According to CNBC, Workday shares slid more than 5% in extended trading Tuesday after the finance and human resources software maker issued quarterly margin guidance that disappointed investors. The company reported adjusted earnings of $2.32 per share, beating the $2.18 consensus, with revenue hitting $2.43 billion versus $2.42 billion expected. For the fourth quarter, Workday forecast an adjusted operating margin of at least 28.5%, just below the StreetAccount consensus of 28.7%. Subscription revenue guidance of $2.355 billion was slightly above the $2.35 billion expected. The company’s revenue grew about 13% year over year in the quarter ending October 31, with net income rising to $252 million from $193 million a year earlier.
Why the margin miss matters
Here’s the thing about enterprise software companies like Workday – investors aren’t just looking for revenue growth anymore. They want efficiency and profitability too. The company actually beat margin expectations for the current quarter at 28.5%, but then guided slightly below for the next period. That’s what spooked the market. Basically, when you’re trading at premium valuations, you can’t afford any missteps, even tiny ones. The stock reaction shows how sensitive investors are to any signs of slowing profitability, especially in this higher interest rate environment.
AI push and activist pressure
Workday isn’t sitting still though. During the quarter, they announced AI agents for analyzing employee performance and testing financial health, plus they’re buying AI and learning software startup Sana for $1.1 billion. And then there’s the Elliott Management situation – the activist investor built a $2 billion stake. That creates both pressure and opportunity. Will Elliott push for more aggressive cost cutting? Or maybe faster AI integration? The timing is interesting because Workday’s stock has fallen 9% this year while the Nasdaq has gained 19%. That performance gap definitely gets activists interested.
Bigger picture concerns
Look, the real question hanging over Workday and other cloud software companies is whether generative AI will disrupt their business models. If AI tools can automate HR and finance functions that Workday specializes in, does that threaten their growth story? The company’s response has been to embrace AI aggressively, but that requires significant investment. And when you’re spending big on AI acquisitions and development while activist investors are watching your margins… well, that’s a tough balancing act. The market seems to be saying they want both growth AND profitability, which is getting harder to deliver in this competitive landscape.
