Workday Q2 AI Products Contribute Over a Quarter of New Contract Value

Workday, Inc. reported better-than-expected fiscal second-quarter results after the market close on Thursday.

Sales rose 12.8% year-over-year to $2.649 billion, beating the consensus estimate of $2.636 billion.

The company reported adjusted earnings per share of $2.75, beating the $2.61 estimate. Diluted EPS rose sharply to $2.57 from $0.84 in the same period last year, including a $1.52 per-share tax benefit related to the transfer of certain intellectual property in an internal legal entity reorganization.

Operating cash flow was $520 million, compared with $616 million in the year-ago period; free cash flow fell to $460 million from $588 million.

Workday repurchased $1.3 billion in stock during the quarter, completing its previously announced $5 billion buyback program six months ahead of schedule. The board approved a new $4 billion open-ended repurchase program.

The company held $3.4 billion in cash and marketable securities at quarter-end.

Business Performance

Subscription revenue was $2.471 billion, up 14% year-over-year; professional services revenue reached $178 million.

U.S. revenue grew 12% to $1.97 billion, while international revenue rose 17% to $682 million.

The company's 12-month subscription revenue backlog reached $9.03 billion, up 14.2%; total subscription backlog grew 8% to $27.4 billion.

Gross revenue retention remained at 97%, with existing customers contributing approximately 60% of subscription revenue growth.

Key Metrics

Workday said AI products contributed over $100 million in new annual contract value in the second quarter, representing more than 25% of total new ACV.

Over 5,500 customers now use Workday's self-built agents, up over 35% quarter-over-quarter; AI SKU annual recurring revenue approached $600 million, up over 200% year-over-year and over 20% quarter-over-quarter.

Workday added 23 Sana Enterprise features in the second quarter. In the August 4 internal rollout, 12,000 users built 22,000 custom agents within three weeks. Sana monthly active users grew nearly 190% year-over-year, with AI generating 78% of published courses.

Adaptive Decision Intelligence became generally available on July 31, with 170 customers adopting it.

Deployment Agent now has over 4,600 customers and 24,000 users, with query volume surging nearly 5,500% in the second quarter.

Data Cloud signed six deals in the second quarter, all Pro Edition, and remains on track for general availability in the third quarter. Over 1,600 customers use Workday via Teams, Slack, Copilot, and Gemini, with over 100 directly using Self Service Agent.

Workday Extend applications grew over 90% year-over-year, with over 3,000 custom apps and agents built since DevCon. Over half of net new customers in the second quarter involved AI, and Workday Go customer count grew more than fivefold quarter-over-quarter.

Guidance

The company lowered its fiscal 2027 sales guidance to $9.94 billion-$9.95 billion from $10.635 billion-$10.660 billion, below the market consensus of $10.669 billion.

The company expects third-quarter sales of $2.515 billion, versus the market consensus of $2.697 billion.

Workday's CFO said the current fiscal 2028 subscription revenue growth target remains consistent with the approximately 11% expected growth rate for the second half of fiscal 2027.

The company expects fiscal 2027 subscription revenue of $9.94 billion-$9.95 billion, corresponding to 13% growth; third-quarter subscription revenue is expected at approximately $2.515 billion.

Following the earnings release, Piper Sandler analyst Billy Fitzsimmons raised the price target to $190 from $145. Needham analyst Scott Berg also raised the price target to $230 from $180.

WDAY share performance: Friday data shows Workday shares rose 6.94% to $207.00.