Workday’s stock falls on disappointing guidance and persistent concerns about AI threat

Workday Inc.’s stock came under pressure in late trading today after the company issued guidance for the current quarter merely in line with expectations, eroding whatever optimism was generated by its solid second-quarter earnings results.

The company reported a profit before certain costs such as stock compensation of $2.21 per share, easing past Wall Street’s target of $2.11 per share. Revenue for the period rose 13% from a year earlier, to $2.35 billion, just squeaking past analysts’ forecast of $2.34 billion.

The stronger-than-expected performance meant Workday’s net income rose, to $228 million, up from $132 million in the same period one year ago. The company’s adjusted operating profit margin also improved to 29%, up from 24.8% in the year-ago period and well above the Street’s expectations.

Workday Chief Executive Carl Eschenbach (pictured) said the company’s solid quarter was driven by a combination of artificial intelligence and platform innovation and international momentum. “Customers are choosing Workday because we help them unlock value today and prepare for what’s next,” he said. “Whether that’s navigating AI transformation, streamlining operations or creating more meaningful work for their people.”

All well and good so far, but then Workday set off alarm bells when it issued its guidance for the current quarter. Chief Financial Officer Zane Rowe said the company is calling for $2.24 billion in subscription revenue and $180 million in professional services, implying a total of $2.42 billion. That’s in line with Wall Street’s forecast. Moreover, Rowe said the company anticipates an adjusted operating margin of exactly 28%, slightly below the Street’s call for 28.1%.

Investors were not too happy, and Workday’s stock promptly fell more than 4% after-hours.

Workday, which sells a comprehensive software platform for human resources and financial management, did at least increase its full-year forecast. It said it’s now targeting total revenue of $9.52 billion at the midpoint of its guidance range, representing growth of 14.2% and ahead of an earlier forecast of $9.4 billion.

In a conference call with analysts, Eschenbach said that the company is facing pressure in the U.S. government and education sectors due to concerns about reduced budgets, and admitted it might continue for a while. “I think we’ll continue to see that as people are trying to figure out what the funding slowdown is going to look like, all the way to the state level,” he said.

In addition, the higher-education sector has also been feeling pressure ever since President Donald Trump signed an executive order in March to shut down the Department of Education. “If it’s a higher-ed university that includes a healthcare system, they too are getting a little pullback in funding,” Eschenbach said. “So it’s something we’re keeping our eye on.”

An even bigger concern for some investors is the rapid growth of the AI industry. Many analysts predict that sales of cloud software could suffer the same kind of devastating blow that subscription services once dealt to packaged software. Workday has responded by trying to develop its own AI tools.

Eschenbach was dismissive of such concerns. “I think this concern about AI disruption and the potential negative impacts for seat-based models are completely overblown,” he insisted. “We hear that AI is eating the software world, and unless something’s changed from yesterday, AI is software, and we’re leaning heavily into it.”

Workday has been focused on developing a range of AI agents, which are software systems that leverage large language models to try and automate complicated business processes and tasks from a simple, plain language command. Workday’s AI agents are focused on human resources teams, and a supervisor might instruct it to find all employees who have recently asked for a pay raise and enter them into a spreadsheet, then help them to judge which requests have merit.

In June, Workday released its latest AI agents, which are focused on extracting accounting details from documents and creating lists of absent days. One week ago, it acquired a company called Flowise, which has developed a visual, drag-and-drop builder for creating customized AI agents, supporting the entire development lifecycle, from prototyping and debugging to analytics and deployment.

Today, Workday announced a second acquisition, saying it’s buying another AI startup called Paradox Inc., which has developed a conversational chatbot that enhances the hiring process by simplifying job applications and improving experiences for candidates. Both startups’ tools will be integrated into Workday’s software.

The after-hours movement means Workday’s stock is down about 12% in the year to date, trailing the broader Nasdaq index, which has gained 9% this year.

Photo: SiliconANGLE