Enterprise software maker Workday (WDAY.US) saw its shares slip as much as 7% in after-hours trading Thursday before paring losses to less than 1%, after the company's sales guidance missed analyst expectations and dampened the recent momentum built on renewed optimism for the software sector. The company's second-quarter fiscal results delivered a mixed picture for investors weighing AI disruption concerns against stabilizing demand.

For the fiscal second quarter, Workday reported revenue of $2.65 billion, up roughly 13% year-over-year and slightly ahead of the $2.63 billion consensus estimate. Adjusted earnings per share came in at $2.75, beating the average analyst forecast of $2.61. Subscription revenue reached $2.47 billion for the quarter, marking a 14% increase from the prior year. The company's subscription revenue backlog over the trailing twelve months stood at $9.034 billion, up 14.2% compared to the same period last year. Total subscription revenue backlog reached $27.403 billion, an 8.0% increase year-over-year.

However, looking ahead, Workday projected its total subscription backlog would grow 8% to $27.4 billion by the end of the fiscal third quarter ending July 31, falling short of the $28.6 billion analysts had anticipated. The company guided third-quarter subscription revenue to $2.52 billion, aligning with market expectations.

Where things stand

Workday belongs to a cohort of application software companies that have been grappling with persistent investor concerns about artificial intelligence disruption. Yet over the past month, those worries have started to ease as sales remained steady, with buyers showing resilience against the threat of emerging AI startups and tools potentially displacing traditional software vendors. The stock has rallied 31% in the last month, though it remains roughly 10% lower for the year to date.

The company, which develops software for office functions including payroll and human resource management, has been weaving AI capabilities into its product suite. It also recently reshuffled its leadership, with former CEO and co-founder Aneel Bhusri returning to the top role in February after stepping down in 2024.

A key factor fueling the renewed bullishness on software stocks has been reports that private equity firm Silver Lake is in talks to acquire Workday, a potential deal that markets view as validating the long-term value of such software providers. Barclays analyst Raimo Lenschow noted in a client note that "the SaaS space has seen a recovery in recent weeks. Workday's largely in-line results and guidance are unlikely to serve as another catalyst."

Bhusri, who also serves as chairman, said in prepared remarks that the second quarter delivered strong performance, with AI contributing more than 25% of new annual contract value and over 5,500 customers having engaged with at least one of the company's natural language agents. "Customers are comfortable entrusting important work to our agents, backed by Workday's deterministic service framework, and that's reflected in the data," he added.

Chief Financial Officer Zane Rowe highlighted the platform's continued growth momentum, noting AI has become a strategic driver for customer expansion. The company now expects fiscal 2027 subscription revenue to reach $9.94 billion to $9.95 billion, representing 13% growth, while raising its non-GAAP operating margin outlook to 31.0% for that period. "We will continue to prioritize investments in our agentic AI roadmap and platform opportunities, while improving operational efficiency as we scale," Rowe said.

In addition, Workday announced its board has authorized an open-ended repurchase program of up to $4 billion of its outstanding Class A common stock. The company also unveiled a new partnership with Amazon Web Services, a unit of Amazon (AMZN.US), integrating Workday Data Cloud with AWS to enable bidirectional, zero-copy access between AWS data and AI services and Workday's HR and financial data. Furthermore, Workday expanded its strategic collaboration with Google Cloud, a subsidiary of Alphabet (GOOGL.US), bringing Workday agents directly into Gemini Enterprise and establishing a unified, trusted foundation that allows agents from Workday, Google Cloud, and third parties to collaborate on real-world HR and financial workflows.