WDAY Q2 Deep Dive: AI Adoption and International Momentum Offset by Market Caution

Enterprise software company Workday (NASDAQ:WDAY) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 12.6% year on year to $2.35 billion. Its non-GAAP profit of $2.21 per share was 4.5% above analysts’ consensus estimates.

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StockStory’s Take

Workday’s second quarter performance aligned with Wall Street’s revenue expectations, while non-GAAP profitability came in above estimates. Despite this, the market reacted negatively, reflecting investor concerns about external pressures and the sustainability of recent momentum. Management highlighted strong customer adoption of AI-driven solutions, particularly the Workday Illuminate suite, as a key driver for the quarter. CEO Carl Eschenbach pointed to robust demand across verticals and emphasized that over 70% of customers have adopted AI features, with net new deals increasingly including these products. The quarter also saw notable traction in international markets and medium enterprise segments, as well as significant wins in the public sector and healthcare. However, management acknowledged that certain areas, such as state and local government and higher education, are facing funding headwinds, which tempered overall enthusiasm.

Looking ahead, management expects continued growth to be fueled by AI innovation, targeted industry expansion, and deeper global reach. The recent agreement to acquire Paradox, a conversational AI company, is seen as a step to strengthen Workday’s talent acquisition capabilities, with CEO Eschenbach stating, “We will be able to deliver an incredibly powerful AI-powered talent acquisition suite.” CFO Zane Rowe noted ongoing investments in new markets, including India, and highlighted that efficiency gains are supporting margin expansion. While management remains optimistic about momentum in the second half of the year, they cautioned that certain verticals, such as state and local government and higher education, may continue to face macroeconomic challenges. The company is also closely tracking customer engagement with AI solutions and the evolving partner ecosystem as indicators of future performance.

Key Insights from Management’s Remarks

Management attributed Q2’s performance to accelerating demand for AI-powered products, strategic expansion in key industries, and ongoing success with new and existing partners.

• AI suite adoption climbs: The Workday Illuminate suite and related AI products saw increasing integration into customer deals, with more than 70% of customers leveraging AI features and net new annual contract value (ACV) from AI products more than doubling year over year. Management described this as a significant contributor to both retention and expansion activity.
• International business gains traction: Workday’s growth in regions such as Europe and Asia-Pacific was highlighted by new wins in the UK, Germany, Japan, and the company’s first deal in Vietnam. The expansion into India, including a new local data center and leadership appointments, reflects Workday’s commitment to scaling in emerging markets.
• Federal sector focus: The launch of Workday Government as a wholly owned subsidiary aims to address the unique needs of U.S. federal agencies, with management citing strong engagement across the Department of Defense and other agencies. Investments in secure cloud environments and AI capabilities are intended to support government modernization efforts.
• Partner and ecosystem expansion: Strategic partnerships contributed more than 20% of net new ACV for the second quarter in a row. Notable collaborations include DailyPay for wage access and ongoing integration with platforms like Equifax, as well as an expanding developer ecosystem around Workday’s platform tools and marketplace.
• Product and platform innovation: Workday launched enhancements to its developer tools, including Extend Pro and Developer Copilot, and completed the acquisition of Flowwise, a low-code platform for AI agent creation. These initiatives are designed to accelerate customer and partner innovation on the Workday platform.

Drivers of Future Performance

Workday expects its forward momentum to depend on AI-powered product adoption, targeted industry expansion, and continued international growth, balanced against sector-specific headwinds.

• AI integration as differentiator: Management believes the growing penetration of AI features in core products will drive customer retention and attract new business, especially as over 70% of customers now use Workday Illuminate. The acquisition of Paradox is also expected to enhance the AI-driven recruiting suite, supporting future revenue growth.
• Geographic and industry diversification: Ongoing investment in markets like India and Japan, alongside focused efforts in public sector and healthcare, are intended to broaden Workday’s customer base. However, management acknowledges that state and local government and higher education may face continued macroeconomic pressures, potentially moderating growth in these segments.
• Operational efficiency and margin focus: The company is prioritizing efficiency gains and targeted investments, with CFO Zane Rowe emphasizing the goal of sustaining non-GAAP operating margin expansion. These efforts are supported by AI-driven process improvements and disciplined resource allocation, helping to balance growth initiatives with profitability.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will closely monitor (1) the pace of AI product adoption and its impact on customer retention and upselling, (2) Workday’s progress in expanding its international footprint, especially in India and Japan, and (3) developments in the federal sector following the launch of Workday Government. The integration of recent acquisitions and sustained partner-driven deal flow will also be important indicators of execution against strategy.

Workday currently trades at $221.33, down from $227.64 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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