Workday (NASDAQ: WDAY) shares fell 6% on Friday’s session after the human resources and finance software company delivered fiscal second-quarter results that beat analyst expectations but issued third-quarter guidance largely in line with consensus.
Investors were left underwhelmed as subscription revenue projections showed little upside, apart from a modest lift from the recently announced Paradox acquisition.
Earnings beat but limited guidance upside
For the quarter ended July 31, Workday reported adjusted earnings per share of $2.21, ahead of the $2.11 expected by analysts polled by LSEG.
Revenue came in at $2.35 billion, just above the $2.34 billion estimate, representing 13% growth year-over-year.
Net income rose to $228 million, or 84 cents per share, compared with $132 million, or 49 cents per share, in the same period last year.
Looking ahead to the third quarter, the company guided subscription revenue to $2.24 billion, in line with StreetAccount consensus.
Professional services revenue is projected at $180 million, implying total revenue of $2.42 billion, also matching analyst forecasts.
Workday expects an adjusted operating margin of 28.0%, slightly below the 28.1% consensus.
For the full year, Workday forecast $8.82 billion in subscription revenue and $700 million in professional services revenue, or $9.52 billion in total, compared with analyst expectations of $9.51 billion.
Sector headwinds in government and education
Despite overall growth, Workday flagged weakness in certain end markets, particularly state and local government and higher education.
CEO Carl Eschenbach acknowledged funding uncertainty at the state level, which continues to weigh on demand.
“I think we’ll continue to see that as people are trying to figure out what the funding slowdown is going to look like, all the way to the state level,” Eschenbach said during the company’s earnings call.
He also noted that US higher education is under pressure following President Donald Trump’s March executive order to shut down the Department of Education.
Institutions with affiliated healthcare systems are facing additional funding challenges, Eschenbach added.
AI investment and Paradox acquisition
In parallel with its results, Workday announced the acquisition of Paradox, a conversational artificial intelligence software provider focused on recruiting.
The deal terms were not disclosed, though Needham analysts estimated the purchase at roughly $1 billion, or around 16 times revenue.
The firm viewed the acquisition favorably, citing Paradox’s natural language recruiting solutions for frontline workers.
Workday also introduced new AI features during the quarter, including agents that can extract accounting details from documents and track employee absences.
These moves underscore the company’s continuing push to embed AI capabilities across its enterprise software suite.
Needham maintained its Buy rating and $300 price target on Workday shares following the earnings report.
The firm highlighted that the current remaining performance obligation (cRPO) growth of 16.3% exceeded guidance, although the upside was attributed mainly to early renewals rather than stronger underlying demand.
While mid-enterprise and European markets outperformed, US enterprise demand remained sluggish, contributing to the limited upside in subscription revenue forecasts.
Needham expects modest share weakness in the near term despite solid long-term growth drivers, particularly in AI-driven innovation.
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