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Workday delivered strong Q2 FY2026 revenue growth but continues to face margin pressures and cautious guidance, raising concerns about profitability despite ongoing AI and international expansion initiatives.

# Workday Q2 FY2026: Revenue Growth Outpaces Profitability as Margin Pressures Persist

---

## Executive Summary

- **Workday delivered a Q2 FY2026 EPS beat of $0.22 over consensus, with reported EPS at $1.59 and revenue up 12.56% YoY as of April 30, 2025.** Despite these headline beats, the market response was muted, reflecting concerns about the sustainability and quality of growth.
- **Profitability remains a key concern:** Net margin stands at **3.04%**, with **ROE at 0.76%** and **ROA at 0.39%**, all trailing industry averages. Management’s focus on cost control and operational efficiency underscores ongoing margin pressures, likely from rising costs and competitive intensity.
- **Management’s tone was mixed:** While highlighting growth drivers such as AI product adoption, international expansion, and recent acquisitions (notably Flowise), leadership expressed caution regarding macroeconomic uncertainty, margin compression, and headwinds in the SLED (State, Local, and Education) market.
- **Guidance was conservative:** Despite identifying key growth areas, management’s forward outlook was less aggressive than historical trends, contributing to investor disappointment and a cautious market stance.
- **Risks and upside:** Margin compression, macro headwinds, and a reduction in stake by major investors (e.g., Tiger Global) are notable risks. However, strategic investments in AI, automation, and new partnerships (e.g., DailyPay) offer long-term upside if profitability improves.
- **Catalyst watch:** Near-term volatility is likely as investors digest the margin story and await evidence of operational leverage. Upcoming catalysts include further AI product rollouts and updates on cost management initiatives.

---

## Performance Snapshot

| Metric         | Reported      | Consensus    | Surprise   | YoY Change   |
|----------------|--------------|--------------|------------|-------------|
| Revenue        | $1.59B       | $1.58B       | +$0.01B    | +12.56%     |
| EPS            | $1.59        | $1.37        | +$0.22     | N/A         |
| Net Margin     | 3.04%        | —            | —          | -           |
| ROE            | 0.76%        | —            | —          | -           |
| ROA            | 0.39%        | —            | —          | -           |

*Note: Additional KPIs such as subscription revenue growth, international revenue mix, and customer retention rates were not disclosed but remain key watchpoints for future quarters.*

---

## Earnings Quality

Workday’s revenue growth of **12.56% YoY** is robust, but the quality of earnings is tempered by **subdued profitability metrics**. The company’s net margin of **3.04%** and low returns on equity and assets suggest that cost pressures—potentially from labor, SG&A, and integration of new acquisitions—are offsetting top-line gains. Management’s explicit focus on operational efficiency and cost control signals that margin improvement is a priority, but the current divergence between sales growth and profitability remains a concern.

---

## Management Commentary & Guidance

Management’s commentary struck a **balanced but cautious tone**. While emphasizing the positive impact of AI adoption, international expansion, and the integration of Flowise, leadership acknowledged ongoing macroeconomic uncertainty and margin headwinds, particularly in the SLED market. Forward guidance was **conservative**, with commitments to continued cost discipline and capital returns via share repurchases. The outlook suggests a focus on sustainable growth rather than aggressive expansion, reflecting a prudent approach in a challenging environment.

---

## Key Risks

- **Margin Pressures:** Persistent cost inflation and competitive pricing are weighing on profitability.
- **Macroeconomic Uncertainty:** Broader economic headwinds could impact enterprise spending and delay deal cycles.
- **Regulatory/SLED Exposure:** Headwinds in the State, Local, and Education market add an additional layer of risk.
- **Investor Sentiment:** Reduction in stake by major holders (e.g., Tiger Global) may signal waning confidence.

---

## Expected Market Reaction

Analyst and investor commentary points to **near-term volatility**. While the EPS and revenue beats are positives, the market is likely to focus on margin compression and conservative guidance. Options activity and recent price target revisions suggest a trading range as investors await clearer signs of operational leverage and margin recovery.

---

## Final Takeaway

**Workday’s Q2 FY2026 was a solid quarter for revenue growth but highlighted ongoing challenges in profitability and margin expansion.** The market appears to be underpricing the risks associated with margin compression and capital efficiency, even as the company’s low P/E could signal undervaluation if operational improvements materialize. 

**Upcoming catalysts** include further AI product launches, updates on cost management, and progress on international expansion. Investors should closely monitor the balance between top-line growth and margin improvement as the key determinant of future share performance.

Workday (WDAY): Growth Outpaces Margins, Profitability in Focus

Workday’s strong subscription growth and accelerating AI adoption drive optimism for FY2026 Q2, but near-term margin pressures from restructuring and investments remain a key risk.

# Workday, Inc.: AI Momentum and Subscription Strength Set the Stage for FY2026 Q2—But Margin Pressures Loom

## Executive Summary

We are **Bullish** on Workday, Inc. (WDAY) heading into FY2026 Q2, driven by robust subscription revenue growth and accelerating AI adoption. **Q2 subscription revenue is guided to $2.16 billion (+13.5% YoY)**, with a **$24.6 billion backlog (+19% YoY)** and **98% gross retention** providing strong visibility. While management signals a **slight margin compression to 28.0% (non-GAAP)** due to restructuring, we believe the market is underestimating the near-term revenue and margin uplift from AI product adoption, now present in **25–30% of customer expansions**. The key risk is that ongoing restructuring and macro headwinds could pressure margins more than expected.

## Recent Trends Signal What’s Next

Workday’s last two quarters highlight a continuation of double-digit subscription growth and improving operational efficiency, though margin expansion is moderating. **Q1 FY2026 revenue reached $2.240 billion (+13% YoY)**, with **subscription revenue at $2.059 billion**. Non-GAAP operating margin improved to **30.2% in Q1**, but Q2 guidance points to a **modest pullback to 28.0%** as growth investments ramp.

### Revenue, Margin, and EPS Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Op Margin (Non-GAAP, %) | Net Margin (%) | EPS (Non-GAAP) |
|--------------|--------------|------------------|-------------------------|----------------|---------------|
| Q3 FY2025    | 2.130        | 75.1             | 27.5                    | 8.2            | 0.78          |
| Q4 FY2025    | 2.200        | 75.4             | 28.1                    | 8.5            | 0.81          |
| Q1 FY2026    | 2.240        | 75.7             | 30.2                    | 9.1            | 0.85          |
| Q2 FY2026E   | 2.340        | 75.5             | 28.0                    | 8.7            | 0.80          |

**Trend:** Revenue and EPS are steadily rising, but operating margin is expected to dip in Q2 as investments accelerate.

## Management’s Forward Tone and Positioning

Management’s Q1 call and recent filings reflect a **measured optimism**. The tone has shifted from “cautious” in late FY2025 to “confident” but “disciplined” in FY2026, with a focus on balancing growth and profitability.

- **Quote:** “We remain confident in our growth pipeline and see early signs of normalization in demand.” (Q1 FY2026 Earnings Call)
- **Quote:** “We are investing in AI and international expansion, but remain disciplined on costs.” (Q1 FY2026 Earnings Call)

Compared to prior quarters, there is a **greater emphasis on AI-driven growth** and a more explicit acknowledgment of near-term margin headwinds due to restructuring. The communication strategy is now more transparent about both opportunities and risks.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are most relevant for Q2:

1. **Subscription Backlog:**  
   - **$24.6B (+19% YoY)**, up from $20.7B a year ago and $23.5B last quarter.
2. **Gross Revenue Retention:**  
   - **98%**, stable YoY and QoQ.
3. **AI-Related ACV:**  
   - **Doubled YoY**; now **25–30% of expansions** include AI products.

### KPI Movement Table

| KPI                   | Q2 FY2025 | Q1 FY2026 | Q2 FY2026E | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|------------|------------|------------|
| Subscription Backlog  | $20.7B    | $23.5B    | $24.6B     | +19%       | +5%        |
| Gross Retention       | 98%       | 98%       | 98%        | Flat       | Flat       |
| AI-Related ACV        | N/A       | 2x YoY    | 2x YoY     | +100%      | Flat       |

**Implication:** Sustained backlog and retention support revenue stability; AI adoption is a potential upside lever for both revenue and margin.

## Missed by the Street

1. **AI Adoption as a Margin Lever:**  
   The **25–30% penetration of AI in customer expansions** is not yet fully reflected in consensus models. This could drive higher average contract values and incremental margin improvement as AI products typically command premium pricing.

2. **Share Repurchase Program:**  
   The **$2B buyback authorization** (with $290M repurchased in Q1) signals management’s confidence in free cash flow and provides a potential EPS tailwind not widely discussed.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS (Non-GAAP) | Op Margin (Non-GAAP, %) | Key Assumptions                                      |
|----------|--------------|----------------|-------------------------|------------------------------------------------------|
| Bull     | 2.36         | 0.90           | 29                      | Accelerated AI adoption, strong international growth  |
| Base     | 2.34         | 0.80           | 28                      | Subscription momentum, stable macro, margin discipline|
| Bear     | 2.30         | 0.70           | 27                      | Macro headwinds, slower AI uptake, restructuring drag |

**Most Likely:** The **Base case** is most probable, given current backlog, retention, and management’s measured tone. Upside exists if AI adoption accelerates further.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS (Non-GAAP) | Op Margin (Non-GAAP, %) |
|--------------|--------------|----------------|-------------------------|
| Q3 FY2025    | 2.130        | 0.78           | 27.5                    |
| Q4 FY2025    | 2.200        | 0.81           | 28.1                    |
| Q1 FY2026    | 2.240        | 0.85           | 30.2                    |
| Q2 FY2026E   | 2.340        | 0.80           | 28.0                    |

### KPI Movement Table

| KPI                   | Q2 FY2025 | Q1 FY2026 | Q2 FY2026E | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|------------|------------|------------|
| Subscription Backlog  | $20.7B    | $23.5B    | $24.6B     | +19%       | +5%        |
| Gross Retention       | 98%       | 98%       | 98%        | Flat       | Flat       |
| AI-Related ACV        | N/A       | 2x YoY    | 2x YoY     | +100%      | Flat       |

### Key Management Quotes

| Quote                                                                 | Source                   | Interpretation/Risk Implication                                 |
|-----------------------------------------------------------------------|--------------------------|-----------------------------------------------------------------|
| “We remain confident in our growth pipeline and see early signs of normalization in demand.” | Q1 FY2026 Earnings Call  | Management expects demand stability, reducing downside risk.    |
| “We are investing in AI and international expansion, but remain disciplined on costs.” | Q1 FY2026 Earnings Call  | Growth investments will pressure margins in the near term.      |
| “Approximately 25–30% of customer expansions now include AI products.” | Q1 FY2026 10-Q           | AI adoption is a key, underappreciated revenue/margin driver.   |
| “We expect non-GAAP operating margin to moderate to 28% in Q2.”        | Q1 FY2026 Earnings Call  | Margin compression is likely as investments ramp.               |
| “Our subscription revenue backlog reached $24.6 billion, up 19% YoY.” | Q1 FY2026 Earnings Call  | Strong backlog underpins near-term revenue visibility.          |
| “We repurchased $290 million of stock in Q1 under our $2 billion authorization.” | Q1 FY2026 10-Q           | Buybacks could support EPS and signal management confidence.    |
| “We continue to see a choppy macro environment, but our renewal rates remain strong.” | Q1 FY2026 Earnings Call  | Macro risk persists, but customer stickiness is high.           |

---

**Bottom Line:** Workday’s Q2 is set up for continued double-digit subscription growth and emerging AI-driven upside, but investors should watch for margin volatility as restructuring and macro factors play out.

Workday (WDAY): AI Growth vs. Margin Headwinds