Workday's stock price rises as software company expands 2027 profit margin forecast.

• Workday's quarterly results came in ahead of consensus.
• The company adjusted its operating margin while lowering its subscription software growth target for 2027.

On Friday, shares of the finance and human resources software maker experienced a 14% increase in value, following the release of its fiscal second-quarter results that surpassed analyst expectations and the announcement of plans to increase its adjusted operating margin through 2027.

Here's how the company did, compared to LSEG consensus:

• Earnings per share: $1.75 adjusted vs. $1.65 expected
• Revenue: $2.085 billion vs. $2.071 billion expected

In the quarter ending July 31, Workday's revenue increased by approximately 17% year over year, while subscription revenue growth also grew by 17%. Additionally, the company's net income rose to $132 million, or 49 cents per share, from $79 million, or 30 cents per share, in the same quarter the previous year.

In the 2025 fiscal year, Workday is now aiming for an adjusted operating margin of 25.25%, which is higher than the 25% forecast it previously provided in May.

Zane Rowe, Workday's finance chief, stated on a Thursday conference call with analysts that he anticipates the company's adjusted operating margin to expand to 30% in the 2026 and 2027 fiscal years, along with an annual subscription revenue growth of 15%. In September 2023, Workday announced its target for a 25% adjusted operating margin in fiscal year 2027 and subscription revenue growth between 17% and 19%.

"Rowe stated that the company is intensely focused on scaling all processes and reviewing product and go-to-market initiatives, while also becoming more targeted in growth investments by balancing product development with go-to-market resources."

Analysts at Deutsche Bank, led by Brad Zelnick, raised their 12-month price target on Workday stock from $265 to $275. Despite this, they maintain a hold rating on the stock.

The analysts were surprised by the 30% operating margin target increase, which was committed earlier and exceeded expectations.

Analysts from Citi, Evercore ISI, and Piper Sandler increased their Workday price targets after the company released its report.

Despite the conditions not being ideal for Workday, organizations are still cautious about signing contracts, and the growth in headcount among the existing customer base has slowed down, according to Rowe.

The Federal Reserve Chair Jerome Powell has announced that the central bank will lower its benchmark rate, which could benefit growing cloud software companies such as Workday. However, investors had moved away from those assets in 2022, opting for more defensive investments in anticipation of rate hikes to combat inflation.

During Friday's trading session, the WisdomTree Cloud Computing Fund, which contains Workday, experienced a roughly 2% increase in value.

Carl Eschenbach, Workday CEO, stated that market conditions will not improve soon.

"He stated that the current IT spending environment and the market we operate in are not temporary, but rather the new standard moving forward. We are ready because we have a top-notch product."

Julie Biel believes that software is a promising small cap investment because it generates more consistent earnings.