Story Stocks^®

Workday (WDAY) exceeded EPS expectations for the tenth consecutive quarter but shares of the HCM and financial cloud software provider are diving lower due to rising growth concerns. Although WDAY is seeing more enterprises and organizations consolidate their HR and finance functions onto its platform, moderating headcount growth and ongoing deal scrutiny continue to weigh on its growth, as illustrated by its downside Q4 and FY26 subscription revenue guidance. The good news is, WDAY's operating margins are expanding as it streamlines its operations and achieves improved efficiencies, which should continue to drive healthy EPS growth.

• Following growth of 18.8% in Q1 and an increase of 17.2% last quarter, subscription revenue growth slowed further to 15.8% in Q3 to 1.959 bln. The downward slide is expected to continue in Q4 with WDAY guiding for subscription revenue of $2.025 bln, equating to yr/yr growth of 15%. Adding to the disappointment, the company's FY26 subscription revenue guidance of $8.80 bln also fell a bit short of expectations.
• During the earnings conference call, WDAY commented that it experienced the same deal scrutiny in EMEA that it discussed last quarter. As such, international revenue growth dipped to 16% from the 18% seen in the prior two quarters. With only 25% of its total revenue coming from overseas, the company believes that it has plenty of runway for growth ahead, but market conditions have not been kind to WDAY.
• One growth catalyst that is beginning to bear fruit is WDAY's investments in AI products and features. In Q3, over 30% of the company's customer expansions involved one or more AI tools, including Talent Optimization, Extend Pro, and Recruiter Agent. With WDAY releasing Illuminate and unveiling four new AI agents in mid-September, the company is poised for even stronger AI-driven growth in the quarters ahead. Illuminate, which is powered by more than 800 bln business transactions processed by WDAY's platform annually, simplifies complex HR and finance processes, including recruiting, expense management, and succession planning.
• Lastly, while the company's subscription revenue guidance disappointed, its FY26 and FY27 non-GAAP operating margin forecasts of 27.5% and 30.0% were notable highlights. For some context, WDAY's non-GAAP operating margin in Q3 was 26.3%.

The main takeaway is that WDAY's growth rates remain on a downhill slide and until they show signs of stabilizing, the stock will likely have trouble sustaining a rally. When the company's growth rates do improve, its earnings will be primed for healthy expansion due to its streamlining efforts.