Workday’s AI Traction Builds as Margin Gains Outpace Near-Term Growth

AI adoption strengthens Workday’s profitability story

Workday (WDAY) reported fiscal second-quarter revenue of $2.65 billion, up 12.8% year over year, while adjusted earnings rose to $2.75 per share. Both topped analyst expectations. Subscription revenue increased 14% to $2.47 billion, and adjusted operating margin expanded to 31.1%.

The larger signal came from AI adoption and the company's forward outlook. AI generated more than $100 million of new annual contract value during the quarter, but Workday's preliminary fiscal 2028 target calls for subscription revenue growth of roughly 11%. WDAY stock moved higher Friday after a volatile initial reaction to the report.

Key Points

• Workday's Q2 revenue increased 12.8% to $2.65 billion, while adjusted EPS reached $2.75 and adjusted operating margin expanded to 31.1%.
• AI products generated more than $100 million of new ACV and more than 25% of total new ACV, while AI ARR approached $600 million and more than 5,500 customers used Workday's organic agents.
• Workday expects approximately 11% subscription revenue growth in fiscal 2028 while targeting at least 200 basis points of additional margin expansion.

AI becomes a measurable contributor to Workday’s growth

Workday's AI strategy moved beyond product development during the quarter and became a more visible part of its commercial performance.

AI products generated more than $100 million in new annual contract value, or ACV, which measures the annualized value of new customer contracts. That represented more than 25% of all new ACV closed during Q2, while more than half of net-new customer wins included an AI solution.

AI-product annual recurring revenue approached $600 million, increasing more than 200% year over year. More than 5,500 customers were using at least one of Workday's internally developed AI agents, up more than 35% from the previous quarter.

Several newer products are also gaining customers. Adaptive Decision Intelligence had been purchased by 170 customers after becoming generally available July 31, while Workday said more than 200 customers purchased its Adoption Agent during its first three days. Developers have also built more than 3,000 custom applications and agents since DevCon.

The broader subscription business remained healthy. Subscription revenue increased 13.9% to $2.47 billion, while Workday's 12-month subscription backlog climbed 14.2% to $9.03 billion. Gross revenue retention remained at 97%.

Why is Workday’s growth outlook getting more attention?

The earnings reaction reflects a gap between Workday's rapidly expanding AI adoption and the pace at which that adoption is translating into broader subscription growth.

For the third quarter, Workday expects subscription revenue of approximately $2.515 billion, representing 12% growth. It also expects current remaining performance obligations, or cRPO, to grow between 11% and 12%, down from the 14.2% growth reported for its 12-month subscription backlog in Q2.

Full-year fiscal 2027 subscription revenue guidance was increased only slightly to $9.94 billion–$9.95 billion from $9.925 billion–$9.95 billion. The company expects growth of approximately 13%.

Workday also provided an early fiscal 2028 target calling for subscription revenue growth consistent with the expected second-half fiscal 2027 rate of approximately 11%.

One reason AI adoption has not produced a larger near-term revenue effect is the company's move toward consumption-based monetization. While more than 5,500 customers use Workday's agents, only slightly more than 200 customers have signed up for Flex Credits.

Management said its current priority is adoption and acknowledged that the revenue impact from consumption could take months or a year to materialize.

Margin expansion and buybacks strengthen the other side of the story

While subscription growth is expected to moderate, Workday continues to improve profitability.

Adjusted operating income increased to $824 million from $680 million a year earlier, lifting adjusted operating margin to 31.1% from 29%. Workday raised its fiscal 2027 adjusted operating-margin target to 31%.

For fiscal 2028, management expects at least another 200 basis points, or two percentage points, of adjusted operating-margin expansion. The company cited investment prioritization, internal use of AI and expense management among the factors supporting that target.

Workday also expects fiscal 2027 operating cash flow of $3.45 billion and free cash flow of $3.18 billion, representing 15% growth.

Capital returns increased as well. The company repurchased approximately 9.8 million shares for $1.3 billion during Q2, completing its previous $5 billion repurchase program six months early. Its board then authorized another $4 billion open-ended share repurchase program.

Workday ended July with approximately $3.4 billion in cash, cash equivalents and marketable securities.

What It Means for Investors

Workday's Q2 results highlight two different trends developing at the same time.

AI is becoming increasingly important to customer acquisition and expansion. More than a quarter of new ACV came from AI products, AI ARR more than tripled from a year earlier, and thousands of customers are already using Workday's agents.

That commercial adoption, however, has not yet changed the company's near-term growth trajectory. Subscription growth is expected to move from 14% in Q2 toward approximately 11% in fiscal 2028, while consumption-based AI monetization remains at an early stage.

Profitability is moving more decisively. Workday expanded its adjusted operating margin in Q2, raised its fiscal 2027 margin target and expects at least another two percentage points of expansion in fiscal 2028.

For investors following WDAY stock news, the next phase therefore centers on whether expanding AI usage begins contributing more visibly to subscription and consumption revenue while Workday continues delivering the margin improvements outlined in its outlook.

Conclusion

Workday's second quarter showed solid execution across revenue, earnings, backlog and profitability, while providing clearer evidence that AI is becoming commercially meaningful.

The remaining question is how quickly that adoption converts into broader growth. AI contributed more than 25% of new ACV, yet Workday's preliminary fiscal 2028 outlook points to subscription growth of approximately 11%.

That contrast between accelerating AI adoption and moderating subscription growth makes AI monetization, cRPO growth and continued margin expansion central measures of Workday's progress from here.

FAQs

How did Workday perform in the second quarter?

Workday reported revenue of $2.65 billion, up 12.8% year over year, while adjusted earnings increased to $2.75 per share. Subscription revenue rose 13.9% to $2.47 billion, and adjusted operating margin reached 31.1%.

How much is AI contributing to Workday?

AI products generated more than $100 million in new annual contract value during Q2 and represented more than 25% of total new ACV. AI-product ARR approached $600 million, up more than 200% year over year.

How many Workday customers are using its AI agents?

More than 5,500 customers were using at least one of Workday's organic AI agents, an increase of more than 35% from the previous quarter.

What is Workday's fiscal 2028 growth outlook?

Workday provided an early target for fiscal 2028 subscription revenue growth of approximately 11%, consistent with the expected subscription growth rate during the second half of fiscal 2027.

What is Workday's profitability outlook?

Workday raised its fiscal 2027 non-GAAP operating-margin target to 31% and expects at least 200 basis points of additional non-GAAP operating-margin expansion in fiscal 2028.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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