Workday Stock Slides on Disappointing Outlook

Workday signage at the AI Summit New York 2023 in New York. (Bing Guan/Bloomberg)

Shares of Workday were sliding in late trading Thursday after the software firm reported solid second-quarter earnings but forecast a slightly disappointing third quarter.

For the second quarter, adjusted earnings-per-share rose to $2.21 versus Wall Street’s consensus estimate of $2.11, according to FactSet, and up from $1.75 cents last year. Revenue for the quarter reached $2.35 billion, ahead of expectations for $2.34 billion, and up 13% over last year.

Workday’s profitability continues to improve, with an adjusted operating profit margin well above expectations at 29.0%, up from 24.8% in the second quarter of 2024.

But the company’s guidance for the third quarter came in a little short of expectations, but it also raised fiscal 2026 guidance, hinting at a strong fourth quarter.

After initially rising on the news, Workday stock was down 3.8% in late trading following the release.

The trading pattern represents a trend in recent tech results in which narrow earnings misses are met with rapid selloffs.

Like many other business software companies, Workday is under pressure from the sudden rise of artificial intelligence. The risk for Workday is that sales of cloud software could face the same devastating blow that subscription-based services dealt to packaged software many years ago.

“I think this whole concern around AI disruption and the potential negative impacts on seat-based models are completely overblown,” Workday CEO Carl Eschenbach said on the company’s earnings call. “We hear that AI is eating the software world, and unless something’s changed from yesterday, I think AI is software, and we’re leaning heavily into it.”

Like other business-software companies, Workday is turning to AI “agents” as it seeks to avoid disruption. Agents are software that use AI models to accomplish a complicated series of tasks from a simple command. In the case of Workday, which is used by human resources departments, a supervisor could instruct the agent to find all employees who have recently asked for pay raises, put them in a spreadsheet with all relevant details, and help the supervisor judge which requests should be considered.

So far, uptake has been slow at Workday and elsewhere. Agents are fairly new, and the AI models that they use to complete their tasks are still far from perfect. That makes the agents a bit risky.

But Workday and its counterparts are looking farther into the future, recognizing that every company is going to be disrupted by AI, and that they will be forced to upend their own business models at least to some small extent. Merely selling software subscriptions may not be enough in a few years, so it makes sense to try to stave off irrelevance now.

Write to Adam Levine at adam.levine@barrons.com