Workday (WDAY.US) Q2 performance is mixed, and the guidance for Q3 subscription backlog orders is below expectations, testing the momentum for a rebound.

The office management software manufacturer Workday (WDAY.US) released sales guidance that fell short of analyst expectations, tempering the momentum that Wall Street had recently built up in favor of the software industry. The stock briefly dropped more than 7% in after-hours trading on Thursday, though the decline had narrowed to less than 1% by the time of publication. The earnings report showed that Workday's revenue for the second quarter rose approximately 13% year-over-year to $2.65 billion, slightly better than the analyst average estimate of $2.63 billion; adjusted earnings per share stood at $2.75, falling short of the analyst average forecast of $2.61. Subscription revenue for the second quarter amounted to $2.47 billion, reflecting a 14% year-over-year increase. The subscription revenue backlog for the past 12 months totaled $9.034 billion, a 14.2% increase from the same period last year. The total subscription revenue backlog was $27.403 billion, marking an 8.0% year-over-year increase. However, Workday anticipates that by the end of the third quarter, which concludes on July 31, its total subscription revenue backlog will grow by 8% year-over-year to $27 billion, falling short of the analyst average expectation of $28.6 billion; it expects subscription revenue for the third quarter to reach $2.52 billion, in line with analyst averages. Workday belongs to a group of application software companies that have been persistently troubled by investor concerns over AI disruption. Nevertheless, as sales remain stable, worries that emerging AI companies and tools could siphon business away from traditional software providers have begun to ease over the past month. The stock has gained 31% in the past month, but is still down about 10% year-to-date. Workday primarily develops software for office administration, including payroll and human resources management, and has been integrating AI into its products. The company has also recently made adjustments to its management. In February of this year, it announced that former CEO and co-founder Aneel Bhusri would return to the CEO role. Bhusri had previously stepped down from the position in 2024. One factor driving investor optimism towards software stocks is reports that private equity firm Silver Lake is negotiating to acquire Workday. The market views this potential deal as a validation of the long-term value of such software providers. Barclays analyst Raimo Lenschow noted, The SaaS sector has seen a recovery in recent weeks. Workdays performance and guidance adhering to expectations are less likely to serve as another catalyst. Aneel Bhusri, co-founder, CEO, and chairman of Workday, stated, We had strong performance in the second quarter, with AI contributing over 25% of the new annual contract value. More than 5,500 customers are currently using at least one of our natural language agents. Thanks to Workday's assured service system, customers can confidently entrust essential tasks to our agents, as reflected in the data. Workday's Chief Financial Officer Zane Rowe remarked, Our second-quarter performance reflects the ongoing strong growth momentum of our platform, with AI becoming the strategic DRIVE for customer expansion. We expect subscription revenue for the fiscal year 2027 to reach $9.94 billion to $9.95 billion, a 13% year-over-year increase, and we are raising the fiscal year 2027 non-GAAP operating margin expectation to 31.0%. We will continue to prioritize investments in our AI roadmap and platform development opportunities, while enhancing operational efficiency as we scale. Additionally, Workday announced that its board has authorized an indefinite buyback of up to $4 billion of its outstanding Class A common stock. Workday has also announced a new partnership with Amazon.com, Inc. (AMZN.US) under its cloud services (AWS), where Workday Data Cloud will integrate with AWS to provide bidirectional, zero-copy access between AWS data and AI services and Workdays HR and financial data. Workday has also expanded its strategic partnership with Alphabet Inc. Class C (GOOGL.US) under Google Cloud, directly integrating Workday agents into Gemini Enterprise, creating a single, trusted foundation that allows agents from Workday, Google Cloud, and third parties to collaboratively manage real HR and financial workflows.