Workday shares dive 12% on lowered subscription revenue outlook

Workday (NASDAQ:WDAY) Inc. reported its financial results for the first quarter, surpassing analyst expectations with an adjusted EPS of $1.74, $0.15 higher than the consensus estimate of $1.59.

The company's revenue also exceeded forecasts, coming in at $1.99 billion against the anticipated $1.97 billion.

Despite these strong results, Workday's stock fell sharply by more than 12% in Friday's premarket, as the company lowered its full-year subscription revenue guidance.

For the fiscal 2025 full year, Workday anticipates subscription revenue to be between $7.700 billion and $7.725 billion, representing approximately 17% growth. This is lower than their previous forecast of $7.725 billion to $7.775 billion and below the consensus estimate of $7.768 billion.

On the other hand, the company has raised its FY25 non-GAAP operating margin outlook to 25.0%, compared to the prior estimate of 24.5% and the consensus projection of 24.6%.

"We see a negative reaction for WDAY post Q1 results," Barclays analysts said in a post-earnings note. "The lowered subscription revenue guidance, especially after Q1, was not expected particularly for a SaaS company like Workday with usually very good visibility."

For the fiscal 2025 second quarter, the company expects subscription revenue to reflect a similar growth rate of approximately 17%, with an adjusted operating margin of 24.5%.

The first quarter proved to be robust for Workday, with total revenues climbing 18.1% to $1.990 billion from the first quarter of fiscal 2024. Subscription revenues, a key metric for the company, increased by 18.8% compared to the same period last year.

The company also saw a significant improvement in its operating income, reporting $64 million, or 3.2% of revenues, a stark contrast to the operating loss of $20 million from the previous year's first quarter.

Adjusted operating income reached $515 million, or 25.9% of revenues, up from $396 million a year ago.

The positive financial performance was underscored by Workday CEO Carl Eschenbach, who highlighted the company's solid quarter of revenue growth and adjusted operating margin expansion.

CFO Zane Rowe noted the alignment of the first quarter performance with their expectations and the company's focus on efficiency, despite acknowledging elevated sales scrutiny and lower customer headcount growth.

While some investors may think the top-line guidance is now de-risked, "they should think again," Guggenheim analysts said in their note.

"The numerical setup for F2Q25 looks very challenging, but we assume management’s visibility over the next couple of months can get them there, and there may be factors we’re not privy to, such as changes in unbilled receivables related to ramped deals or early/late renewals, etc," they added.

"However, having to depend on close rates consistent with F1Q against a larger pipeline that may simply be bloated because of slipped deals (like much of our coverage) does seem risky."

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