Shares of business-management software company Workday (WDAY 4.53%) are up 11.7% as of 11:55 a.m. ET Friday, according to data from S&P Global Market Intelligence, in response to its second-quarter results reported after Thursday's close. Although fresh economic headwinds led to merely mediocre guidance, strong revenue growth allowed the organization to top its bottom-line estimates. An aggressive stock buyback plan supported by wider profit margins is further fanning today's bullish flames.
Shifting gears in response to the slowdown
For the three-month stretch ending in July, Workday turned $2.09 billion worth of revenue into non-GAAP/operating income of $1.75 per share. Both numbers were marked improvements on year-ago comparisons of $1.79 billion and $1.43, respectively. And while sales were only in line with estimates, profits handily topped expectations of $1.64 per share.
The future could prove tougher than the past or present, however. CEO Carl Eschenbach commented during Workday's Q2 earnings conference call, "We continue to experience deal scrutiny and moderated headcount [employee] growth within our customer base." In this vein, subscription-revenue growth guidance through 2027 was lowered from an annualized pace of 18% to 15%, although this slowdown is already taking shape. Subscription-revenue growth guidance for the current quarter is only $1.96 billion, just below estimates.
NASDAQ: WDAY
Key Data Points
But the software company is responding...albeit indirectly. While overall growth may now be slowing, Workday intends to widen profit margins going forward by culling costs and increasingly careful expansion. If all goes as planned, operating profit margins should swell from around 25% now to 30% by 2027.
This new focus on profitability is clearly exciting investors. These bigger profits will also help support the additional $1 billion worth of stock repurchases announced Thursday evening.
Workday stock still offers plenty of upside from here
A near-11% surge from a stock in a single day can be intimidating to would-be buyers. Such moves often invite profit-taking, undermining the gain in question. We may well see at least a little of that with Workday shares here.
On balance, though, there's still more upside than not. Even with Friday's big advance, Workday shares are 17% below February's peak. And more than half of the analyst community currently rates Workday stock a strong buy. Just be prepared for continued volatility if you're planning on stepping in.
