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WDAY's Operating Margin Expands: Will the Improvement Continue?
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Key Takeaways
Workday's non-GAAP operating margin expanded to 31.1% as operating income rose 21%.
Subscription revenues grew 13.9%, while its 12-month backlog increased 14.2% to $9.034 billion.
Workday's AI business gained momentum, with agentic AI ARR reaching about $600 million, up 200%.
Workday, Inc. (WDAY - Free Report) delivered strong improvement in profitability in the fiscal second quarter. Non-GAAP operating income increased 21% to $824 million, while the corresponding margin expanded to 31.1% from 29%. Thus, operating profit grew substantially faster than revenue, which rose 12.8% to $2.649 billion. This indicates improving operating leverage.
Continued growth in its recurring subscription business is a strong contributor to the margin expansion. In the second quarter, subscription revenues increased 13.9% year over year to $2.471 billion. The company's subscription revenue backlog also remained healthy. The 12-month subscription revenue backlog rose 14.2% to $9.034 billion, while total subscription backlog reached $27.403 billion. This provides visibility into revenue growth for upcoming quarters.
Workday's expanding AI business is becoming an important growth driver. More than 5,500 customers were using at least one organic agent, indicating an increase of more than 35% from the previous quarter. Annual recurring revenues from agentic AI reached approximately $600 million, up more than 200% year over year.
Now, if we look beyond several non-GAAP adjustments such as share-based compensation, amortization, acquisition costs and restructuring expenses, GAAP profitability is improving steadily. GAAP operating income increased from $248 million to $313 million, while the margin rose from 10.6% to 11.8%. Going forward, the main test will be whether Workday can sustain its operating margin expansion in the long run or not. That will depend on its ability to expand its customer base, capitalize on cross-selling opportunities, top-line expansion and internal operational efficiency.
Other Tech Firms With Strong Margin Expansion
Corning Incorporated (GLW - Free Report) continues to enhance its financial profile under the Springboard initiative. In the second quarter, Corning’s core operating margin expanded 220 basis points to 20.2%, and ROIC improved 190 basis points to 13.5%. There are several factors driving this strong and consistent improvement in profitability. Optical Communications remains Corning's biggest growth engine. Strong hyperscale data-center investments and growing demand for GenAI networking infrastructure are driving revenues and profitability in this segment.
Another major player in the electronics manufacturing services industry, Sanmina Corporation (SANM - Free Report) , is benefiting from a strong improvement in profitability. Non-GAAP operating income rose to $275.8 million, while operating margin expanded to 8.0% from 5.7% in the prior-year quarter. Sanmina attributed the improvement to strong execution, disciplined cost management and higher contributions from non-recurring engineering services. Continued momentum in cloud and AI infrastructure as well as broad-based growth across the core Sanmina business is a positive.
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WDAY's Operating Margin Expands: Will the Improvement Continue?
Key Takeaways
Workday, Inc. (WDAY - Free Report) delivered strong improvement in profitability in the fiscal second quarter. Non-GAAP operating income increased 21% to $824 million, while the corresponding margin expanded to 31.1% from 29%. Thus, operating profit grew substantially faster than revenue, which rose 12.8% to $2.649 billion. This indicates improving operating leverage.
Continued growth in its recurring subscription business is a strong contributor to the margin expansion. In the second quarter, subscription revenues increased 13.9% year over year to $2.471 billion. The company's subscription revenue backlog also remained healthy. The 12-month subscription revenue backlog rose 14.2% to $9.034 billion, while total subscription backlog reached $27.403 billion. This provides visibility into revenue growth for upcoming quarters.
Workday's expanding AI business is becoming an important growth driver. More than 5,500 customers were using at least one organic agent, indicating an increase of more than 35% from the previous quarter. Annual recurring revenues from agentic AI reached approximately $600 million, up more than 200% year over year.
Now, if we look beyond several non-GAAP adjustments such as share-based compensation, amortization, acquisition costs and restructuring expenses, GAAP profitability is improving steadily. GAAP operating income increased from $248 million to $313 million, while the margin rose from 10.6% to 11.8%. Going forward, the main test will be whether Workday can sustain its operating margin expansion in the long run or not. That will depend on its ability to expand its customer base, capitalize on cross-selling opportunities, top-line expansion and internal operational efficiency.
Other Tech Firms With Strong Margin Expansion
Corning Incorporated (GLW - Free Report) continues to enhance its financial profile under the Springboard initiative. In the second quarter, Corning’s core operating margin expanded 220 basis points to 20.2%, and ROIC improved 190 basis points to 13.5%. There are several factors driving this strong and consistent improvement in profitability. Optical Communications remains Corning's biggest growth engine. Strong hyperscale data-center investments and growing demand for GenAI networking infrastructure are driving revenues and profitability in this segment.
Another major player in the electronics manufacturing services industry, Sanmina Corporation (SANM - Free Report) , is benefiting from a strong improvement in profitability. Non-GAAP operating income rose to $275.8 million, while operating margin expanded to 8.0% from 5.7% in the prior-year quarter. Sanmina attributed the improvement to strong execution, disciplined cost management and higher contributions from non-recurring engineering services. Continued momentum in cloud and AI infrastructure as well as broad-based growth across the core Sanmina business is a positive.
Workday’s Price Performance, Valuation & Estimates
Workday shares have lost 11.3% over the past year compared with the industry’s decline of 10.9%.
Image Source: Zacks Investment Research
From a valuation standpoint, WDAY trades at a forward price-to-earnings ratio of 17.22, below the industry average of 28.55.
Image Source: Zacks Investment Research
Earnings estimates for 2027 have increased 0.65% to $10.82 over the past 60 days, while the same for 2028 has declined 0.08% to $12.66.
Image Source: Zacks Investment Research
Workday currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.