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Workday reported results for the second quarter last night. This has broken Wall Street expectations in most respects, but pre-market inventory has fallen by around 5%, testing technical support near its August low. The company recorded double-digit revenue growth, revenue beats and stronger operating margins, but investors' responses reflect disappointment at careful progress guidance and concerns about growth durability. This quarter provided a variety of situations as Workday is considered a pioneer in corporate recruitment for Agent AI. Strong demand and early updates for new AI-driven products have fueled the backlog, but the suppressed guidance from management in the second half suggests an ongoing tug of war between opportunity and macro headwinds.
The heading number was solid. Workday reported adjusted earnings per share of $2.21 ahead of its consensus estimate of $2.11. Revenues rose 12.6% year-on-year, increasing to $2.35 billion in line with forecasts, while subscription revenues rose 14% to $2.17 billion. The adjusted operating income of $680 million is ahead of the $657 million consensus, representing a 29% non-GAAP operating margin, a step up from the last quarter. The 12-month subscription revenue backlog, or the current remaining performance obligation (CRPO), rose 16.4% year-on-year to $79.1 billion, exceeding Workday's 15-16% guidance range. Its CRPO beat is worth noting because it demonstrates healthy demand and strong update activity, particularly with AI-related add-ons.
The performance of Workday's Agent AI Units was a central focus. Management highlighted that over 75% of new customer transactions include at least one AI product, with Net New ACVs associated with AI more than doubled year-on-year.. Products like talent optimization, recruitment agents and contract intelligence have gained strong intakes, but the Evisort acquisition continued to bring about significant growth. The company has also signed a decisive agreement to acquire Paradox, a conversational AI recruitment platform. Analysts were generally impressed by the range of AI adoption and focused on 100% NET NEW AI ACV growth and rising partner source trading.
Despite the solid quarter, investor skepticism was supported by guidance. Workday increased its 2026 subscription revenue outlook to $8.82 billion, representing 14.2% growth, due to the acquisition of the pending paradox. Without that contribution, predictions remained flat, suggesting conservatism or uncertainty about organic momentum. In the third quarter, management was led to a subscription revenue of $2.235 billion, essentially in line with the consensus, and a CRPO growth of 15.5%. While the 29% operating margin guidance is ahead of street forecasts, revenue conservatism overshadowed the strength of profitability. Analysts stressed that they highlighted the management's decision not to raise guidance to reflect the second quarter beat.
Quarterly growth drivers include early updates related to AI adoption, continuing momentum for financial management products, and strong partner channels. International revenues rose 11%, with notable victories in EMEA and Asia, with US revenues rising 13%. The company also saw the government and higher education traction, but management acknowledges funding pressure at the state level and within the university, particularly following recent federal budget adjustments. Headwinds are questions about longer trading cycles, uneven macro conditions, and how competitive the company's AI landscape is as more players enter.
The analyst's views reflect both optimism and attention. Cantor Fitzgerald repeatedly rated overweight with a price target of $265, highlighting attractive long-term risk rewards, but acknowledged the lack of meaningful guidance pay raises. Oppenheimer cut his target to $270 despite strong AI bookings. Canaccord cut its target from $330 to $275, but maintained its purchases and claimed that Workday's entrenchment position, 97% retention, and Trust Factor would be isolated from AI destruction. BMO has slightly lowered its target to $285, but praised the Paradox deal as a sensible move to strengthen recruitment. Mizuho was constructive, repeating its $275 goal, referring to a durable growth driver, including finance, partner expansion and AI adoption. KeyBanc reduced its target to $285, but emphasized that margin strength and CRPO beats are still encouraging.
The general thread for analyst commentary is that the quarter was strong, but the guidance leaves open questions about Workday's short-term trajectory. The Bulls point to sustainable growth, AI adhesion rates, strong renewal activities and disciplined cost management, but skeptics argue that they point to the lack of organic guidance raises as evidence of fundamental attention. Investors may also be working on the assessment. Workday trading at premium for many SaaS peers, even after recent pullbacks, expanding the impact of conservative guidance.
In the short term, technical will emerge, testing the low in August, at a level of $206. The weaknesses before the market continue with careful forward commentary. The Bulls could potentially bring in more downsides by falling below that level, but as Workday builds track record in the profitability and cash flow sector as it grows, it argues that risk rewards are becoming more and more attractive. In the long run, Workday's AI strategy, deep corporate relationships, and expansion of its products into finance and government will make it a key player in the SaaS landscape. The next catalyst will be Workday Rising in September, where management is expected to lay out a more detailed roadmap for AI monetization and product integration.
In short, Workday provided quarters that exceeded expectations for revenue, EPS, margins and backlog, but failed to encourage the market with conservative guidance in mind. The AI story remains strong, with new online bookings more than doubled, and new acquisitions expanding the company's footprint. However, investors are cautious as there are no more meaningful guidance pay raises and macro headwinds. Analysts remained primarily supportive, with price targets being reduced conservatively, but valuations remained and reflects the view that while short-term uncertainty persists, the company's long-term positioning as AI leaders remains unharmed. For now, sentiment depends on whether management can demonstrate a second half acceleration and realize AI promises without sacrificing profitability.
