When HR and financial management software company Workday (WDAY) reported solid Q4 results in February, it disappointed investors by only reaffirming its FY25 subscription revenue guidance of $7.725-$7.775 billion, sending shares sharply lower. Now, a reiteration of that guidance would look favorable as the company lowered its subscription revenue outlook to $7.700-$7.725 billion in last night's Q1 earnings press release, representing year-over-year growth of about 17% at the midpoint.
- WDAY is experiencing elevated deal scrutiny as enterprises face high interest rates and persistent inflation. This has led to slower hiring activity, resulting in lower customer headcount growth and fewer large deals for WDAY in Q1. However, WDAY's win rates remain strong when purchase decisions are made.
- International expansion is a key growth strategy for WDAY, but macroeconomic pressures were particularly strong in EMEA, where fewer large deals were closed compared to the previous year. Customers are committing to lower headcount levels on renewals than anticipated. Overall, WDAY's international revenue grew 18% year-over-year to $497 million, down from last quarter's 21% growth.
- Despite reduced subscription revenue guidance, WDAY increased its FY25 non-GAAP operating margin guidance to 25.0% from the prior forecast of 24.5%. CFO Zane Rowe credited the improved margin outlook to WDAY's focus on driving increased efficiencies across the company. This is notable as WDAY ramps up investments in AI-powered technologies.
- WDAY released its AI-powered Payroll Insights product in Q1, helping payroll workers quickly detect anomalies. Additionally, its new talent optimization tool is seeing strong attach rates on new deals, with over half of WDAY's core customer base now licensed for this AI product, showing significant momentum heading into Q2.
The main takeaway is that macroeconomic headwinds have strengthened, causing enterprises to adopt a more cautious approach to IT spending. WDAY's softer outlook could be a red flag for other enterprise software companies such as Salesforce (CRM), Oracle (ORCL), ServiceNow (NOW), and Atlassian (TEAM). From a company-specific standpoint, WDAY's expanding AI capabilities and improving operating margins are two appealing fundamental attributes.
