Workday Q3 Earnings Beat on Strength in Subscription Services

Workday Inc. WDAY, a leading provider of enterprise-level software solutions for financial management and human resource domains, reported better-than-expected fiscal third-quarter results. Non-GAAP earnings of $2.32 per share surpassed the Zacks Consensus Estimate by 19 cents.

Revenues surged 12.6% year over year to $2.43 billion. The figure surpassed the Zacks Consensus Estimate by $17 million. Healthy traction in multiple verticals boosted the top line.

WDAY’s Segment Performance

In the fiscal third quarter, Workday reported $2.244 billion in Subscription revenues, up 15% year over year. The company has shown consistent growth across several geographies and industries. Net sales beat our estimate of $2.23 billion.

AI adoption is driving the upsell of Workday solutions. Over 75% of the customers have opted to use Workday Illuminate AI, propelling over 1 billion AI actions on Workday platforms. More than 75% of net new deals and 35% of the expansion deals with existing users included one or more AI products. Growing emphasis on digital transformation through AI integration across sectors has become a major growth driver for Workday.

In the fiscal third quarter, Workday witnessed solid traction in tech, media, healthcare and financial services. Healthcare becomes Workday’s sixth industry to generate $1 billion in annual recurring revenue. In this sector, the company secured multiple customer wins such as Ardent Health, Ascendiun and Northeast Georgia Medical Center. Bayer, ING Bank and Tandem Bank in the EMEA region, while in the APAC region, Genesis Energy, DBS Bank and MGM Grand Paradise are major customer wins. The company has also witnessed healthy growth in the public sector. The Department of Energy has opted to deploy Workday solutions. The company is also working with the Department of Intelligence.

During the fiscal third quarter, 12-month subscription revenue backlog was $8.21 billion, up 17.6% year over year. Total subscription backlog was $25.96 billion, up 17% year over year. Gross revenue retention, which measures the percentage of recurring revenues a company retains from existing customers, remained at a healthy level of 97%.

Revenues from professional services were $188 million compared with $201 million in the prior-year quarter. The top line beat our estimate of $180.1 million.

WDAY’s Financial Position

In the October quarter, sales and marketing costs rose to $677 million from $620 million in the year-earlier quarter. General and administrative expenses were $234 million, up from $198 million in the year-ago quarter. Costs of subscription services increased to $395 million from $329 million in the year-ago quarter.

In the fiscal third quarter, Workday generated $588 million in cash from operations compared with $406 million in the year-ago quarter. In the first nine months of fiscal 2026, the company generated $1.66 billion in cash compared with $1.34 billion in the prior-year period. As of Oct. 31, 2024, the company had $2.6 billion in cash and cash equivalents, with $2.98 billion of long-term debt. Total current liabilities were $5.01 billion compared with $5.54 billion in fiscal 2024.
 
In fiscal 2025, this Zacks Rank #2 (Buy) company bought back 3.4 million shares worth $803 million. At the quarter’s end, the company had $4.4 billion left under its buyback program.

Workday’s Guidance

For the fourth quarter of fiscal 2026, Workday expects Subscription services revenues to be $2.35 billion, representing growth of 15%. Management expects the non-GAAP operating margin to be 28.5%.

For fiscal 2026, the company expects subscription revenues to be $8.82 billion, indicating growth of 14% year over year. The non-GAAP operating margin is anticipated to be 29%. Capital expenditure is approximated to be around $200 million, down slightly from fiscal 2025. Non-GAAP tax rate is expected to be 19%. Operating cash flow is forecasted to be $2.9 billion.

For the upcoming quarter, the company expects the first phase of delivery to DIA and the revenue contribution from the SANA acquisition is likely to have been a major growth driver. AI-driven investments are also fostering growth for the company.

Stocks to Consider

Celestica Inc. CLS sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last reported quarter, it delivered an earnings surprise of 7.48%. The growing proliferation of AI-based applications and generative AI tools across industries presents a solid growth opportunity for Celestica. CLS’ focus on product diversification and increasing its presence in high-value markets is positive. Its strong research and development foundations allow it to produce high-volume electronic products and highly complex technology infrastructure products for a wide range of industries.

CommScope Holdings Inc. COMM sports a Zacks Rank #1. CommScope’s comprehensive, differentiated portfolio allows it to hold a dominant position in the communication infrastructure industry.

In the last reported quarter, COMM delivered an earnings surprise of 67.57%. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, CommScope is dedicated to developing solutions designed to support wireline and wireless network convergence, which will be essential for the success of 5G technology.

Ericsson ERIC carries a Zacks Rank #2 at present. It delivered an earnings surprise of 23.08% in the last reported quarter.

Ericsson is well-positioned to cash in on the market momentum with its competitive 5G product portfolio. The company continues to execute its strategy to become a leading mobile infrastructure provider and establish a focused enterprise business. The combination of strategic buyouts and continuous innovation is expected to accelerate commercial expansion and solidify Ericsson’s position in the wireless equipment market.

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