Carl Eschenbach, co-CEO of Workday, speaking on CNBC’s “Squawk Box” at the World Economic Forum Annual Meeting in Davos, Switzerland, on Jan. 18, 2024.
Adam Galici | CNBC
Workday shares soared 12% on Friday, one day after the finance and human resources software maker issued fiscal second-quarter results that exceeded analysts’ estimates and announced plans to further widen its adjusted operating margin through 2027.
Here is how the company did, compared to LSEG consensus:
- Earnings per share: $1.75 adjusted vs. $1.65 expected
- Revenue: $2.085 billion vs. $2.071 billion expected
Workday’s revenue was up about 17% year over year in the quarter ending July 31, according to a statement. Subscription revenue growth grew 17%. Net income, at $132 million, or 49 cents per share, increased from $79 million, or 30 cents per share, in the same quarter a year ago.
With respect to guidance, Workday is now looking for an adjusted operating margin of 25.25% in the 2025 fiscal year, compared to the 25% forecast it provided in May.
On a Thursday conference call with analysts, Zane Rowe, Workday’s finance chief, said he expects the company’s adjusted operating margin to expand to 30% in the 2026 and 2027 fiscal years, along with an annual subscription revenue growth of 15%. In September 2023, Workday said it was targeting a 25% adjusted operating margin for fiscal 2027 and subscription revenue growth between 17% and 19%.
“We are relentlessly focused on scaling all of our processes across the company as we review our product and go-to-market initiatives,” Rowe said. “We’re also becoming increasingly more targeted in our growth investments, balancing product development with go-to-market resources.”
Deutsche Bank analysts led by Brad Zelnick increased their 12-month price target on Workday stock to $275 from $265. They have a hold rating on the stock.
“The increased 30% operating margin target was the big upside surprise as it is now committed both sooner and greater than most were expecting,” the analysts wrote.
Citi, Evercore ISI and Piper Sandler analysts also raised their Workday price targets following the company’s report.
Conditions aren’t perfect for Workday, however. Organizations are still being more careful than usual before agreeing to sign contracts, Rowe said, adding that headcount growth among the existing customer base has slowed down.
Many other software companies have pointed to rougher economic conditions in recent quarters. But on Friday, Federal Reserve Chair Jerome Powell said “the time has come for policy to adjust,” an indication that the central bank will lower its benchmark rate. That might benefit growing cloud software companies such as Workday. Investors moved away from those assets and opted for more defensive investments in 2022 as they anticipated rate hikes to ward off inflation.
The WisdomTree Cloud Computing Fund, an exchange-traded fund that includes Workday, ended the day up 2% in Friday’s trading session. The S&P 500 index gained 1%.
But Workday CEO Carl Eschenbach did not suggest that market conditions will improve soon.
“In fact, we think the current environment of IT spending and the environment we’re selling into isn’t something that’s just been here the last couple quarters,” he said. “We think it’s the new norm going forward. We’re prepared because we have a great product.”
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