Workday, Inc. (WDAY) Q2 2026 Earnings Conference Call Transcript
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Overview
Workday's earnings call reflects positive sentiment with strong subscription revenue growth, AI product expansion, and strategic acquisitions like Paradox. Despite concerns about AI disruption, Workday's robust customer base and high retention rates mitigate these fears. The Q&A highlights positive AI adoption, strong international performance, and strategic government sector focus. While some financial details were vague, the overall tone and strategic initiatives suggest a positive market reaction, likely resulting in a 2% to 8% stock price increase.
Key Financial Performance
Subscription Revenue $2.169 billion, up 14% year-over-year. The growth was driven by strong customer adoption across key verticals, geographies, and segments.
Professional Services Revenue $179 million, resulting in total revenue of $2.348 billion, growth of 13% year-over-year. This was supported by ongoing momentum in growth areas.
U.S. Revenue $1.76 billion, up 13% year-over-year. Growth was attributed to elevated volume of renewal activity and new ACV momentum.
International Revenue $584 million, up 11% year-over-year. Growth included a 3-point impact from an increased mix of international partner deployments.
12-month Subscription Revenue Backlog (cRPO) $7.91 billion, increasing 16.4% year-over-year. Growth was driven by elevated renewal activity, higher-than-expected early renewals, and strong partner growth.
Total Subscription Revenue Backlog $25.37 billion, up 18% year-over-year. Gross revenue retention rates remained healthy at 97%.
Non-GAAP Operating Income $680 million, representing a non-GAAP operating margin of 29%. This reflects targeted investments in AI talent, new markets, and industries, while driving efficiencies.
Operating Cash Flow $616 million, growth of 8% year-over-year. This was supported by operational performance and efficiencies.
Headcount Approximately 19,500 employees globally as of July 31, 2025.
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Operating Highlights
Workday GO: Launched in Q1, driving traction in emerging and medium enterprises.
AI Products: More than 30% of customer base deals and 75% of net new deals included AI products like talent optimization, recruiting agent, and contract intelligence agent. Net new ACV from AI products more than doubled year-over-year.
Paradox Acquisition: Signed a definitive agreement to acquire Paradox, a conversational AI platform for job applications.
Flowise Acquisition: Acquired Flowise, a low-code platform for building AI agents, enhancing AI capabilities.
Customer Expansion: New HCM relationships with Carrefour, Memorial Health, Smurfit Westrock, and Banamex. Expansions with Sanofi, Blue Origin, and Google.
International Growth: Strong performance in EMEA, APAC, and first deal in Vietnam with Masan Group. Investments in Japan and India showing results.
Government Sector: Launched Workday Government, a subsidiary for U.S. government needs, with strong engagement across the Department of Defense and other agencies.
Subscription Revenue Growth: Achieved 14% growth in subscription revenue, totaling $2.169 billion in Q2.
Operating Margin: Non-GAAP operating margin reached 29%, with ongoing efficiencies and targeted investments.
AI Integration: AI is central to operations, driving efficiencies across people, processes, and systems.
AI and Platform Innovation: Focused on delivering AI solutions for HR and finance, with 70% of core customers using Workday Illuminate.
Partnership Ecosystem: Expanded partnerships with AWS, Google Cloud, PwC, and others to enhance platform capabilities.
Developer Community: Developer community doubled year-over-year, with enhancements to Workday Developer Copilot and AI Agent Gateway.
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Risk or Challenges
Regulatory and Compliance Risks: The company acknowledges risks related to regulatory and compliance issues, particularly in the context of serving the U.S. federal government and expanding into new markets like India. These risks could impact operations and strategic objectives.
Economic and Market Conditions: Economic uncertainties and market conditions, including international revenue growth challenges and dependency on U.S. revenue, could adversely affect financial performance.
Competitive Pressures: The company faces competitive pressures in the AI and cloud-based HR and financial management sectors, which could impact its ability to maintain market share and profitability.
Supply Chain and Partner Ecosystem Risks: Dependence on partners for 20% of net new ACV and international deployments introduces risks related to partner performance and alignment with company objectives.
Strategic Execution Risks: The company’s aggressive expansion into AI, acquisitions like Paradox, and new market entries (e.g., India) pose execution risks, including integration challenges and resource allocation issues.
Technological and Innovation Risks: Rapid advancements in AI and technology require continuous innovation. Failure to keep pace could result in loss of competitive advantage.
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Guidance & Outlook
FY '26 subscription revenue guidance: Increased to $8.815 billion, reflecting a growth of 14%.
Q3 FY '26 subscription revenue: Expected to be approximately $2.235 billion, also reflecting a growth of 14%.
cRPO (12-month subscription revenue backlog): Expected to increase between 15% and 16% in Q3 FY '26.
FY '26 professional services revenue: Expected to be approximately $700 million.
Q3 FY '26 professional services revenue: Expected to be $180 million.
FY '26 non-GAAP operating margin: Increased to approximately 29%, reflecting ongoing efficiencies.
Q3 FY '26 non-GAAP operating margin: Expected to be 28%.
FY '26 operating cash flow outlook: Increased to $2.85 billion, driven by timing of cash tax payments and operating performance.
FY '26 capital expenditures: Expected to be approximately $200 million, reflecting free cash flow of $2.65 billion, a growth of 21%.
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Shareholder Return Plan
Repurchased Shares: We repurchased $299 million of our shares during the quarter and had $1.2 billion in remaining authorization as of July 31.
Repurchased Shares: We repurchased $299 million of our shares during the quarter and had $1.2 billion in remaining authorization as of July 31.
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Key Q&A
Q:What is Workday's perspective on the fear that AI startups might disrupt SaaS and seat-based models?
A:Workday believes that concerns about AI disruption to SaaS and seat-based models are overblown. They are leveraging their strong market position and customer base to become a go-to provider for AI solutions in the enterprise. Workday has over 11,000 customers, including 65% of the Fortune 500, and a high gross retention rate in the high 90s. Over 70% of their customers have adopted Workday Illuminate, and 30% of sales back into their customer base included an AI SKU. They also reported 100% year-over-year growth in net new AI SKUs this quarter.
Q:What is Workday's response to Sam Altman's post about OpenAI entering SaaS?
A:Workday does not have a specific viewpoint on Sam Altman's post about OpenAI entering SaaS, as they are unsure of what it entails. However, they emphasize that AI is software, and Workday is heavily investing in it.
Q:Are there any macroeconomic challenges affecting Workday's business?
A:Workday is monitoring international markets due to geopolitical situations, tariffs, and wars, but they have seen strong performance in Europe, particularly in the UK and Germany. In the state and local education (SLED) business, they observed headwinds due to funding slowdowns, especially in higher education and state-level funding. However, they closed significant deals like the University of Virginia and are keeping an eye on these areas.
Q:What is the significance of Workday Government as a wholly owned subsidiary?
A:Workday Government was launched to focus on the government sector and demonstrate commitment to this market. They are building a specific cloud environment with higher security levels for government agencies. This move has been well-received, and Workday is engaging with various federal agencies, including the Department of Defense and intelligence agencies, to support their AI transitions.
Q:What is the strategic importance of the Paradox acquisition for Workday?
A:The Paradox acquisition enhances Workday's recruiting suite by supporting high-volume hiring and providing a mobile and AI-led approach. Paradox's conversational and mobile-first design aligns with Workday's focus on candidate-first experiences. The acquisition also allows Workday to expand into competitors' installed bases and strengthens their AI-driven recruiting capabilities.
Q:How is Workday's AI adoption progressing?
A:Workday's AI adoption is progressing strongly, with 70% of customers using Workday Illuminate and 30% of sales back to the customer base including an AI SKU. Over 70% of net new sales include AI solutions, and AI-related products like Evisort and Extend Pro are experiencing significant growth. Workday is also seeing high engagement in their customer experience centers, indicating strong interest in their AI solutions.
Q:What is the status of Workday's medium enterprise business?
A:Workday's medium enterprise business, branded as Workday GO, is performing well, especially in full-suite sales. They are focusing on faster deployment, leveraging partners, and improving time-to-value. A seasoned executive has been brought in to lead this segment globally, and it is expected to be a strong growth area.
Q:What are Workday's plans for international markets?
A:Workday is seeing strong performance in Europe, particularly in the UK and Germany, and has a solid customer base in these regions. They are also experiencing growth in Japan and have entered the Indian market with plans to build a data center and expand operations. Workday is confident in their ability to compete and win in these markets.
Q:What is the role of Workday's partner ecosystem in their growth?
A:Workday's partner ecosystem is contributing over 20% of new ACV and is driving innovation by building new solutions on the Workday platform. Partnerships like the one with DailyPay are expanding Workday's offerings, and the ecosystem is seen as a key driver of growth and innovation.
Q:What is the financial impact of the Paradox acquisition and early renewals?
A:The Paradox acquisition is expected to contribute $15 million to the fourth-quarter revenue. Early renewals, driven by customer demand for new solutions like AI, have also contributed to strong performance. Workday emphasizes that early renewals are customer-driven and not incentivized by the company.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details about the financial impact of AI adoption and the exact revenue contribution from Paradox. They also did not clarify the exact size of early renewals' contribution to the quarter's performance.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI agent
AI opportunity
AI platform
AI product
AI solution
AI talent
Agent
Analyst Day
Conference
Extend Pro
Financial Analyst
Flowise
India
Instructions
Paradox
Research Division
Virginia
acquisition
agent AI
application experience
benefit category
cRPO
developer
engagement
globe
health care
innovation
million
momentum customer
network
partnership
people work
platform AI
purpose
region
renewal
retail
term AI
value today
worker
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Workday's earnings call reflects positive sentiment with strong subscription revenue growth, AI product expansion, and strategic acquisitions like Paradox. Despite concerns about AI disruption, Workday's robust customer base and high retention rates mitigate these fears. The Q&A highlights positive AI adoption, strong international performance, and strategic government sector focus. While some financial details were vague, the overall tone and strategic initiatives suggest a positive market reaction, likely resulting in a 2% to 8% stock price increase.
WDAY Slides
WDAY Report
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