Workday’s Q2 Performance Surpasses Investor Expectations

HRTech company, Workday has exceeded investor expectations for quarter two revenue. The company reported $2.085 billion in total revenue, up from $1.787 billion last year. Shares of the HR software company experienced a 15% rise on Friday, the highest in about two years.

According to Yahoo Finance, the Workday share jump was triggered by an announcement that the company would increase profitability in the coming three years.

Workday specializes in enterprise applications that help businesses, government agencies, and educational institutions manage their human and financial resources.

Workday Share Profitability

Speaking on a conference call, Workday’s Chief Financial Officer Zane Rowe said the company’s adjusted operating margins are expected to reach 30% by January 2027. Workday had set this figure at 25% last year.

Rowe said Workday’s subscriptions, which are the main source of revenue for the company, will grow by about 15% over the same period. Carl Eschenbach, Workday’s Chief Executive Officer said that emphasis on profitability provides more cash for strategic growth initiatives.

Eschenbach also said that Workday will reduce operating costs by adopting selective hiring and leveraging AI in its finance departments and call centers. The HRTech company will be hiring more workers in India and Costa Rica.

Investor Disquiet

The long term Workday profitability outlook has helped to dislodge the disquiet previously expressed by investors about the company’s in-line quarterly results and annual sales forecast.

“There were some positive nuggets in management’s outlook including a 17% increase in subscription revenue and a $1 billion share buyback program,” Running Point Capital’s Chief Investment Officer, Michael Ashley Schulman said

The US-based company also maintained its annual subscription forecast of $7.73 billion and an operating margin outlook of 25%.

“We see a macroeconomic environment consistent with last quarter,” Rowe said.

Workday executives said that the company is reviewing its medium-term plans to fast track expansion and moderate its subscription revenue growth pace. In recent years, the company has introduced new features and made attempts to grow its customer base. In July, Workday partnered with Salesforce to build a collaborative AI tool.

Corporate Spending

Despite a slowing labor market, corporate spending on payroll and human resources among small and medium sized businesses has been increasing. Workday expects reduced hirings to dip its subscription revenue in quarter three.

Prior to the results announcement, analysts had highlighted the negative effect that corporate job cuts could have on software companies that charge customers per use. Workday said its subscription backlog was $6.8 billion.

“Enterprises continue to remain in a cost-cutting mode with below-average headcount addition,” Bloomberg Intelligence Analyst, Anurag Rana said.

According to analysts, the company could also experience longer sales cycles as a result of higher inflation and cost of borrowing. Overall, Workday’s results point to a tough environment for expanding the customer base.

Workday reported a $1.75 profit per share for the period ended July 31. The company announced a 49 cents earnings per share, 10 cents more than the 30 cents announced in the same period last year.