Workday Jumps After Signaling New Focus on Profitability

(Bloomberg) — Workday Inc. shares jumped in extended trading, reversing earlier declines, after executives said the company would sharply increase profitability over the next three years.

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Adjusted operating margin will reach 30% by the fiscal year ending in January 2027, Chief Financial Officer Zane Rowe said on a conference call Thursday after the software company released quarterly results. During an event last year, Workday had said that figure would be 25%. Subscription revenue growth — which makes up most of Workday’s total sales — will be about 15% in the coming fiscal years, Rowe said.

The shares gained almost 10% in extended trading after closing at $231.08 in New York. Earlier, the stock had dropped as much as 7.4%.

A greater emphasis on profit gives the company more cash to invest strategically in growth initiatives, said Chief Executive Officer Carl Eschenbach during the call.

Workday, which makes software for business tasks such as managing personnel, will save money in part by being selective in hiring and using artificial intelligence in its call centers and finance departments, Eschenbach said. The company also is adding more workers in Costa Rica and India, he said.

The long-run outlook overshadowed earlier investor malaise about in-line quarterly results and Workday’s annual sales forecast. Subscription revenue increased 17% to $1.9 billion in the fiscal second quarter, the company said in a statement. The reported revenue met the average projection from analysts, according to data compiled by Bloomberg.

The Pleasanton, California-based company also maintained its fiscal-year subscription forecast of as much as $7.73 billion while bumping its operating margin outlook to 25.25% from 25%. It also announced a $1 billion share buyback program.

Under Eschenbach, Workday has been introducing new features and trying to expand its customer base. In July, the company announced a partnership with Salesforce Inc. to build an AI tool that works between their platforms.

Analysts had pointed ahead of the earnings to the potential negative affect of corporate job reductions on software makers like Workday, which charge customers per user. The company said its near-term subscription backlog, watched as a metric of business momentum, was $6.8 billion. Analysts, on average, expected $6.76 billion.

The results suggest a tough climate for growth in users, said Anurag Rana, an analyst at Bloomberg Intelligence. “Enterprises continue to remain in a cost-cutting mode with below-average headcount addition.”

Workday reported profit, excluding some items, of $1.75 a share in the period ended July 31, compared with an average estimate of $1.64.