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When HR and financial management software company Workday (WDAY) reported solid Q4 results in February, it disappointed investors by only reaffirming its FY25 subscription revenue guidance of $7.725-$7.775 bln, sending shares sharply lower. Today, a reiteration of that guidance would look pretty good because in last night's Q1 earnings press release the company lowered its subscription revenue outlook to $7.700-$7.725 bln, representing yr/yr growth of about 17% at the midpoint.

• The cause for the softer outlook is a familiar one: namely, WDAY is seeing elevated deal scrutiny as enterprises continue to contend with high interest rates and persistent inflation. Due to these macroeconomic headwinds, companies have slowed the pace of their hiring activity, resulting in lower customer headcount growth and fewer large deals for WDAY in Q1. The good news is, when purchase decisions are being made, WDAY says that its win rates remain strong.
• A key component of WDAY's growth strategy is to expand internationally, but the macro-related pressures were especially prevalent in EMEA, where the company closed fewer large deals compared to the year-earlier period. Its customers are committing to lower headcount levels on renewals compared to what it was anticipating. Overall, WDAY's international revenue grew 18% yr/yr to $497 mln, down from last quarter's growth of 21%.
• Despite the reduced subscription revenue guidance, WDAY did nudge its FY25 non-GAAP operating margin guidance higher to 25.0% from its prior forecast of 24.5%. During the earnings call, CFO Zane Rowe credited the WDAY's focus on driving increased efficiencies across the company for the improved margin outlook. Considering that WDAY is ramping up its investments in AI-powered technologies, the improved margin outlook is a notable positive.
• On the topic of new AI capabilities and products, WDAY released its AI-powered Payroll Insights product in Q1, which helps payroll workers to quickly detect anomalies. Furthermore, its new talent optimization tool is experiencing strong attach rates on new deals. In fact, over half of WDAY's core customer base is now licensed for this AI product and the product has significant momentum heading into Q2.

The main takeaway is that macroeconomic headwinds have strengthened, causing enterprises to take a more cautious approach with their IT spending. Therefore, WDAY's softer outlook could be a red flag for other enterprise software companies such as Salesforce (CRM), Oracle (ORCL), ServiceNow (NOW), and Atlassian (TEAM). From a company-specific standpoint, WDAY's expanding AI capabilities and its improving operating margins are two appealing fundamental attributes.