Workday (WDAY, Financial), a leading provider of human capital management and financial cloud software, saw its shares surge after releasing its Q2 FY25 results and updating its FY25 guidance. The primary driver behind this rally is CEO Carl Eschenbach's announcement during the earnings call about the company's renewed focus on profitability.
Key highlights include:
- Workday plans to improve its operating margin to 30% by FY27, up from the current 25%, by controlling headcount growth and leveraging its partner channel.
- WDAY announced a new $1.0 billion stock repurchase plan, which is expected to boost EPS growth. EPS grew 22% year-over-year to $1.75, marking the ninth consecutive quarter of beating expectations. This growth was driven by improved efficiencies, pushing the non-GAAP operating margin up by 130 bps year-over-year to 24.9%.
- Subscription revenue increased by 17% year-over-year to $1.903 billion, slightly down from last quarter's 18.8% growth. Despite ongoing deal scrutiny and moderated headcount growth among its customers, WDAY's win rates remain high, helping to counteract the broader IT spending slowdown.
- WDAY reaffirmed its FY25 subscription revenue guidance at $7.700-$7.725 billion, reflecting approximately 17% growth. However, the medium-term outlook was slightly lowered, with expected annual subscription revenue growth of about 15% for FY26 and FY27. CFO Zane Rowe noted that the company is becoming more selective in its growth investments to enhance ROI.
The main takeaway is that while the business environment remains challenging for Workday, the company's strategic focus on targeted hiring and efficiency improvements, including increased use of AI in call centers, is expected to drive higher margins and earnings growth.
