revenue and reaffirmed its full-year outlook on subscription sales, but its guidance for the current quarter did not impress investors very much, and its stock was trading lower after-hours.

The human resources software company delivered first-quarter earnings before certain costs such as stock compensation of $2.23 per share, beating Wall Street’s estimates of $2.01 by a comfortable margin. Revenue clocked in at $2.24 billion, up 13% from a year earlier and ahead of the expected $2.22 billion. Subscription revenue, which makes up the bulk of the company’s sales, also rose 13% from a year earlier, to $2.06 billion.

All told, Workday was able to eke out a net profit of $68 million in the quarter, lower than the $107 million in net income it recorded in the year-ago period.

Workday Chief Executive Carl Eschenbach (pictured) hailed what he said was “another solid quarter,” saying that the company’s performance is a testament to the durability of its business and the relevance of its platform.

“CEOs increasingly turn to us to drive efficiency, agility and growth,” the CEO added. “We are delivering real ROI for our customers by helping them effectively manage their most critical assets – people and money – on one unified platform with AI at the core.”

Workday is the creator of a cloud-hosted software platform for human capital and financial management, helping large and medium-sized businesses manage their workforces and financial processes. Its flagship product includes applications for tasks such as payroll management, benefits administration and financial reporting.

Like many software firms, Workday has been enthusiastic about the prospects of artificial intelligence, racing to enhance its platform with generative AI capabilities. Last year, it launched an updated version of its Workday Illuminate AI platform, introducing AI agents that can help to automate various business processes and workflows in areas such as recruitment, expense reporting and succession planning.

The company has since doubled down on agentic AI, and a few days ago, it announced yet another suite of new agents, including a contract intelligence agent that’s designed to quickly surface key details in agreements, and another one optimized for negotiating contracts. It also debuted a new “frontline agent” for reporting employee absences and finding replacements, and a contingent sourcing agent to streamline the process of hiring workers for temporary roles.

Though Workday has been quick to expand its AI capabilities, some investors worry that the technology could ultimately undermine its human resources management business if it ends up causing major disruption to labor markets.

The company also faces broader macroeconomic uncertainties. While many technology firms have struggled this year amid the uncertainty linked to U.S. tariffs and other changing government policies, investors have been more optimistic about the prospects of software firms, whose products aren’t directly in the firing line. Workday’s peers, such as Snowflake Inc. and Microsoft Corp., say they’ve seen no noticeable impact on customer behavior.

But in any case, Workday has set itself the task of boosting its profitability, and earlier this year announced a significant number of layoffs. In an update today, Workday Chief Financial Officer Zane Rowe said the company remains “focused on executing in this uncertain environment.”

His comments set the tone for a conservative forecast. For the current quarter, the company is looking at subscription revenue of around $2.16 billion, exactly in line with Wall Street’s consensus estimate. The company also reiterated its full-year subscription revenue guidance of $8.8 billion at the midpoint.

Holger Mueller of Constellation Research Inc. said Workday had a good quarter, growing well and doing more than $2 billion in subscription revenue for the first time, but he pointed to some worrying data points that may have stoked investor’s concerns.

“Despite reducing its headcount by around 7.5%, all of its key costs, including R&D, sales and marketing and general and administrative, were up during the quarter,” the analyst said. “There was also an impairment charge for restructuring that practically halved its operating income from 3.2% to just 1.8% of revenue. It’s clear that Carl Eschenbach and his team are managing Workday on a razor-thin margin and desperately trying to avoid slipping back into the red.”

The guidance suggests it may be touch and go in the current quarter. Subscription revenue makes up more than 90% of the company’s total sales, and is therefore one of the most keenly watched metrics for investors. Unfortunately for Workday, the market had been hoping for a brisker pace of growth, and its stock fell more than 6% on the report.

Photo: SiliconANGLE