Story Stocks^®

Workday (WDAY), a provider of human capital management and financial cloud software products, is rocketing higher after issuing 2Q25 results and updating its FY25 guidance, but the main catalyst for the surge is tied to something else. During the earnings call last night, CEO Carl Eschenbach commented that WDAY intends to sharpen its focus on profitability by keeping a lid on headcount growth and by leveraging its partner channel. Accordingly, Mr. Eschenbach said that he expects operating margin to improve to 30% by FY27, up from the current figure of about 25%.

• Adding to the bullish storyline, WDAY also announced a new $1.0 bln stock repurchase plan, providing another driver for EPS growth. On the topic of earnings growth, EPS grew 22% yr/yr to $1.75, beating expectations for the ninth consecutive quarter. The upside was driven by improved efficiencies across the company, which drove non-GAAP operating margin higher by 130 bps yr/yr to 24.9%.
• The news on the demand side isn't quite as upbeat. Subscription revenue came in at $1.903 bln, up 17% yr/yr, down from last quarter's growth of 18.8%. Mr. Eschenbach stated that the company continues to experience deal scrutiny and moderated headcount growth within its customer base. However, he added that WDAY's win rates remain high, helping it to offset the broad-based softness in IT spending.
• After lowering its FY25 subscription revenue guidance last quarter, WDAY reaffirmed its forecast last night, guiding for subscription revenue of $7.700-$7.725 bln, representing growth of approximately 17%. WDAY's medium-term outlook, though, was ratcheted a bit lower with the company expecting annual subscription revenue growth of about 15% for FY26 and FY27. Along with the challenging demand backdrop, CFO Zane Rowe stated that the company is becoming increasingly targeted in its growth investments as it looks to enhance ROI across the portfolio. 

The main takeaway is that the business climate remains difficult for WDAY as enterprises continue to rein in costs, but the company's decision to take a more targeted approach with hiring and drive more efficiency, including through using more AI in its call centers, should push margins and earnings growth higher.