Workday, Inc. WDAY combined second-quarter earnings beat with faster AI adoption and a higher margin outlook. Attention now turns to whether those trends can support fiscal 2028 growth.
The central issue is monetization. Core subscription growth is expected to moderate, making Workday’s ability to convert expanding AI usage into incremental annual recurring revenues increasingly important.
Workday’s Q2 Beat Shows Subscription Strength
Second-quarter revenues rose 12.8% year over year to $2.65 billion, beating the Zacks Consensus Estimate of $2.63 billion by 0.6%. Non-GAAP earnings of $2.75 per share topped the consensus mark of $2.62 by 5%.
Subscription revenues increased 13.9% to $2.47 billion and accounted for about 93% of total revenues. Roughly 60% of subscription revenue growth came from expansion among existing customers.
Workday, Inc. Price, Consensus and EPS Surprise 
Workday, Inc. Price, Consensus and EPS Surprise
Workday, Inc. price-consensus-eps-surprise-chart | Workday, Inc. Quote
WDAY’s AI Sales Are Moving Beyond Product Availability
AI products generated more than $100 million of new annual contract value in the quarter, representing more than 25% of total new annual contract value. Agentic AI annual recurring revenues approached $600 million, rising more than 200% year over year.
Adoption is spreading across several offerings. More than 200 customers had signed up for Flex Credits, while 170 customers had purchased Adaptive Decision Intelligence. More than half of net new wins included one or more AI solutions.
Workday Raises Its Fiscal 2027 Margin Outlook
Workday raised its fiscal 2027 non-GAAP operating margin outlook to 31%. Management maintained operating cash flow guidance of $3.45 billion and expects free cash flow of $3.18 billion for the year.
Workday continues to prioritize investment in its agentic AI roadmap and platform opportunity while driving operating efficiencies. That combination keeps the focus on whether AI spending can scale without sacrificing the margin trajectory.
WDAY’s Fiscal 2028 Framework Shifts Focus to AI
Management currently targets about 11% subscription revenue growth in fiscal 2028, consistent with the expected growth rate in the second half of fiscal 2027. Workday also expects non-GAAP operating margin to expand by at least two percentage points.
Potential upside could come from Sana Enterprise, Workday Extend with Data Cloud and AI agents, which are seeing strong early demand. Management is prioritizing adoption before full monetization and expects AI to become a more significant contributor to incremental annual recurring revenues from fiscal 2028 and beyond.
Workday’s Costs and Sales Cycles Remain Key Risks
Total costs and expenses increased 11% year over year to $2.34 billion in the second quarter. The increase included $126 million of higher employee-related costs and $32 million of additional third-party hosted infrastructure spending.
Oracle Corporation ORCL lists AI agents across Oracle Fusion Cloud HCM functions such as benefits, compensation and employee self-service. SAP SE SAP has expanded suite-wide agentic AI across SAP SuccessFactors, including recruiting, payroll, learning and talent development. Workday has also cited greater deal scrutiny and longer sales cycles in some markets.
WDAY’s Growth Score Supports a Cautious AI View
The fiscal 2028 setup is improving, but AI adoption still needs to translate into durable incremental revenues as core subscription growth moderates. Cost discipline and sales execution remain important to how much of the opportunity reaches reported results.
WDAY currently carries a Zacks Rank #3 (Hold), supporting a measured near-term stance. Its Growth Score of A is favorable for investors focused on growth characteristics. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Value Score of D, Momentum Score of F and VGM Score of C make the broader quantitative profile less supportive. Since Zacks Style Scores complement the Zacks Rank, the mix indicates stronger growth characteristics than value and momentum attributes at present.
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This article originally published on Zacks Investment Research (zacks.com).